BROOKE GLADSTONE: From WNYC in New York, this is NPR's On the Media. I'm Brooke Gladstone, and this week we're all about the music. Everything that’s gone wrong in the news business went wrong first in the music business, at least the part that has to do with digital technology and the fact that the stuff we used to pay for we can now get easily for free. And, we have an anniversary of sorts to hang our exploration on. Exactly 10 years ago this fall recording industry execs had to confront what many saw as a cancer on their business model, a peer-to-peer file sharing service known as Napster. So, that’s the setup. But we've decided to let public radio and TV reporter Rick Karr guide the hour. He’s been studying precisely this issue for a dozen years. So Rick, take it away.

[MUSIC - ”LIVIN’ LA VIDA LOCA” UP AND UNDER]

RICK KARR: In 1999, the major record labels were “Livin' la Vida Loca.” They sold about 13 billion dollars worth of music – last year, just 8 billion. The industry’s troubles started exactly 10 years ago this fall. Back then most people didn't know what an mp3 was. There was no satellite radio, no Internet radio. There was no Apple iTunes music store because there were no iPods. But there was a new piece of software written by a college kid in Boston that let people copy one another’s music collections without paying. In the summer of 1999, Napster had only a few thousand users, but the record labels’ trade association was already getting nervous. A couple of months later, nearly a million people were using the software. So Hilary Rosen, who was at the time the head of the Recording Industry Association of America or RIAA gathered her members together to discuss filing a lawsuit. But first, she signed onto Napster to play a little game.

HILARY ROSEN: So you had the heads of all of the record companies in the country sitting around the table naming songs, their newly released hit songs and their back catalog songs. And every single song was available that people named, on Napster, by the time we ended up filing that litigation.

RICK KARR: So wait, let me make sure I've got this right. You’re sitting there in a board room at RIAA headquarters.

HILARY ROSEN: It was actually at the Four Seasons Hotel in Los Angeles.

RICK KARR: Okay, at the Four Seasons [LAUGHS] Hotel in Los Angeles, and you’re sitting there with a PC [LAUGHS] running Napster to demonstrate -

HILARY ROSEN: Running Napster.

RICK KARR: - to the heads of the labels that all of their stuff is out there.

HILARY ROSEN: All of their stuff was out there. You don't need to read legal briefs to all of a sudden have some alarmist view about that. All you needed to do was be in that room. Having said that, the other fantastic thing was all of these people are huge music fans, right? So there was this definite vibe that, oh, my God, this is so cool. Then why aren't we doing this? There were many of us who were kind of heartbroken that we were starting out in such an adversarial position with them. And I think that heartbreak kind of lasted for, for the next two years, when the companies didn't sign a deal, couldn't get to a deal, and ultimately Napster got shut down. I think it’s still the best music delivery [LAUGHS] system that anyone has seen.

RICK KARR: It almost sounds like you’re saying it was kind of a lost opportunity.

HILARY ROSEN: Well, it was a lost opportunity. It’s not widely known how serious and prolonged the efforts were to actually take advantage of Napster and have licensing and have it be something that the industry embraced. It just didn't happen. There was just never enough money to go around in the nascent days of online music to make people feel like they were going to get enough to pay for the future.

RICK KARR: Now, back to the present. Things aren't a whole lot better. Some online music services are still the targets of lawsuits, just like Napster was, and the labels and online music entrepreneurs are still arguing about money. Tim Quirk’s been hip-deep in the business the whole time. He started out as a musician playing in the major label band, Too Much Joy, but since the late '90s he’s been trying to create a legal online music service that’s as good as Napster was back in the day. Quirk is vice president of music programming for Rhapsody, which offers its subscribers unlimited access to music for a monthly fee. He says the problem is that the major labels are still, 10 years later, motivated primarily by fear.

TIM QUIRK: They know what their catalog was worth in the past. They know what it’s worth today. They do not know what its future value will be, so their job is to maximize its present-day value. And any new business model that comes along, their default assumption is that it’s going to screw up their business somewhere else. The big fear is not so much a loss of money as a loss of control. The system before worked for a few. It made a few very, very, very wealthy. And every time there is a new business model success in the music industry, the copyright owners tend to get resentful about it. So MTV was a huge success. Labels still hate MTV because they felt like MTV was building a business on their backs. You hear a lot of the same kind of talk with the success of iTunes. Even though it’s putting big paychecks in the record company coffers, they're still upset that, that it’s got so much power over them.

RICK KARR: The major labels say, don't be so quick to point the finger. Jonathan Lamy’s a senior spokesperson for the RIAA. He says record labels weren't the only ones with their hands out.

JONATHAN LAMY: If you want to develop a new business model, you need the record companies to okay their rights. You need the music publishers who represent songwriters, who also own a right within each song that you hear. Often you need artists who have perhaps in their contracts the ability to okay or not okay a new business model. So there are lots of different players within the industry. That said, the basic point that I think everybody appreciates now is that we are here, we're online, we're making our music available in lots and lots of different ways. We're trying to encourage fans to turn to those sites because that really is our future.

RICK KARR: You've still got that huge problem, though, of the unpaid services. You've still got BitTorrent out there, which by some accounts is the largest source of traffic on the Internet right now. Is it still as big a problem as it was 10 years ago, and if so, what do you do to get people to stop doing it?

JONATHAN LAMY: It still is an enormous problem, but I think we've had more success than sometimes people recognize. If you look back over the last 10 years, the sites that formerly profited from facilitating theft have either gone out of business or become legitimate. The second point I would make is that we recognize we will always live with a degree of people taking music. We did that in the physical world when you had bootlegging. The idea here is at least to try and keep it at a manageable level, so that legitimate businesses, like iTunes and Rhapsody and Amazon and all the others, imeem, can really take root and flourish.

RICK KARR: One of the other things that you've done to try to combat these services is actually file lawsuits against some of the music fans who've used them.

JONATHAN LAMY: Last December we officially announced that we would end the litigation program against end users. Four or five years ago when we first started the program, we felt like we had no choice. We were facing a culture of people who just were unaware of the law, despite all of the educational efforts that we had made. We did polling, you know, a few months after we started the program and saw that the number of people appreciated that there was a law and that you could break the law and get in trouble had gone from like 33 percent to something like 75 percent, but it was never designed to be a panacea.

[MUSIC - ”I’VE SEEN BETTER DAYS” UP AND UNDER] RICK KARR: Now, there are other ways to get people to stop downloading music and not paying for it. One method that’s been successful in Europe is an online service that streams whatever music you want to hear to your computer, kind of like an Internet radio station with a request line that’s always open, so you always get to pick what’s next. It’s called Spotify and, again, in Europe, because it’s not available here, it’s incredibly popular.

ELIOT VAN BUSKIRK: It’s kind of a magical feeling the first time you try the service. I started rediscovering music again; it’s so effortless to check something out.

RICK KARR: That’s Eliot Van Buskirk who writes about online music for Wired.com. The best thing about Spotify, he says, is the price.

ELIOT VAN BUSKIRK: It’s free, in Europe. They'll play you an audio ad and the audio ad synchs up with a video ad that they display at the same time. And then the hope is that you will pay to upgrade for 10 Euros a month. This is the genius part of it. They hook you with this unlimited free music service, and there’s sharing, and it’s great. Now you want to plug something in with headphones and walk out the door and listen to it on your mobile device, like an iPhone, you have to be a premium subscriber.

RICK KARR: Why does it seem so much easier for entrepreneurs and people who create software like this to launch these products in Europe?

ELIOT VAN BUSKIRK: There’s different rights organizations in Europe that apparently have taken a different stance towards how much they should charge for somebody that streams a song. I've heard estimates that they pay a tenth what they would pay to do the same in the States. And so, we see all kinds of strange differences where our friends [LAUGHS] in Europe are able to share playlists, email each other URLs to listen to a song. You can even take it a step further and set the playlist to be collaborative, so that you and your friends can edit the playlist, they can delete the whole thing, do all this stuff that we can't do.

RICK KARR: So if you’re an online music entrepreneur, in the U.S., at least, even 10 years after Napster, it’s still not such a good time. And if you work for a record label, if you manage to keep your job, that is, it’s decidedly not a good time. And if you’re a record retailer, it is emphatically not a good time! But Tim Quirk of the music subscription service Rhapsody says the rest of us, fans and musicians, are better off than we were 10 years ago.

TIM QUIRK: Far better off; it’s almost a paradise. As a listener, it means you've got access to almost anything you want to hear, almost anywhere you are, almost whenever you want. If you’re an artist, labels are now an option, not a necessity. You can go direct to fans, if you want to. Even if you do opt to go with a label you can get, depending on the label [LAUGHS], you can get much better terms than you used to be able to get because nobody’s got a lock on distribution anymore.

RICK KARR: So what happens next? I mean, 10 years from now, where do you think the music business is?

TIM QUIRK: I will make a prediction. Music as a service is what the average person will take for granted 10 years from now. The question, and this is where the hope comes in, is whether it will be unlicensed services that aren't compensating anybody, or whether they will be licensed services that somehow people are paying money. You know, paying a monthly subscription fee to Rhapsody is one way. Paying a little bit extra to your ISP for the right to not get sued [LAUGHS] when you’re downloading music off of peer-to-peer services is another way. I can't predict what the outcome will be, but there’s just so much resistance on the part of the copyright owners to creating sustainable deal terms.

RICK KARR: You mean, in other words, that they're asking for too much money from you and you can't recoup that from your users?

TIM QUIRK: And not just us personally, I mean, I've seen it with every music service because, like I said, it took 10 years to sell mp3s even though the marketplace had demonstrated that this was the format of choice back in 1999. That’s when “mp3” first overtook “sex” as the top search term on Yahoo.

RICK KARR: Ten years on, the record industry’s still trying to figure out how to capitalize on that interest. Quirk says until it does, fans will just keep doing what they've been doing since 1999, getting music online without paying for it. [NEW RADICALS SINGING “YOU’VE GOT THE MUSIC IN YOU”/UP AND UNDER] Coming up, an argument over a different kind of theft or borrowing, fair use, or something. Basically it’s an argument over what is art. This is On the Media from NPR.