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Music Industry Shows Signs 
of Adapting Amid Tumult
 Laura M. Holson

Oh, to be a music industry executive these days. Sales of compact discs are sliding, down 10 percent this year, as CD burning and file-sharing proliferate. Legislators who have criticized the industry, saying it has a perception problem, are considering regulations to end some long-held practices, like paying independent promoters to persuade radio stations to play hits. And some people are concerned that disgruntled artists may stage a public protest at next year's Grammy awards, as they did last February, in a bid for greater autonomy.

Still, in the midst of one of the most tumultuous times in the music business since the payola scandals of the 1950's and 1960's, the industry is showing signs of adapting. In recent months music companies have tried to make more music available online. Artists are being wooed by labels to help in the fight to combat piracy. And the unusually tight-lipped industry, which has a reputation for suing rather than settling disputes amicably — consider the protracted legal fight over Napster — is being forced to speak out on its own behalf.

"People who think the record companies don't get it haven't paid attention," said Hilary Rosen, chief executive of the Recording Industry Association of America, the industry's lobbying arm in Washington. "One of the defining things to happen over the last year is people started to think that change wasn't bad."

But if record executives are singing a kinder, gentler tune, it is because, in effect, they have no choice. Almost every big music company has reported profit declines in recent quarters. Most recently the Universal Music Group, which is the world's largest record company and is owned by the Paris-based Vivendi Universal, said last month that its operating income dropped 89 percent in the third quarter largely because of higher costs to promote and develop musicians.

Universal executives, for their part, pointing to expected high CD sales, say income will improve in the fourth quarter. But many analysts fear that the problems Universal and others are facing continue to be systemic and cannot be reversed quickly. Consider the following: Universal's dominance in rap and hip-hop (it is home to rappers like Ja Rule, DMX and Eminem) is threatened as other music genres adopt the style.

Take the case of the rock band Linkin Park, the Warner Brothers Records act popular for blending rock music with rap lyrics. It sold 12 million copies of its Hybrid Theory last year, making it 2001's best seller. And pop princes and princesses, like Christina Aguilera and Justin Timberlake, have co-opted the sound as their own this year.

"This is a band who is selling records to kids who, years ago, would have bought gangsta rap albums," said Craig Marks, the editor of Blender magazine.

Despite that, Doug Morris, chief executive of the Universal Music Group, is optimistic, predicting that the industry's subscription-based online offerings, which recently began to allow CD burning, will provide a lucrative source of secondary revenue — enough to rival the sale of compact discs. "Every day it is more and more," he said in a recent interview. "It is going to shock everyone."

That, of course, does not mean recording companies are going to become lax in their effort to battle piracy in 2003. In an effort to thwart file-sharing, some companies are already employing technology that allows compact discs to be played only on CD players, not on computers.

Copy-protected CD's are more common abroad, in part because record executives fear a strong reaction from paying consumers in the United States who want to play their CD's on their computers, where they can create custom playlists. By the end of next year, though, copy-protected discs could be more common in the United States, analysts say.

Still, Ms. Rosen said, "There is no silver bullet for piracy enforcement."

Another area likely to change is the accounting of royalties for artists, a particularly thorny issue for record labels and musicians alike. In the last few years many artists — like the Dixie Chicks, the country crooner LeAnn Rimes, the former Eagles member Don Henley and Courtney Love — have balked at what they call shoddy industry accounting practices.

Hearings were held by California legislators early this year, where record executives were told they had a perception problem that needed to be reckoned with. Hearings are expected to be held by legislators in New York, too.

Some companies have already begun to adapt. In November, the Bertelsmann Music Group said it would pursue a more explicit royalty accounting plan, which would not give artists more money, but would help them better understand what they received. That same month Universal executives circulated an internal memo saying the company would simplify its accounting procedures, giving auditors more and better access to their documents.

Managers and artists' lawyers were encouraged by the news, but some were skeptical that the industry as a whole would move quickly to institute broader changes. 




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