Fighting the rising swapping tide.

THE recording industry already has blamed illicit music file swapping for keeping as much as $5 billion from its coffers since 1999.

But it gets much worse. With the number of households installing high-speed Internet access - the key component in moving large data files - projected to nearly triple within four years, the music business faces the prospect of mammoth losses and little assurance that its counterattacks to piracy will have much effect.

For now, the industry is litigating where it can, lobbying Congress to tighten existing laws; and seeking alternative business models to crowd illegal swapping from the marketplace.

Just last week, a federal judge ordered the Internet unit of Verizon Communications Inc. to reveal the name of a customer accused of music piracy, a potentially significant legal foothold for the record industry.

"There is no question that enforcement of existing laws will have a significant role in migrating consumers away from illegal services," said Cary Sherman, president of the Recording Industry Association of America, the trade group representing record companies. "It is illegal and unethical. You see how it is hurting the music marketplace from the retailers to the artists, so it's appropriate to stand up and say it's wrong."

But as the music industry pushes for tighter controls, technology companies are starting to fight those efforts. A group called the Alliance for Digital Progress, backed by the likes of Microsoft Corp. and Dell Computer Corp., is expected to lobby against efforts to build anti-piracy mechanisms into computers and software. Also entering the fray are consumer groups that fear anti-piracy efforts will eat into privacy safeguards.

The biggest roadblock to deter music piracy, however, is the most blatant: for every legal victory and technological advance the industry makes, those bent on moving copyrighted material without compensating its creators and distributors always seem to stay one step ahead. And just forcing Internet service providers to reveal their customers' names won't necessarily lead to prosecution.

"People write these programs at home and just distribute them," said Lee Black, an analyst at Jupiter Research, which tracks online activity. "They're easy to do and they keep getting smarter."

Problem of scale

The record industry has never really had a problem with file sharing per se, just widespread file sharing. Audiotapes did little to stunt record sales in the '70s or CD sales in the '90s. CD burning and file-swapping between friends is generally looked at in the same light. Even now, some labels worry about alienating their customers who want to share files and burn CDs.

"I don't know of a record company that has ever sought to interfere with somebody making a mix tape or burning a compilation CD," said Sherman. "Personal use is not the issue here, it's the scale."

And trying to persuade users of file-sharing networks that illegal downloading is "uncool" is considered the least effective remedy.

"It's not about the ethics," said Jim Griffin, chief executive of L.A.-based Cherry Lane Digital, a music publisher. "Capitalism depends on us looking for the shortest path. And it's not a moral judgment, it's how markets behave."

The recording industry initially tried to go after the software companies that enable users to share music. It was successful in speeding the death of Napster, but that did little more than open the door for the likes of Kazaa, Grokster and Morpheus.

If the industry is able to shut down a site, another is certain to take its place.

The problem is that there are virtually no barriers to setting up a site where users can download swapping software. It can be done, and often is, from remote islands beyond the reach of U.S. copyright law. Even if all the sites were somehow shut down, Internet users could still e-mail file sharing software to each other.

For their part, the companies making these applications say they break no laws and encourage users to respect copyrights.

"We do not promote or condone the transfer of copyrighted information. And so we don't assume any more responsibility than AOL or Microsoft does for their instant messaging services," said Trey Bowles, vice president of strategic planning for StreamCast Networks Inc., the Franklin, Tenn.-based company that makes the Morpheus application.

Bowles says that 29 firms, including recording companies, independent labels and movie studios, are suing Morpheus but he is confident his company will survive the litigation. "Peer-to-peer technology is the future," he said.

'Digital wrapper'

StreamCast makes money from advertising on its Web site and by selling ads imbedded within the software applications. In fact, Bowles sees Morpheus as in the vanguard of an era when users will pay to swap music. His vision has bands and their labels committing to a specific delivery technology -- like one developed by StreamCast -- that would put a "digital wrapper" on music files. That wrapper, only to be applied to new recordings, would keep users from using another site to swap songs for free.

But pay models, no matter who offers them, have their limitations for the most obvious reason: why pay for something when it's available for free? Just ask the record companies.

Ever so slowly, subscription services have emerged as alternatives -- however rickety -- to the peer-to-peer networks that allow individuals to connect directly to each other and trade music files. Each has its own model, but thus far the major selling point has been customer service -- nonexistent in the peer-to-peer world -- and the moral high ground.

"We take the perspective that it is basically impossible to stop people from using peer-to-peer networks," said Steve Grady, general manager of Emusic, "As an industry. the only thing you can do if you want to survive is create something that people will pay for."

Emusic, a unit of Vivendi Universal Net USA that claims 75,000 paying subscribers, charges $120 a year for access to its 230,000song catalog that includes a sliver of songs from the Universal Music Group catalog and a larger offering from lesser-known artists on independent labels. All songs are available in MP3 format, which allows users to bum CDs or share files on the Web.

Pressplay, a joint venture between Universal Music Group and Sony Music Entertainment, gives users access to a hefty catalog from Sony, Universal and Warner Bros. and costs $180 a year. For its catalog of popular artists, though, Pressplay's customers have less control over the music they buy.

Some songs are only available for streaming, which means users can only listen to them on their computers; for an additional $1 per song, music can be downloaded permanently or burned onto CDs.

Still, with the plethora of sites working outside the copyright system -- Kazaa, Morpheus, Gmkster and others -- getting users like 30-year-old Keola (who asked that his last name not be used) to pony up any money is a challenge.

A self-described music junkie, Keola claims to have spent more than $30,000 on CDs and used to spend up to three hours in the record store each weekend. Nowadays he stays home and gets his music online -- and he's not paying for it. "I haven't gone out of my way to buy CDs," he said.

First steps

At this point, the industry is not counting on any one approach to combat piracy but a combination of efforts -- in the courts, in Congress and among users themselves. "There is no magic bullet. You need multiple strategies to change behavior of this kind' said Sherman.

In some cases, the record companies are taking matters into their own hands.

One popular method is "spoofing" in which they share fake music files with unsuspecting users in hopes of clogging the network. "That way people get what they pay for' Sherman said.

One way to keep online pirates from trading music before it actually comes out, says Wayne Pighini head of marketing for Santa Monica-based Vagrant Records, is to send advance album copies, such as press copies, as a lower-quality recording. The song might cut out part way through or change volume several times throughout the recording.

"We try to screw with the music a little bit," he said.

But adding new technologies also costs money, which raises operating costs at a time when the industry's economic foundation is being challenged. And despite last week's Verizon ruling, the various legal challenges could take years to resolve.

Meanwhile, record company revenues are down and retailers are shutting their doors. Music retailer Wherehouse Entertainment Inc.'s Chapter 11 bankruptcy filing, which it attributed, in part, to sales lost to online piracy punctuated the problem last week. The Torrance-based company says it will close 120 stores in the coming months.

File-swappers like Keola seem unperturbed: "Go ahead and prosecute all of us," he said. "We both know it's not a good use of time and money."

[GRAPH OMITTED]

Cutting Into Sales

File sharers admit their buying has decreased.


Increased:              16%
Decreased:              31%
Stayed about the same:  53%

Note: Table made from pie chart

RELATED ARTICLE: Making Them Pay

No Doubt has chosen litigation as a strategy to make music file swappers paying customers.

Online subscriptions: Several subscription sites have emerged as legitimate alternatives to peer-to-peer networks. Examples are Emusic, Pressplay and Listen.com. For access to online content, including songs that can be burned onto COs, subscribers pay between $10 and $20 per month, but often have limited access to content.

"Spooling": Record companies can send several fake copies of songs over peer-to-peer networks. This makes it harder to get a true copy of a song online, and also frustrates users, encouraging them to just go buy the CD.

Encryption: To keep consumers from downloading recordings to their computers, some companies have proposed encrypting the CD so that it cannot be read by a computer or destroys itself when attempt is made to copy the disc.

Legal Action: Litigation so far has failed to keep consumers from swapping files. It worked with Napster, but new services have emerged. Record companies have targeted the swappers themselves by getting their names from Internet service providers.

Education: Looking to convince consumers that file swapping is theft, the Recording Industry Association of America is hoping to make file swapping "uncool."