"The Cloud is coming to steal my music collection!"

It sounds like a bad horror movie, and yet it might be true. The common way to listen to music has changed relatively slowly over the years, from records to CDs to downloadable files, the last format being one we were supposed to stick with until we all got used to it. But the reign of the digital download may turn out to be shorter than we thought. Downloads could go the way of the forlorn CD, felled by something even more ephemeral: the cloud.

If you read Google's press releases the way some people scan box scores, you know the basics. The term is short for cloud computing, the general concept of storing and accessing data remotely rather than on your computer, phone or hard drive. It isn't exactly new. The practice has been around for years, with "antisoftware" applications like Salesforce, and Web-based e-mail accessible from anywhere. But the extent to which the cloud is affecting the way we listen to and own—or, perhaps more important, don't own—music is just beginning to be felt.

Industry insiders disagree on whether the cloud concept will replace the downloaded file. "Labels had to deal with the disappearance of the CD, and now they're going to see the complete disappearance of the download," says David Hyman, CEO of MOG, a Berkeley-based music subscription service that relies on cloud computing. Others aren't quite so bold. "To say downloading is going to disappear is a stretch," says Neil Smith, vice president of business management at San Francisco's Rhapsody, one of the oldest music subscription services, which was launched in 2001.

Still, no one disputes that cloud computing is changing the way we listen to, access and purchase music. "Where we go from 2010 forward is going to be very heavily driven out of the cloud," says R.J. Pittman, director of product management at Google. This means a shift from ownership to subscription, from buying individual albums or tracks to buying regular access to everything, whenever and wherever we want it.

But this change hinges on a couple of major factors, not the least of which is that we must own a way to be connected to the cloud—such as a phone with an Internet connection—to benefit from it. This has some industry watchers skeptical. "Not everyone owns an iPhone or a smartphone; not everyone wants to own that," says Bruce Houghton, president of the Skyline booking agency and editor of HypeBot, a music and technology blog. He and others say that while there is undeniably a movement toward subscription models and free streaming services like Internet radio, the result is likely to be some combination of the two. Spotify, a European music subscription service not currently available in the U.S., has an iPhone app that creates a cache of several thousand songs in your phone for when you are offline—on an airplane, in the subway, camping in the woods or wherever. Hyman says MOG will soon release an app with similar capability. This hybrid model could become the norm for subscription-based services, offering a mix of ownership and fee-based on-demand access.

Then there's licensing. The major labels that own the rights to much of the music we listen to have historically depended on sales of albums and songs to drive their revenue. Individual licensing rates for streaming music—essentially the amount labels are due for each listen of a song from streaming services—are very much in flux. In fact, it's the reason Spotify isn't available here yet. Communications manager Andres Sehr will say only that the company is working to resolve its licensing issues in the U.S., and hopes to launch in "early 2010."

But even the most generous licensing agreement would give labels far less than the rates they are used to collecting on sales of CDs and digital downloads. This leaves record companies scrambling to replace lost revenue and to come up with a new business model based on lower fees from more users, instead of the higher fees from fewer users to which they have grown accustomed.

From an artist's perspective, the silver lining in the lower-fees-per-stream model is greater exposure, which can be exploited through creative merchandise sales and live performances. But many analysts believe that labels are failing to find ways to cash in on the new business paradigm.

"What the Internet promises is more people listening to much more music," says music industry analyst Bob Lefsetz, who blogs about the industry at the Lefsetz Letter. The major labels, he says, "have refused to monetize that in a way that the public wants it." He points to the advent of home video in the 1980s, when many observers tagged America as an "ownership culture" and said home video rentals would never take off. The eventual success of that market is one reason he believes subscription services like Spotify and MOG are offering the brightest hope for a new business model, provided they can work out satisfactory licensing agreements.

Internet radio outlets like Oakland-based Pandora are in a slightly different category: They broadcast ads but don't charge fees for users and are no less dependent on favorable licensing rates. Asked whether he thinks consumers will really give up the idea of having music collections, Lefsetz chuckles, "Well, the key is not to ask anybody who has a music collection."

Regardless of whether labels want to accept lower fees for their content, Houghton says, they may have little choice. "The music business is competing against free at this point, whether they like it or not," he says. Since users now have the ability to stream or illegally download songs for free, what's key for labels now is to get "some money instead of no money." One revenue possibility is for music subscription services to bundle their product with Internet service providers (ISPs), in much the same way individual cable channels come with your cable TV service.

So Rhapsody, for example, would be part of your Comcast Internet service, offering access to tens of thousands of songs for the (presumably slightly higher) price of your home Internet service. Rhapsody's Smith says that may be one direction his company is headed, and it's hard to imagine the other major subscription services sitting that out.

Aside from having a stadium-size cache of music to listen to at any time, another carrot for consumers is that the new music services are aiming to be more than simple jukeboxes. Pandora creates free radio stations that stream your favorite artists and suggest others they think you will like; MOG and Spotify offer similar "music discovery" tools. MOG even has an intriguing "slider" bar, where users can choose the degree to which they listen solely to one artist or mix it up with suggestions of similar acts. The service, Hyman says, "kind of lives in this world between passive and active," where listeners spin songs they know, or tune into a virtual equivalent of a college radio DJ who knows their tastes.

These benefits could turn out to be the main selling point for cloud-based service consumers, and for artists who want their music introduced to vast numbers of potential fans who probably wouldn't have heard them otherwise. In the end, Internet users have been used to stealing music off the Web. The only way to counter that, Hyman explains, is to offer a service that's better than what people can grab for free.

So don't fret. The cloud may be coming to steal your record collection. But once the dust settles, you might end up with something you like even more.

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