Sonic Boom: Napster, P2P and the Battle for the Future of Music

If the Internet before 1995 was not exactly silent, beyond the novelty, most listening was not much fun. If you were lucky enough to have a high-speed connection at work or school, you could download songs with only a short wait. But outside that lucky circle, at a time when 14.4 kbs modems were considered hot stuff, getting music over the Net was like waiting for ketchup to flow from a new bottle: pretty frustrating if you were hungry.

By the time the Internet appeared on the covers of magazines and newspapers and had worked its way into the American consciousness, it was clear to the cognoscenti that audio on the Net would eventually be a mass phenomenon. But it seemed to most that the bandwidth commonly available to consumers could not support a mass audience for a decade. It seemed that Internet audio would only arrive after the full range of interactive TV and wired home entertainment had time to blossom.

One man wasn’t willing to wait around for speedier Net connections before he shook things up. When Rob Glaser unveiled RealAudio in 1995—over two years before MP3.com was launched—something clicked. Sure, the buzzing, noisy sound of highly compressed audio was not great. But the gratification that came from listening to what you wanted without waiting an hour or two for a download, even when using a puny home modem, won streaming media a place in the hearts—and on the desktops—of many. A huge network of audio providers, including radio stations, retailers, and Web sites looking to expand their offerings, like CNET and HotWired, effectively made “Real” the Internet standard for streaming audio (and the main contender for video soon after).

Rob Glaser, the burly, sometimes confrontational former Microsoft VP, knew perfectly well how to play the standards game. He was determined to make the most of his new company, his first since resigning from Microsoft following a rumored power struggle with Nathan Myhrvold to head the company’s multimedia division. For Glaser, the moment he first used the Mosaic browser, he knew he’d found something that would change everything.

“To me media is the center and the formalization of everything there is about human society,” Glaser said. “Some people believe if we didn’t invent first oral and then written communication, there would be no fundamental difference between us and any other species on the planet.”

He believed exploiting that difference was his destiny, an obsession begun at an early age. Uniting the computer and media was his interest since at least high school. “At a core level,” Glaser said, “I’ve always been a media junkie interested in the nexus between media communications infrastructure and interactive digital technology—the things that I’m working on now and with RealNetworks.” These interests and his entrepreneurial spirit coincided to give him the inspiration to create, and doggedly work to dominate, the field. In an environment filled with college-age youths willing to lose themselves completely to their work, Glaser was able to compete because he seems to have been born with a superhuman ability to juggle an astounding number of projects. He described an “intense focus” that one sometimes sees in college kids “when they first discover that they’re able to do things and have that kind of expressive impact—that you can stay up all night and write software that does something that’s never been done before.” Like a few other Energizer Bunny-like Microsoft alumni, Glaser has pushed himself far.

Glaser embodied some interesting contradictions, which would inevitably carry over into the company he founded. The son of a psychiatric social worker and a printer from Yonkers, New York, Glaser was tirelessly devoted to social activism from his teens, during which time he leafleted for farm workers and organized against nuclear power. At Yale, while simultaneously working for three degrees (one in computer science and two in economics), he somehow found the energy to write a column and edit the editorial page of the Yale Daily News, lead the Campaign Against Militarism and the Draft, and run a small videogame company called Ivy Research. By the time he graduated in 1983, Glaser was a textbook workaholic, an attribute that primed him for success at Microsoft, as well as for running the Real-Networks juggernaut.

A childhood incident seems to have set the spark that propelled him down this path. While in third grade, the young Glaser went with his New York classmates on a field trip to nearby Inwood Park, just outside the city, to visit the Native American caves where, into the ’50s, one could find arrowheads.

“In addition to [the artifacts] there was a massive amount of garbage and pollution,” remembered Glaser. His class was disturbed by the conditions, and his teacher encouraged them to write the parks commissioner, bundling and sending the finished complaints. The commissioner soon sent his response, a letter that quoted some of Glaser’s text. The 8-year-old was very impressed by the power of interactive communication.

In high school, this fascination would continue, and while he studied early computer science, Glaser and his classmates hooked up a terrestrial wired radio station, broadcasting by stringing wires within his high school, running from a room halfway between the gym and the cafeteria. “You could argue that I’m pursuing the same interests that go back twenty years, or thirty years to third grade, only on a larger scale.”

After his incredibly busy performance at school, Microsoft was the only company fast enough for Glaser. He joined the company because he was impressed with the team there, and soon he rocketed to head several key projects, picking up on some of the main technologies that would drive the Net. “I was certainly very lucky from a timing standpoint,” he said, noting that he was involved with all the networking products for Microsoft in the late eighties and learned protocols such as TCP/IP (the technical underpinnings of the Internet). He was also in charge of multimedia consumer systems, which helped him understand a fair amount about hypermedia and interactive experience from the standpoint of the stand-alone PC.

After Glaser’s departure from Microsoft, a good friend named Mitch Kapor, inventor of Lotus 1–2–3, convinced him to join the Electronic Frontier Foundation, which Kapor had cofounded with John Perry Barlow, the Grateful Dead lyricist. At the EFF meetings Glaser hooked up with Dave Farber, who would become the chief technology officer for the Federal Trade Commission. Glaser said about Farber: “if you use the plural, ‘fathers’ of the Internet, he’d certainly be in the Philadelphia Convention Hall picture.”

Although Glaser also met people involved with developing interactive TV, he was not intrigued by that technology; he concluded that it “had no method, from either a technical or from a business standpoint, of bootstrapping itself.” It would not be able to take off—because it had no way of reaching the critical mass of viewer and broadcasters interested in making it succeed. But the Net, on the other hand, excited him with its potential. He believed it offered “an architectural solution for all the fundamental issues.” Namely, the distribution network was already developed enough to sustain momentum. “It was clear to me that through the whole phenomenon later called viral marketing this was going to unleash incredible impact,” Glaser said. “It was one of these snowballs moving downhill with incredible alacrity, so it seemed to me that if we could do the same thing for audio and video that Mosaic was doing for static text and images, that we would have a profound impact.”

The Web would not spring to life without baby steps, so audio—low fidelity audio—was Glaser’s way of making the first move. With friends who had been involved in politics, he launched Progressive Networks, a company that would deliver highly compressed sound files in small streams so that even with slow modems, anyone could listen in real time. The idea was to start playing the files while they were still being downloaded, to eliminate the usual frustrating wait before anything could be heard. The system was dubbed “RealAudio,” using the space-less conjunction favored by Net companies. To make it work for the slow modems of the time meant heavily compressing the audio file, stripping away a vast amount of information and leaving only the bare bones of sound. What you ended with usually resembled a scratchy low-fi AM radio. Even with its faults, the fact that RealAudio worked was an exciting beginning, and it was actually a very apt solution for talk-based radio and news shows. While some hard-core geeks conceivably would spend a night downloading a song by their favorite groups, few would do the same for National Public Radio’s “All Things Considered.” But once the barrier of a huge download was eliminated, many listeners flocked to the Web to hear to their favorite shows at their convenience and search the archives of countless broadcasts.

RealAudio’s main target was radio stations that wanted to make their broadcasts, usually talk, available. Glaser could see the difficulties of persuading the record labels to release their prized catalogs of songs and didn’t want to pursue music downloads just yet. Comparing streaming audio files for broadcast to downloading them for physical delivery, Glaser decided for two reasons to avoid the latter. The first reason was that low-power modems made downloading too onerous for the general public. The second, more persistent issue was that the owners of copyrights were unlikely to embrace the Net, “not for reasons of rational economic self-interest, but because the music industry operated in a hidebound, one might even say cartel-like, way.”

Glaser described the attitude of the major record companies as “‘we have these physical pressing plants, why would we put anyone else in the distribution business?’” He could see that they didn’t want to let anyone else in “even though those new people might have grown their business. So, our philosophy was: let’s deliver the best possible consumer experience and focus on something that doesn’t have gatekeepers that can unilaterally determine whether or not we can get something going.” The reluctance of rights holders did not subside over time. Quite the contrary, he said, “now it’s the battle royale.”

The radio strategy worked, and soon there were stations all over the world distributing programming on the Web, from hour-long specials to around-the-clock broadcasting. Web sites like CNET and HotWired were trying to use the Net to score points over old media by supplementing their written offerings with RealAudio interviews and reporting. Despite only-adequate sound, online offerings expanded beyond talk to music radio, and RealAudio also became the default format for previewing songs on sites such as Amazon.com. It wasn’t just in America, either. Envelope-pushing radio stations around the world began to broadcast their content over the Net. Expatriates from countries as far apart as Finland and Thailand were able to tune in to the music of their homelands, just as scattered American college alumni could stay tuned to their universities’ stations.

Several generations later, RealAudio started to sound very good, especially over faster lines. Fidelity at slower settings was better, too. With its primacy established for streaming audio, the company next turned its focus to developing video on the Net. It changed its name to RealNetworks and filed for an IPO. On November 21, 1997, the company raised $37.5 million by selling 3 million shares.

While video was the obvious progression from audio, and dominating the field a worthy goal, the company failed to see how popular downloadable music was becoming. It wasn’t until after the success of Winamp and Napster that RealNetworks would release RealJukebox, an MP3 player of its own. Though RealAudio convinced a generation of Net users that sound worked on the Web, it did not focus any efforts to build a business selling or distributing popular songs. That was where Liquid Audio stepped in.

While Santa Cruz was the lush and isolated birthplace for IUMA’s portal for bands, there was another spot not far north whose rich mix of academic values, technical innovation, and do-it-yourself culture encouraged pushing all the limits of music, especially when it came to technology. If the semiconductor chip business was important enough to name the whole region “Silicon Valley,” the heady musical side of Palo Alto and neighboring Redwood City and Menlo Park was busy following its own path, and one would inevitably intersect the other.

The sprawling suburbs, towns, and wooded hills southwest of the San Francisco Bay seemed to represent American innovation in the latter parts of the twentieth century. The area also defined experimentation, both technical and social, and was the birthplace of the Grateful Dead and the Jefferson Airplane, though they later moved to the urban setting of San Francisco’s Haight Street. Despite plenty of upscale neighborhoods, from the sixties through the early nineties there was still room for bohemians and enclaves such as that of author Ken Kesey, whose regional “acid tests” (as well as LSD experiments conducted by Stanford) were crucial factors in launching the psychedelic movement of the sixties.

“It’s a fertile area, that’s for sure,” said Liquid Audio CEO Gerry Kearby, pointing out that the trio of Stanford University, audio hardware manufacturer Ampex, and the Grateful Dead all combined to create an environment of audio exploration; his company brought together veterans from all three. The combination of music and the computer was simply inevitable, and there was not a more likely spot for propagation than the South Bay and its community of Deadhead engineers.

“All that stuff sort of started with the Dead. They spent a lot of money trying to figure out how to make stuff sound better, and how to push the envelope,” said Kearby. “Bands like the Dead and companies like Ultrasound—the Dead’s PA company—were very involved in the transition of adding computers to the process of making music.”

Because Ampex “was the greatest audio company in the world in the late ’70s and ’80s,” engineering products that are still in use today, Kearby says that the company was responsible for a convergence of audio engineers in the region. Ray Dolby, for instance, was working at Ampex when he developed his idea for noise reduction. “It’s no accident that I’m here, and many top engineers at Dolby and Liquid Audio came from Stanford,” said Kearby. Besides of its network of like-minded professionals with a penchant for experimentation, the environment was good for inspiration.

Kearby’s contribution to the online world evolved from a rich collage of experience in the many sides of making music. He was born in Oklahoma, and his life was typical of many American rolling stones; his hometown was where he decided it would be. Though he attended college during the Vietnam War, Kearby was drafted into the Marines, losing the typical student exemption because he was too busy playing in rock bands and “forgot to go to classes.” He managed to avoid a Southeast Asian tour of duty and became drummer in a Corps band. There he saw a different type of action; he was required, he says, to play drums in the middle of a Washington “riot” while an angry mob pelted him with rocks.

After his time in the service, Kearby resumed his studies at San Francisco State University without much direction—he refers to his time there as “majoring in the G.I. Bill.” (Actually, he earned a B.A. in broadcast management and audio engineering.) Back in San Francisco he helped some friends manage a recording studio and found that he enjoyed the work. Kearby became a sound engineer for bands like Jefferson Starship and the Grateful Dead until “after a couple of years it occurred to us that we were doing all the work, and the musicians were getting all the money.” During this period he was also actively teaching music to marching bands, a vocation he practiced for ten years.

In the mid-’80s, as easy-to-use personal computers like the Apple Macintosh were gaining popularity, Kearby and some friends from the Center for Computer Research in Music and Acoustics at Stanford realized that there would be a market for computer-controlled recording studios. They formed a company called Integrated Media Systems, which was quickly tapped by George Lucas to build his first professional digital recording studio. Kearby describes the development as almost happening by itself: “one day we woke up and found ourselves a high technology company.” By 1989, the company sold his digital audio workstation to the Swiss firm Studer Editech, and Kearby stayed on as VP of sales and marketing. After several years, he grew restless. In 1995, Kearby quit his job, and took the summer off to “walk the dog and watch the O. J. trials.”

By then the hype over the Internet had grown into a roar and was quickly becoming an American obsession. Whether walking the dog or watching TV, few Bay Area residents escaped the powerful buzz. Kearby was no exception, and with plenty of sound technology experience under his belt, he realized that he knew how to make “the kind of authoring tools that everyone on the Internet needed.” He had heard the streaming offered by Glaser’s RealAudio and thought it was “OK,” but realized that musicians and labels would soon want to sell songs and records on the Net and that this business—worth potentially billions of dollars—would require special tools. He believed that he could build those tools.

Kearby quit walking his dog so much and recruited a friend, the software engineer Phil Wiser, also from Integrated Media Systems, and venture capitalist Robert Flynn. They began developing the Liquid software and went in search of the right venture company for financing. They believed Hummer Winblad to be that company—because of its reputation as a smart investor that took a hands-off approach after assembling the management team—but roping the company in would prove difficult. Kearby and Wiser originally thought that their system would need a hardware component, in addition to their software tools; something with added processing power to decrypt sound while retaining high quality. Hummer Winblad was a software-only firm and declined to even hear their pitch.

When a self-imposed deadline for launching his company or finding another job was just a month away, Kearby read an ad in the paper announcing that venture capitalist Ann Winblad would soon make an appearance at San Jose’s nonprofit Center for Software Development (now known as the Software Development Forum). This was a fundraiser—casually called “The Gong Show”—at which developers paid a nominal fee to talk to a VC for ten minutes, with all proceeds benefiting the center. Kearby called the center the day before the event and was told that the event had been sold out for months. He asked if anyone might have canceled. Nope. Realizing that this was probably a needy group of developers, Kearby had the bright idea to inquire if anyone’s check had bounced. Sure enough, one had, and he was able to assume that place.

His presentation went well, and on second meeting Winblad told him that although she liked his ideas, he was clearly “an audio guy” who “didn’t think like us Silicon Valley people.” He needed some help polishing his pitch. She suggested that he hook up with Steve Holtzman. A latter-day Renaissance man and a connected Silicon Valley player, Holtzman juggled careers as an avant-garde composer and digital theorist. An unimposing figure with sharp, darting eyes, Holtzman had held successive positions as VP of marketing at Wise and Radius, and he’d earned a lot through their successful IPOs.

As one who’d often contemplated music’s place on the Net, Holtzman was immediately enticed. He called Kearby that day and met him the next. After lending a quick hand to polish Kearby’s plan, Holtzman ended up writing a check for $100,000 on the spot. Kearby phoned Winblad to relay the good news. “I said ‘Hey, Ann, your due diligence guy just wrote me a check. Let’s do this deal,’” Kearby remembered. Though she was obviously keen on the deal, Winblad put Kearby through an “Excalibur test” by seeing if he could strike an exclusive deal with Dolby labs. Through years of work, Kearby was very familiar with the key figures at Dolby and had good relationships there. But the company was known to refuse any exclusive deals, and so it came as a surprise that Kearby instantly snagged the exclusive Internet rights to use Dolby’s encoding technology. Hummer Winblad put together a $2 million deal that included $600,000 from Intel, and Liquid was launched in May 1996.

By November, the company assembled a product that did not require any additional hardware and set out to show it to the world. Sammy Hagar, fresh out of Van Halen, a friend of Kearby’s, offered to put up a single from his first post – Van Halen album, Salvation on Sand Hill. Both Hagar and Liquid were happy with the consumer response. “The reaction was pretty immediate at the pro-media level,” Kearby said, claiming 100,000 downloads for the song. There was an added benefit of generating that same number of addresses for a Hagar e-mailing list. This list concept was key in strengthening artists’ abilities to market themselves and loosen the grip of the industry. “We saw the Internet as a way for musicians to be able to sell their music without having to get record contracts,” said Kearby.

The Liquid system was threefold. There was the encoding software, called the Liquifier, which used the AAC compression, a stronger, better-sounding format than MP3. To send Liquid files over the Net, the Liquid Music Server was needed. In addition to standard file-server functions, the Server encrypted every music file and slapped a watermark in it for good measure. Only those listeners with a Liquid Music Player positively identified as the owner of a certain song were allowed to play it. If anyone else tried, they were redirected to a commerce site where they might purchase a copy for themselves.

Once a song was downloaded, listeners were allowed to burn one copy to a CD, provided they had such a burner. Overall, what customers got was a process that left them with pretty much what they would get if they bought their music at a record store, minus a little sound quality and the CD booklet. Liquid Audio made retailers nervous, but was still familiar to the industry compared to much of the Net, inasmuch as it spoke a language that retailers were familiar with and changed the business in terms they understood. When Liquid launched, MP3 was still essentially underground.

Despite tools such as e-mail registration that would help artists to control their own marketing, Liquid was very careful not to rock the boat within the establishment and worked hard to stay on friendly terms with everyone.

“When I started the company I had a mantra that was: ‘empower those in power,’” said Kearby. “It just seemed like such a complex food chain that almost anybody could veto you. When we started, my partners Rob and Phil and I diagrammed the music food chain and made sure that the Internet provided a positive value proposition for everyone from the recording studio owner, through the distributor, through the collection agency through the retailer and then ultimately the consumer. We were often accused of doing too much, but when you’re inventing an industry.… It wasn’t like Henry Ford had any choice but to put four wheels on a car. You’ve got to do the whole thing.”

Liquid Audio’s insistence on copy protection and other industry-friendly gestures still did not appease all quarters. The industry remained wary. Kearby presented a demo—a song produced by the legendary hit man Phil Ramone—at the offices of online music retailer N2K (later acquired by CDNow). Kearby took the group through all the steps: paying for the song, downloading and then burning it to disc, just as Liquid Audio hoped consumers would. Playing the CD back and comparing it to the original on “a very high-quality set of speakers” impressed everyone. Ramone himself, Kearby related, turned to him and said, “This is gonna piss a lot of people off!”

The people that Liquid was most likely to disturb were the ones who had the most to lose from an Internet sales model: the brick-and-mortar retailers who weren’t set up to sell on the Web. In September 1997, their fears were stoked. Capitol records planned to release “Electric Barbarella,” a single from a new album by the ’80s new wave glamour boys Duran Duran. The company wanted not only to release the single in the Liquid format, but also, contrary to advice by Liquid, release it online—before it made it to retail. The retailers were immediately displeased. Phil Ramone was right: The Net has the capability of offending, or disintermediating, everybody. Capitol backed down after retailers threatened to boycott the CD, and the song was released on the Net and in stores simultaneously. Retailers needn’t have worried so much: few consumers were receptive to buying music through such an untested system, and nothing very sexy was there to lure them to experiment.

Although Glaser’s RealNetworks and Kearby’s Liquid Audio achieved their own brand and degree of success, neither company was prepared for the tidal wave that MP3 rode in on. And while being tied so heavily to their own proprietary system may prove to be a long-term blessing, as the wealth of MP3-based innovation began to spring up around the Web, it was hard to see the format as anything but a curse, especially for Liquid, which was such a direct competitor. Until 1999, only the Liquid Player could play its specialized format. While the Player had loads of great features, including the ability to display cover art and integrate commerce, it was next to impossible to get music fans to download and install it when they had such a wide choice of other, more enticing options. Namely, free music.

If the successive waves of online music pioneers included many who were pushing the technological, social, and legal limits for a mixture of aesthetic hopes and utopian dreams, what pushed MP3.com founder Michael Robertson was something different. He hadn’t cared very much about music since ending a brief stint playing clarinet in his high school band, and the first time he even noticed the term MP3s was when he saw how popular it was as a search word on a Web site he was running. But Robertson was a natural-born capitalist.

“Well, you know (#litres_trial_promo), I grew up really poor,” Robertson said once in an unguarded moment. “I think that has a way of motivating people, and I do have the entrepreneurial bug. Hopefully, after three companies, maybe I got it right with MP3.com.”

Blond, boyish-looking, and with the constantly upbeat manner of a salesman or a preacher, Robertson grew up in San Diego, California, in a very religious family with modest means. Not interested in more of the same for himself and his kids, Robertson meticulously transformed himself into a notoriously hard-driven entrepreneur. After receiving his B.A. in cognitive science from University of California San Diego, he jumped into the world of high tech by starting two successive software companies, MR Mac and Media Minds. The first was a networking and security consultancy, for which his enthusiasm faded when he realized how hard it was to scale to something really big. Software didn’t have that limitation—although one body could only do so much consulting, one program could travel anywhere. Media Minds made imaging software, tools for managing digital photos; it wasn’t very successful, Robertson contended, because it was ahead of its time. To have that much experience under his belt while not yet thirty was priceless.