With the invention of the phonograph by Thomas Edison in 1877, music became available in a unique,


With the invention of the phonograph by Thomas Edison in 1877, music became available in a unique, new, and different medium. Before the phonograph, music could be listened to only when played live to an audience. With the ability to record and permanently capture music, an industry was formed. Through its more than 130-year history, the industry has had many peaks and valleys and has faced a number of unique issues as the industry evolves in a digital age. A historical summary of the music industry in presented in Table 1.

The Rise of Napster A critical step is needed to transfer recorded music legally or illegally from one computer user to another. That first step is creating a software program that will convert and compress the information into a transferable file.

The advent of MP3 files allowed music to be sent and stored electronically through the Internet. Napster became the mother ship of music transfer. Users could download and trade the music files without any third party being involved in the process. The first MP3 player, MPMAN, was introduced in South Korea by Saehan in February 1998 and was released in the United States in the summer of 1998. The MPMAN was the first portable player that could play MP3 files. The Recording Industry Association of America (RIAA) sued the manufacturer of the MPMAN player on October 9, 1998, for facilitating copyright infringement. The music industry claimed that it was unethical and illegal because the artists who were involved in the recording of the song received no payment when the user obtained the song via an MP3 file on the Internet.1 The software program used to transform a personal computer into a server that could be used to transfer music files was developed by an 18-year-old freshman at Northeastern University in Boston, Massachusetts. Shawn Fanning just wanted a method with which he could trade music with his friends, but his software changed the music industry forever. At 19, Fanning dropped out of Northeastern so he could build Napster into one of the most visited websites on the Internet. Fanning’s uncle, John Fanning, financially supported Shawn’s vision and became Napster’s largest shareholder. Napster’s software allowed users to search quickly and effectively to identify where MP3 files were available on other websites.

The Long and Winding Road of the Music Industry 1877: Thomas Edison invents the phonograph record, which

In 1999, the RIAA filed a copyright-infringement suit against Napster and claimed that Napster was the facilitator for the illegal transfer of music from one peer user to another. Napster claimed that it was just a service where peers could trade music between websites and was not involved in the actual transfer of music, whether it was legally or illegally done by the computer users. In January 2000, the RIAA sued MP3.com for compiling a database of RIAA members’ music without permission from the artists.3 In April 2000, the heavy metal group Metallica sued Napster for allowing users to illegally transfer Metallica songs without the band receiving any royalty compensation. In March 2000, Nullsoft, a division of America Online, introduced Gnutella as a file-sharing system that does not have the centralized index server Napster used.

From 1999 to 2003, between $700 million and $2 billion in sales were lost to the music companies and the artists through illegal music file sharing. By the end of 2004, the RIAA and the International Federation of the Phonographic Industry (IFPI) had filed more than 7,700 legal actions against individuals and organizations that share music illegally through file transfers.5 The downloading of music files is predominately done by younger listeners. A poll published in the Wall Street Journal in 2003 revealed that 53% of respondents age 12 to 17 and 44% of respondents age 18 to 24 had downloaded music from the Internet. The percentage dropped quickly to 23% for the age range 25 to 34, 12% for respondents 35 to 54, and 3% for those respondents who were 55 years of age or older.

On April 3, 2001, musician Don Henley of the Eagles testified before the Senate Judiciary Committee in Washington, representing the Recording Artists Coalition (RAC), a large group of musicians. Henley stated that the file-transferring system used by Napster and other swapping services such as Gnutella, Kazaa, and OpenNap did not allow the artists to collect rightful compensation for their work. On June 5, 2001, Napster announced that it would start offering a subscription-based system in which the user must pay for access to music files from three of the major record labels.8 The decision was based on the fact that the RIAA won the legal battle to force Napster to filter out all copyrighted songs from its file-trading system that the user does not have to pay a fee for.9 The battle over copyrighted songs was not over. Just as with the boy who put his finger in the dike, another hole opened. Kazaa seized on the vacancy of free music trading left by Napster to establish its own fileswapping system that was easier to use. By February 2002, more than 33 million users logged on to Kazaa to transfer music to each other. In early 2002, 1 billion files were traded daily on Kazaa, including music, software, and movie files. The RIAA filed suit against Kazaa and claimed that the company had created the equivalent of a 21st-century piratical bazaar, allowing the illegal trading of copyrighted material. Claiming the same defense as Napster, Kazaa stated that it could neither control nor be responsible for the illegal actions of its users. The parent company of Kazaa, Sharman Networks, also owned Streamcast, which had given out more than 60 million copies of its file-sharing software. The CEO of Streamcast, Steve Griffin, compared file sharing with photocopying. He stated at a music summit in Los Angeles in February 2002 that employees used a copy machine to make copies of articles to pass around the office so everyone in the office does not need to buy the magazine. So why would it be any different to share music files?10 The music industry lost the initial lawsuit against the file-transferring service Grokster on April 25, 2003, when a federal court ruled that Grokster was able to continue to offer its software to transfer music files. The court ruled that Grokster was not responsible for the illegal transfers because it did not have centralized computer services that would allow it direct access to monitor which files were being transferred from one peer to another. This system was different from Napster’s “central list” system, which did allow Napster the opportunity to review what files were being transferred.11 As a result, the RIAA decided on June 25, 2003, that it was going to start suing individual users who had illegally transferred large numbers of music files. On September 8, 2003, the first lawsuits were filed against individual users. In the text of the letter sent with the summons was an explanation of the music industry’s position. The RIAA stated that copyright is not a crime with one victim: Many people are involved in the recording, manufacturing, and distribution of music, and their salaries depend on the legal purchase of music. The initial settlement amounts ranged from $2,000 to $5,000.12 The RIAA targeted users who had shared more than a thousand files. The copyright law in the United States allowed the RIAA to sue users for as much as $150,000 per song for copyright infringement.13 In October 2007, Jammie Thomas-Rasset became the first individual to go to trial for illegally downloading music. The jury found Thomas-Rasset liable for copyright infringement, and she was ordered to pay $222,000 for illegally downloading 24 songs.14 In November 2010, a retrial resulted in a different verdict for Thomas-

Rasset. Instead of having to pay $222,000, she was now ordered to pay $1.5 million. Needless to say, Thomas-Rasset’s attorney stated they were planning to appeal the verdict.15 On June 27, 2005, a victory occurred for the music industry against Grokster when the U.S. Supreme Court ruled that file-sharing websites could be sued for encouraging illegal copyright infringement by the users of their services. The court ruled that Grokster or any other file-sharing service is liable for the actions of its users who infringe on copyrighted material.16 On September 5, 2005, the federal court in Australia ruled that Kazaa’s file-sharing system breached copyright laws in that country, and Kazaa was given 2 months to alter its file-sharing software. Kazaa was controlled by Sharman Networks, located in Sydney, Australia. Kazaa had taken over from Napster as the most popular free file-sharing website. Kazaa made its money by selling advertising on the webpages as the users searched for music files.17 In July 2006, Kazaa agreed to pay the music industry $115 million to settle global lawsuits pertaining to illegal downloading. Sharman Networks also promised to use all reasonable means possible to discourage online piracy by its users. Sharman Networks stated that it would begin negotiations with the record labels to obtain legal access to the copyrighted songs.18 On November 7, 2005, Grokster closed down its operations without warning. The only message left on its website stated that the Supreme Court unanimously decided that Grokster had illegally traded in copyrighted material and that there were other services that offered legal downloading of music and movies, but Grokster was not one of them. Shutting down the operations was part of the settlement Grokster had reached with the music industry. The settlement also stipulated that Grokster was not allowed to directly or indirectly infringe on the copyright of any of the companies that filed the lawsuit against Grokster.19 The settlement also included Grokster paying the RIAA $50 million to compensate for its past illegal activities.

On May 16, 2006, the RIAA filed a lawsuit against XM Satellite Radio for its portable device called Inno that can save as many as 50 hours of music for one monthly fee. Similar to an iPod, the Inno allowed a listener to hit a record button on the device whenever a song that the user wanted to save was broadcast on XM Satellite Radio. The RIAA claimed that the listener did not pay the copyright to “own” the song, which can be permanently stored on the hard drive within the Inno. The RIAA filed for copyright infringement and for unauthorized digital delivery, reproduction infringement, and unfair competition. The RIAA asked for $150,000 for each song copied by customers of XM that had been downloaded onto one of the portable devices.20 XM had responded to a product offered by its competitor, Sirius Satellite Radio, called the S50. It offered the same features, and Sirius settled with the music industry by agreeing to make a payment to each music company from the proceeds for each S50 that was sold. XM argued that it was already paying broadcasting rights for the songs and wanted to know why it should have to pay additional royalties for a device that is similar to using a tape recorder to record songs. The music industry responded by stating that XM was indirectly “selling” the songs by allowing the listeners to capture the songs permanently on the device.21 In December 2008, the music industry waved a partial white flag when it decided to stop suing thousands of people for downloading pirated songs. The legal proceedings that had started in 2003 and had grown to 35,000 people were not effective in deterring illegally downloaded music. The music industry stated it would focus on working with Internet service providers to stop the downloading. France and the United Kingdom used this philosophy to address music piracy. Both countries require the Internet service providers to warn users about illegal downloads and then potentially shut down their Internet service if the providers refused to stop downloading pirated songs. In France, a new agency was formed that polices the Internet and requires that offenders who have repeated offenses must appear in court, After two written warnings, the users in France can have their Internet disconnected for as long as a year and can be fined more than $400,000.22 In May 2011, the major record labels won a 5-year battle when they settled a lawsuit with LimeWire for $105 million for copyright infringement. LimeWire is a file-sharing network that allowed its users to upload and download music without permission.

The Savior of the Music Industry: iTunes

In April 2003, what saved the music industry’s attempt to control illegal file transfers took place when the Apple iTunes Music Store service was introduced. The predicted success of iTunes was seen after 2 days when 475,000 songs were legally downloaded through the iTunes service for 99¢ per song. The ironic point about Apple being the savior for the music industry was that Apple officials were not concerned with illegal music transfers per se but wanted more people to buy its computers. Apple officials believed that an easy legal way to transfer music from a computer to a portable device would give Apple a competitive advantage. Apple managers realized the power of iTunes and offered a Microsoft Windows version of the software in October 2003 and focused on selling iPods to be used with iTunes. Of course, iTunes and iPods exploded in demand. In its first year, iTunes sold 70 million songs, and by the end of 2004, 10 million iPods had been sold. By the end of 2005, 30 million iPods had been sold and 600 million songs had been downloaded.


1. Comment on how widespread illegal transferring of music is on college campuses.

2. Should payola be allowed? What is the real ethical problem with it?

3. Why do you think Eliot Spitzer became involved in the music industry’s problems?

4. Is it fair that artists must shoulder the burden of proof with respect to their royalty payments? Defend your position.

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Understanding Business Ethics

ISBN: 9781506303239

3rd Edition

Authors: Peter A. Stanwick, Sarah D. Stanwick

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