December 1998: The record industry is in turmoil. The sudden explosion of the MP3 movement has surprised the slow-moving labels, and millions of music fans are already trading bootleg MP3s. The first commercial MP3 players are hitting stores across America -- now you can take your collection of MP3s anywhere you want, far away from your desktop. A panicky Recording Industry Association of America, representing the country's major record labels, slaps Diamond Multimedia with a lawsuit claiming that Diamond's Rio MP3 player is helping music fans traffic in pirated tunes.

But the RIAA is also working behind the scenes, hoping to wrest back control of a distribution medium it sees slipping out of its grasp. In December it announces the formation of SDMI, a "working group" helmed by MPEG compression technology pioneer Leonardo Chiariglione and entrusted with the job of figuring out a way to "protect copyrighted music in all existing and emerging digital formats and through all delivery channels." The companion press release includes a long list of technology and hardware companies that are supposed to be supportive of the initiative -- AOL, AT&T, IBM, Lucent, Matsushita, Microsoft, RealNetworks, Sony, Diamond Multimedia, Headspace, Iomega, Liquid Audio, Samsung and Texas Instruments.

Today, not quite two years later, technology industry support for SDMI has weakened, according to representatives of some of the participating companies. Now they are saying that most of them scrambled to join SDMI only because they believed the alternative was soliciting interference from the federal government.

"We weren't very happy about getting involved," explains one computer industry member. "We would have preferred to have a more serious discussion with the record industry about what rationally can and can't be done to limit unauthorized copying of music. But they wanted to create this huge forum with all these participants, and Leonardo the Great leading it."

The picture attendees paint of the past 18 months of SDMI meetings isn't pretty. Bickering was rife, thanks to rooms full of representatives of companies with competing products and interests and executives who displayed what one observer called a high "blowhard factor." Some SDMI members described Chiariglione as an "autocratic" executive director prone to tirades; others complained about the glacially slow pace of decision making.

Today, the list of SDMI participants is a who's who of the technology and recording industries, featuring 175 companies ranging from Nokia to Napster, Universal Music to ASCAP, Compaq to Intel. But the responsibility of making SDMI work was placed squarely on the shoulder of the technologists. Says one member: "The labels looked to the computer industry to really carry the burden here of stopping digital music; they didn't know how to do it themselves and they blamed us for the position that they're in today. It's been a struggle to be cooperative and address their concerns, but bring realism to this whole space."

The problem that the record industry chose to focus on is the basically insecure nature of the compact disc. Right now anyone can copy a CD's contents and distribute it across the Net. SDMI's solution was to propose a watermarking system that would be built into future CDs and read by software and hardware devices. Anyone who downloaded a pirated MP3, for example, would find that his SDMI-compliant software wouldn't read that watermark and would refuse to play the song.

Several of the participating technologists believed SDMI's solution to be a futile waste of time. Watermarks, many geeks feel, can and will always be broken. The proposed watermarking systems are also inherently not consumer friendly, say some SDMI members. Instead of trying to deal with the problem of insecure CDs, suggested several representatives, SDMI should be focusing on encryption and digital rights management systems that could be used for new digital music.

But that wasn't going to happen. SDMI had devolved into a futile attempt to protect something that couldn't be protected; but the record labels still felt obliged to try. As one member explains, "The record industry has a business valued in the tens of billions built around selling music on plastic. What they might see in revenues over the next few years in terms of electronically distributed music is not great enough to make them shift their focus to that yet."

So what has SDMI come up with, after two years of work? A complex and convoluted watermarking system, contributed primarily by Verance (an SDMI member company that specializes in watermarking technology). In Phase 1, SDMI-compliant devices (such as digital music players) will be sent out into the marketplace; and in Phase 2, SDMI-compliant music (CDs and digital music) with watermarks will go on sale. The system will limit when and how you are allowed to play watermarked music. And for the system to work, consumers with SDMI-compliant devices will have to download additional SDMI software.

SDMI-compliant players will let consumers play their MP3s, but this is a concession that hardware companies had to battle fiercely to win. Even so, according to SDMI members, early tests of some watermarked music showed an audible degradation in the quality of the sound.

The technology companies were biased against watermarks from the beginning for other reasons, too. Watermarks are expensive to implement, stretch the resources of one's computer and make copying CDs more time-consuming. And they aren't at all consumer friendly -- as one insider puts it, "From a consumer standpoint, the only thing this watermarking system does is not let you play you music."

Talal Shamoon, who heads up SDMI's "perimeter technologies" working group, disagrees with this assessment. "The record industry is extremely sensitive to consumer experience," he says. "I'm confident that the technology that's chosen will go through enough testing to guarantee that it's a good consumer experience."

Shamoon is convinced that SDMI-compliant music will permit anything except downloading and playing pirated files -- an assertion that has been virulently dissented by the Electronic Frontier Foundation.

In any case, the companies building SDMI-compliant hardware and software music players are in a no-win situation: They will be forced to pay millions in licensing fees for a watermarking system that might not even work, and will undoubtedly anger consumers. And since hardware SDMI compliance is voluntary, there will almost certainly be companies that choose not to comply, putting those that do comply at a disadvantage. If consumers have an option to purchase an entertainment system that doesn't follow SDMI guidelines, why will they opt for an SDMI-compliant system that limits what they can do with their music?

Most important, few experts believe that watermarks are a good way to protect music. Most technologists I spoke to think that watermarks can easily be broken; already, various bulletin boards boast posts from programmers declaring how watermarks can be cracked.

"The whole focus on using watermarks to screen music is not wise use of resources -- it's expensive, doesn't provide good protection from content and I suspect we'll discover the watermarks are easily broken," says one member. He pauses, and adds: "I'd be shocked if they weren't easily broken."

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