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In spite of record CD sales last year, the venerable compact disc could begin a slide into audio obscurity in the next three to five years, some experts say. CDs "will follow the path of eight-tracks ... They're slowly going away," predicted P.J. McNealy, senior consumer electronics analyst at Dataquest Inc., part of the Gartner Group Inc., a market research firm.
Results of a Gartner survey released last week said 23 million Americans now listen to music downloads -- high-quality music grabbed from the Internet for playback on a computer or any of a growing number of portable devices. In terms of a trend, "I think we're already there," said Shawn Conahan, director of wireless strategies at MP3.com, a Web service promoting downloads.
He and others in the emerging digital audio industry say teenagers who are growing used to fetching their music online, or converting it from CDs into the popular MP3 digital format -- a process called "ripping" -- are the vanguard. This is a generation "that doesn't care about the plastic" CD, said Jim Cady, president of Rio Inc., maker of the first popular line of portable MP3 music players.
The rest of us, along with the recording industry, will spend much of the next few years catching up, industry people said. McNealy, speaking at the Consumer Electronics Show in Las Vegas last week at a seminar he titled, "Internet Audio: the Albatross of the Recording Labels," said that while the CD may never completely disappear, the initial popularity of music downloads already shows that "the Internet has had a fundamental effect on people's behaviors."
At the moment, artists, record companies, hardware manufacturers and a slew of Internet startups are searching madly for the formula that will make downloading music both easy and profitable -- a combination that remains elusive. The controversial free song-sharing service called Napster has proved extraordinarily easy to use and has millions of fans. But so far, it is known for generating copyright-infringement lawsuits, not profits.
"We're educating a generation of thieves," McNealy said. Meanwhile, would-be competitors that actually sell downloads and pay royalties are having a tough time squeezing money out of consumers. Public digital-music-related companies such as EMusic Inc., MP3.com and Liquid Audio Inc. have seen their stock prices plummet. EMusic, which offers downloads for sale, announced layoffs and other cost-cutting measures last week, with its president and chief executive, Gene Hoffman, blaming declining advertising and "widespread illegal distribution of digital music."
A similar company, Musicmaker.com, said Jan. 3 that it was closing its Web site and liquidating to reimburse investors. "They can't compete with free," Matt Oppenheim, senior vice president of business and legal affairs for the Recording Industry Association of America, said on the cable TV show Silicon Spin, taped on the exhibition floor during the Consumer Electronics Show.
A pending copyright-infringement lawsuit brought against Napster Inc. by major record labels helped push the Redwood City, Calif., company in October to join with German media giant Bertelsmann AG in developing a way to charge users of the Napster service. Details of such a plan still have not been announced. Napster, however, contends that even its free service promotes CD sales by giving consumers a chance to sample music they may later buy. Additionally, the company last week added a link to CDNow, the Fort Washington-based online seller of CDs, to its software; CDNow is owned by Bertelsmann.
Despite such upheaval in the industry, the Las Vegas trade show featured a cornucopia of new gadgets for downloading, storing, playing and networking digital music. Scores of companies, including computer-chip maker Intel Corp. and electronics manufacturers Sony Corp. and RCA showed off their latest versions of portable MP3 players. Portable players have been around for about two years, but some of the latest are coming with hard disks of up to 20 gigabytes, capable of storing hundreds of hours of music. And many other new digital audio innovations will be flooding into the marketplace this year.
These include devices that record hours of MP3 files onto blank compact discs; portable and component players for such discs; adapters for playing MP3s stored on a laptop through a car's dashboard cassette deck; and Internet radios -- devices that look like table radios, but are actually modem-connected boxes for playing the thousands of audio signals now streaming online. A Hong Kong company, Perception Digital, demonstrated software meant to let a consumer locate a song in an otherwise unwieldy database by humming a few notes.
McNealy noted that companies producing cell phones, handheld computers and MP3 players are beginning to combine those functions on the same device. "You're going to see those things continue to merge," he said. And with so much money at stake, easy methods for providing the public with cheap downloads that nevertheless protect the copyrights of artists and publishers will emerge in the next 18 months to two years, McNealy said.
"People just want the music, anywhere, on any device," he said. He predicted that successful download businesses will offer music by the track from huge libraries of song titles. The often-suggested $ 10-per-month download subscription services will work, he said, only with certain genres of music, such as Top 40, or with extremely popular artists, such as Metallica and the Rolling Stones -- groups with enough hard-core fans to make their download sites profitable.
As for Napster, he said, even if the free service is shut down, "there still will continue to be an underground [for illicit song swapping], no matter what." Experts remain divided as to whether Napster encourages or discourages CD sales. In the latest Gartner survey, 34 percent of those who download free music said they were buying fewer CDs as a result. An equal number, 34 percent, said they were buying more. The rest were unsure. Even with CD sales up for the last year, McNealy said, the number of downloaders who are buying less music means "the record companies are seeing revenue fly out the window." He projected downloads could overcome CDs in popularity by 2007. However, he was unwilling to say that CDs will become extinct. "People like CDs because they're shiny and look nice, and you can put them all over the wall," he said.