[JPL] To Be Owned By Sony

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Sun Nov 20 09:00:55 EST 2005


By Jefferson Graham, USA TODAY
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(Nov. 18) - It sounded like music to record executives' ears.

Copy-protection software that would to do the impossible: make CDs that
couldn't be repeatedly copied.

Britain's First 4 Internet landed meetings with the four major record
labels, trying to sell software called XCP. The concept was that consumers
could burn one copy and one copy only, defeating the rampant piracy that the
industry says costs it billions in lost revenue.

Each label signed up. EMI, Warner Music and Universal employed the company
only for trials, using a limited form of XCP that scrambled the CD for
pre-release promotional copies sent to critics.

Sony BMG, the world's second-largest label, decided to go one step further,
releasing more than 50 consumer titles with the strictest form of copy
protection ever used by the music industry. The move backfired after a
computer researcher blogged about his discovery of potentially grave
problems: Hidden files on the CD made PCs susceptible to viruses if the disc
was played on a computer. (Related item: Sony CDs that have XCP protection)

A two-week firestorm ensued, with class-action consumer lawsuits and online
calls for boycotts of Sony. Microsoft, anti-virus companies and even the
Bush administration weighed in. Sony, which at first denied there was a
problem, began to realize the extent of the damage and started taking steps
to fix things.

Last Friday, Sony said it would stop manufacturing these CDs. On Monday, it
told USA TODAY it would recall them altogether. Sony is asking retailers to
pull the titles off their shelves and wait for clean replacement copies,
which might not arrive in stores until next Friday, leaving some artists off
the shelves temporarily for the all-important Thanksgiving shopping weekend.

"I could understand Sony's reticence if we were talking about a big-ticket
item, like a computer," says crisis management expert Robin Cohn, the author
of The PR Crisis Bible. "But a $15 CD? That's nothing. Sony should have been
able to handle this in two days. Instead, the story just kept on going and
going."

Merger Fallout

How did one of the world's most loved media companies, part of the
technologically innovative Sony Corp., find itself caught in the crossfire?
Sony has declined to comment on details of its agreement with First 4
Internet, which also has declined to comment.

But start by looking at the merger of two record labels, the executives in
charge of them and what massive staffing cuts can do to an organization.

In 2003, former NBC News president Andy Lack, who had no prior music
experience, was recruited to run Sony Music - home to some of the biggest
icons in music, including Bob Dylan, Bruce Springsteen, Barbra Streisand,
the Dixie Chicks and Johnny Cash.

The following year, he arranged a merger with Bertelsmann's BMG, which is
based in Germany and home to RCA and Arista Records (Elvis Presley, Santana,
Dave Matthews Band, Alicia Keys).

Lack's Sony bosses were not keen on the merger, but he convinced them. "I
said, 'I won't put us into a merger where we don't maintain control,' " Lack
told USA TODAY earlier this year. "That sold them."

Lack cut 25% of Sony BMG's workforce, slashing nearly 2,000 staffers. He
prided himself on bringing an outsider's viewpoint to an insular business,
associates say. "Andy came in with a fresh perspective that was sorely
needed," says Wayne Rosso, the CEO of MashBoxx, a start-up digital music
company.

Meanwhile, there were changes at the top at Sony Corp., whose Walkman music
player had been eclipsed in the cool department by Apple's iconic iPod.

Sir Howard Stringer, Lack's former boss from when he once worked at CBS, was
named CEO of Sony, the first westerner to hold the title. In September,
Stringer cut 10,000 jobs from the Sony payroll.

"All the changes help explain the screw-up, but they don't excuse it," says
Richard Doherty, an independent analyst with the Envisioneering Group. "The
Sony engineers we talk to (about the infected CDs) are just as shocked as
everyone else. One hand did not know what the other hand was doing."

The Piracy War

Ever since 1999, when a college student found a way to trade music files
online easily and for free with the original Napster, the music industry has
spiraled, trying to catch up to technological change.

At first, the industry fought by trying to sue music file-sharing companies
out of existence. The record labels have won several important legal
victories but still have not won the war. More people than ever are using
file-sharing software, trading more than 1 billion songs monthly.

Lack came to Sony determined to change things. "Technology, such as the
iPod, is a friend to the music industry," he told USA TODAY earlier this
year.

Instead of fighting with file-sharing companies, he became their friend. He
made overtures to Napster founder Shawn Fanning and Rosso, the outspoken
former president of Grokster. With his encouragement, both have started
services that promise to legitimize file sharing: Rosso's MashBoxx and
Fanning's Snocap.

It was BMG that started flirting with copy protection on a bigger scale than
other labels. Piracy is said to be worse in Germany, and executives became
convinced that CD-burning was a much bigger issue than file sharing.

BMG began releasing copy-protected CDs in 2002 internationally from several
artists, including Natalie Imbruglia. Under Lack's leadership, in June 2004,
it became the first major label to issue a copy-protected CD in the USA, an
album by the band Velvet Revolver.

The disc used a form of copy-protection that is less restrictive than XCP.
It incurred no consumer backlash, and opened at No. 1 on Billboard's list in
its first week of release.

A 200-CD PC

Sony executives have been criticized through the years for not talking to
colleagues across divisions. That seems to be the case between Sony BMG
Music and Sony's computer arm, Vaio.

Sony BMG wants to discourage CD-burning. Sony Vaio, on the other hand,
recently released a new $2,100 PC with a 200-CD changer, the VGX-XL1. Load
up 200 blank CDs in the tray, and the computer "will be set to automatically
and sequentially copy all of your content in one single session," Sony says
in its promotional material.

Doherty, the Envisioneering analyst, says he visited Sony this week for a
meeting with top executives, and in terms of the CD crisis, "they're not
sweating, which really surprises me, because I know I sure would be."

Doherty, who specializes in consumer behavior research, works with a team
that surveys consumers about their habits and concerns. "I can tell you that
(consumers) are very concerned and looking for a faster response from Sony
BMG," he says. "It will be a long time before they put a Sony BMG CD into
the CD tray."

Sony's response has been that the infected CD issue wasn't its fault. On its
website, the company says the software "was provided to us by a third-party
vendor."

First 4 Internet, based in Oxfordshire, and founded in 1999, also produces
porn-filtering software. The company didn't return phone calls Thursday.

"Sony should have taken full responsibility right off the bat," says Cohn.
"This is about the people affected, and you want to show them you're doing
everything you can to solve this problem."

She contrasts Sony's response to Johnson & Johnson's Tylenol-tampering scare
of 1982, when the company swiftly removed all product from shelves in
response to reports of possible deaths.

"Companies need to respond immediately when something happens," she says.
"If they don't, the story just keeps on going."

Sony says it's still committed to copy-protection and defends its handling
of the XCP situation. "We are committed to doing whatever it takes to make
this right," says Sony BMG spokesman John McKay.

Two lawyers have filed class-action lawsuits against Sony BMG, accusing the
giant of computer fraud, on behalf of 15 consumers who purchased XCP discs
by Neil Diamond, Switchfoot and Van Zant, among others.

Yes, Sony has addressed the situation, "but the question is how do they do
the remediation," says Scott Kamber, an attorney who filed one of the
lawsuits.

He paints an image of one XCP disc in a public library system, being
listened to by hundreds, if not thousands of consumers on their laptops, via
headphones, and infecting every one of their machines. "These CDs are like
ticking time bombs," he says. "Sony has a real obligation to get these discs
out of circulation."

The irony, Doherty says, is that Sony could have easily nipped this in the
bud.

"Howard Stringer should have appeared on TV and said, 'I'm sorry, we don't
know how this happened, but it won't happen again.' "

  

11/18/2005 07:15



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