Appetite for Self-Destruction

The Spectacular Crash of the Record Industry in the Digital Age

Steve Knopper

• Publisher: Free Press
• Year: 2009
• ISBN:
  9781416594550
• Topic: Media & Performing Arts
• Subtopic: Music History & Criticism

For the first time, Appetite for Self-Destruction recounts the epic story of the precipitous rise and fall of the recording industry over the past three decades, when the incredible success of the CD turned the music business into one of the most glamorous, high-profile industries in the world -- and the advent of file sharing brought it to its knees. In a comprehensive, fast-paced account full of larger-than-life personalities, Rolling Stone contributing editor Steve Knopper shows that, after the incredible wealth and excess of the '80s and '90s, Sony, Warner, and the other big players brought about their own downfall through years of denial and bad decisions in the face of dramatic advances in technology. Big Music has been asleep at the wheel ever since Napster revolutionized the way music was distributed in the 1990s. Now, because powerful people like Doug Morris and Tommy Mottola failed to recognize the incredible potential of file-sharing technology, the labels are in danger of becoming completely obsolete. Knopper, who has been writing about the industry for more than ten years, has unparalleled access to those intimately involved in the music world's highs and lows. Based on interviews with more than two hundred music industry sources -- from Warner Music chairman Edgar Bronfman Jr. to renegade Napster creator Shawn Fanning -- Knopper is the first to offer such a detailed and sweeping contemporary history of the industry's wild ride through the past three decades. From the birth of the compact disc, through the explosion of CD sales in the '80s and '90s, the emergence of Napster, and the secret talks that led to iTunes, to the current collapse of the industry as CD sales plummet, Knopper takes us inside the boardrooms, recording studios, private estates, garage computer labs, company jets, corporate infighting, and secret deals of the big names and behind-the-scenes players who made it all happen. With unforgettable portraits of the music world's mighty and formerly mighty; detailed accounts of both brilliant and stupid ideas brought to fruition or left on the cutting-room floor; the dish on backroom schemes, negotiations, and brawls; and several previously unreported stories, Appetite for Self-Destruction is a riveting, informative, and highly entertaining read. It offers a broad perspective on the current state of Big Music, how it got into these dire straits, and where it's going from here -- and a cautionary tale for the digital age.

Chapter 1

1983–1986

Jerry Shulman’s Frisbee: How the Compact Disc Rebuilt the Record Business

JAMES T. RUSSELL hated the pops and crackles in his Bach, Beethoven, and Bartók records.

It was the early 1960s. Rock ’n’ roll was young. Frank Sinatra was still the King of Pop. Russell clung to the classical recordings he’d been buying since high school. Not a single radio station played this type of music in Richland, Washington, where Russell lived. He became obsessed with preserving his LPs so they wouldn’t deteriorate into static. Like some audiophiles of the time, he tried using a cactus spine instead of a steel stylus on his record player. That worked OK, but he still heard the infernal snapping and crackling. “I’d been tinkering with how to get better sound out of an LP for fifteen years,” he says. “I decided: ‘This isn’t going to work. We need a better record.’”

Russell was no ordinary audiophile. Born in Bremerton, Washington, he had become fascinated with radios during grade school—building them, listening to them, figuring out how the electricity worked inside. One day his older sister suggested he would enjoy physics in high school. And sure enough: “Pow!” he recalls. “That was the world. Everything is based on physics. And that was that.” At Reed College in Portland, he plunged into anything involving instruments—computers, optics, chemistry—although he got a degree in physics, naturally. His first job out of college was at the Atomic Energy Commission’s Hanford Nuclear Plant. Russell’s job was basically to help engineers when they ran into technical snags. Soon he started inventing stuff, like computer controls for a test reactor.

In 1965, Battelle Memorial Institute took over from General Electric as the manager of Russell’s lab. He had hardly been shy over the previous few years, in complaining about the Bach and Beethoven records—or broadcasting his determination to do something about them. Fortunately, his new bosses were slightly more receptive to his crazy ideas, even if they had nothing to do with nuclear physics.

Russell’s home hi-fi, like all music systems of the time, was based on analog sound—a needle inscribed each curvy sound wave into the grooves of a vinyl record. Taken together, and played on a phonograph with a stylus moving in the groove, these waves added up to music. But the phonograph had no way of keeping out dust and other foreign particles. Which meant static—Russell’s nemesis. He juggled the possibilities in his mind. He visualized exactly what he wanted to build. Then he wrote it all down, in an official Battelle lab notebook.

He had one big idea to solve the problem. Optics. Who needed a needle? Russell would use a beam of light to read his new musical discs. Still, he wasn’t the first inventor to run into frustration with this idea. The whole “mechanical-optical structure,” as he called it, was too complicated to work in the average living room. And the costs, for hi-fi enthusiasts, could have added up to $15,000 or $20,000. That was far too expensive.

What he needed was a cheap way to record music onto a disc the size of a 45 rpm single. He considered several techniques, including one involving frequency modulation, commonly used in FM radio, but they all relied on old-fashioned analog technology. The static would still drive him crazy. Then he came across another helpful science: pulse-code modulation, or PCM. An ITT scientist was the first to suggest this idea in 1937, and the legendary Bell Laboratories electrical engineer Claude E. Shannon developed the blueprint for future use in the late 1940s. When Russell started his own experiments, the telephone industry was already tinkering with PCM. The idea was to take an analog signal, like something you’d hear on a record player or the radio, and convert it into a series of microscopic blips—ones and zeroes. It turned out to be the key technology for digitizing sound. With digital, a symphony could be recorded not as cumbersome sound waves but as groups of tiny binary dots.

This technology eventually became known as “red book,” the heart of every compact disc. Play combinations of these tiny ones and zeroes 44,100 times per second and you start to hear music.

Russell knew it would be a long road to build this kind of musical disc. “Just about each time I came up with a solution to the problem at hand,” he says, “there were more problems to solve.” To turn a symphony score into digital bits, for example, he would need to create hundreds of thousands of these bits. They would never fit on a disc small enough for home hi-fis. So he decided to make the bits incredibly tiny—the size of a micron, or one-millionth of a meter. That would require a microscope. And even if he did manage to come up with such a disc, he’d have to devise an intricate error-correction system so each disc could play all the music flawlessly. But if he did…imagine the possibilities. Records that sounded just as perfect every time you played them. Needles that didn’t wear out. Discs that didn’t scratch or warp over time.

One Saturday when he had the house to himself and he could really focus on his work, everything clicked—optics, pulse-code modulation, digital, a precision-mechanical system, microns, plastic discs. “Well,” Russell says, “it seemed pretty straightforward to me at the time.”

He proposed the big idea to his bosses at Battelle on March 9, 1965, and they told him to go for it. Over the next year and a half, he would build a contraption that worked roughly like the compact disc players that still sit in cars and living rooms around the world. In an early Battelle public-relations photograph of Russell standing next to his machine, both of them look like relics from another era. Russell has dark, slicked-back hair, a widow’s peak, glasses, a dark suit coat, and a thickly knotted tie. The machine next to him is a foot and a half long and a foot tall, made of thick pieces of metal. It could be a CT scan for a small animal—large and boxy on one end, with a cylindrical piece in the middle and various wires and rods extending to a point on the other. The “discs” are clear, rectangular glass plates the size of paperback novels. “It’s all very well that I built a patent, but there’s lots of patents out there that are worthless,” he says. “The fact that we were able to build a laboratory prototype added enormous credence to the whole idea.”

Russell is careful not to refer to himself as the inventor of the compact disc. In fact, the early history is somewhat confusing. Russell acknowledges that two electronics giants, Sony and Philips, came up with their own discs independently, sometime after he invented the technology. But back in September 1966, when Russell filed the sixth patent of his forty-year, fifty-three-patent career, he became the first inventor to create the fundamental technology that would lie at the heart of every compact disc. The US Patent Office gave him the patent in 1970. It is unclear just how closely the Sony and Philips engineers paid attention to Russell’s work. In any event, decades later, the owner of his patents would establish that Russell was the first to get this far with CD technology, winning a huge US court ruling in the early 1990s.

But instead of wealth and fame, all James T. Russell received as a reward was a stack of patent papers and, from his employer, a one-foot-tall crystal obelisk recognizing his work in optical-digital recording technology. So why don’t all the people who keep hundreds of CDs lovingly alphabetized throughout their homes remember Russell as the Thomas Edison of the digital age? “Long, sad story,” says the retired physicist, seventy-five, from the basement lab of his home in Bellevue, Washington.

In the early 1970s, the funding dried up at Battelle. Nobody had the cash to help an obsessive nuclear physicist invent a better record. “It was very frustrating,” Russell recalls. He pitched it to companies, and was told that his invention involved too many different high-tech ideas that couldn’t possibly be compatible. Besides, if it was so great, IBM would have already done it.

Russell didn’t want to give up on his idea, despite five years of frustration. And although strapped for cash, Battelle didn’t want to give up, either. In fall 1971, a New York venture capitalist, Eli Jacobs, responded to a request from the lab and contacted Russell about his invention. The two agreed to sidestep into video, and Russell successfully grafted digital recordings of TV shows onto glass plates similar to the audio ones he’d come up with several years earlier. (Russell still keeps a stack of these plates in his basement lab.) They sent out 2,500 brochures inviting everybody to Richland—the press and big companies with pockets deep enough to license the technology. More than one hundred people accepted the invitation. In 1974, Philips and Sony sent reps to his lab. The Philips guy told Russell the company wasn’t working on optical-digital technology and, in his opinion, never would. A few months later, an Eli Jacobs rep flew to Eindhoven, Holland, to try to sell the invention to Philips, the huge Dutch electronics company that would help bring the compact disc to the worldwide market. What he was describing, the Philips people told him, was great for computers, but it just wouldn’t work for entertainment.

What Russell didn’t know was that, in 1974, Sony and Philips were in fact working jointly on their own versions of the technology he had already patented. Using lasers developed at MIT and Bell Labs in the 1960s, both companies independently hit upon a way of recording and listening to digital music. Sony had built a refrigerator-sized, several-hundred-pound contraption called the X-12DTC. It was even bigger and clumsier than Russell’s awkward-looking device.

“[Russell] was one of the pioneers. He did excellent work essentially all alone,” says K. A. “Kees” Schouhamer Immink, a longtime engineer for Philips. “Philips just had bigger pockets. They could invest billions of dollars just to do that.”

By the 1980s, Russell’s optical-digital technology was completely out of his hands. Battelle had licensed his patents to Eli Jacobs. When Jacobs’s Digital Recording ran out of money, the venture capitalist sold all of his company’s patents—including Russell’s—to a Toronto start-up for $1 million in 1985.

The executives at this company, Optical Recording Corporation, knew what they had. ORC’s savvy, opportunistic owner, John Adamson, saw that Russell’s patents—now his patents—could be worth hundreds of millions of dollars. He brought the patent papers and a couple of attorneys to dozens of meetings with Sony and Philips reps in Tarrytown, New York, Tokyo, Osaka, and elsewhere. Naturally, the lawyers from these gigantic electronics companies argued that their own patents came first. Although Adamson’s company was quickly running out of money and close to bankruptcy, his people persevered. In February 1988, well into the CD era, they convinced Sony and Philips to pay him royalties; by the end of that year, ORC was flush with $10 million.

Buttressed with cash and confidence, Adamson and his lawyers shifted their focus to CD manufacturers—major record labels—beginning with massive Time Warner and its subsidiary, Warner Music. ORC sued for patent infringement in 1990. The media conglomerate’s lawyers were fierce. “Nobody’s ever recognized [Russell] as being an inventor of the CD,” Michael Rackman, a patent attorney who represented Time Warner, says today. “Let’s suppose that I invent a new way to communicate, and you invent a tank and you put my communications in the tank. Are you going to say I invented the tank?” But the jury was unconvinced. In 1992, it ruled for the Toronto company and ordered Time Warner to pay $30 million. Other record labels then agreed to pay royalties, for sums Adamson won’t disclose. Not a bad return for ORC’s original investment in James T. Russell’s patents.

Russell, however, received not a cent.

Today, Russell spends his time inventing new devices, consulting for companies, and playing with his seven grandchildren. He dreams about cities with lots stacked upon lots poking more than half a mile into the sky. Why not? Digital was once considered a loopy idea, too.

On its official website, Philips credits its own engineers for inventing the CD. Sony Corp.’s official 1996 history Genryu credits researcher Heitaro Nakajima, who “must have been one of the first to actually produce digital sound.” But documents from the Patent Office and US District Court in Wilmington, Delaware, clearly establish Russell as the first person to come up with the blueprint. As he predicted in 1966, this would lead to the very same world-changing technology used in DVDs and CD-ROMs. Russell, who lives in a hilltop house that overlooks the Cascade Mountains, is not bitter. “But a little credit would have been nice,” he says. “And maybe a little money.”

UNLIKE JAMES T. RUSSELL, the engineers at Sony Corp. had a powerful benefactor who immediately recognized the beauty—and the dollar signs—in digital optical technology. His name was Norio Ohga, and he hadn’t intended to go into business. He was an opera singer, studying at the Tokyo National University of Fine Arts and Music. One day in the early 1950s, Tokyo Telecommunications showed up at his college to record a symphony with a newfangled tape recorder. Ohga had never seen anything like it. He was so smitten with the new technology that he went before the faculty senate and persuaded the university to buy one of these machines for 140,000 yen—the equivalent of a year’s tuition for most students on campus. It was a highly unusual situation—students rarely addressed the faculty this way—but Ohga won them over with his charm and confidence.

Soon he started a correspondence with Tokyo Telecommunications. He wrote up technical diagrams to improve its tape recorder. Impressed and taken aback, founders Masaru Ibuka and Akio Morita invited Ohga to join the company. They courted him for a few years, as he focused on his singing and traveled through Asia and Europe. In 1959, he relented.

Ohga would rise through the ranks at the company, which eventually became Sony Corp. Given his classical music background, he took a particular interest in his engineers’ work with digital recording. When he learned they were developing an “audio laser disc,” he immediately made it a top company priority. In fact, one of Sony’s top researchers, Heitaro Nakajima, had been working on digital audio since roughly 1967, when he headed the technical division of NHK, Japan’s public broadcasting company. He accepted a job at Sony in the early 1970s, and (perhaps unbeknownst to him) followed Russell’s tracks for the next several years. By 1976, Sony’s team of engineers had come up with the X-12DTC digital-recording behemoth—too big, of course. Within another two years they presented Ohga with a laser audio disc about the size of an LP record, holding 13 hours and 20 minutes of digital sound. Ohga immediately recognized it would cost the company more than $1 million to produce just one. He told the engineers to try again.

Meanwhile, Philips was making progress on the same idea. The company was still reeling from Laservision, its videodisc system, a titanic commercial flop. The company put out about 400 players, and received 200 returns by disappointed customers who’d been under the mistaken impression that it could record TV shows. (Would that we could go back in time and introduce desperate All in the Family fanatics to TiVo.) Philips’s engineers had long pooh-poohed audio in favor of video, but after the Laservision debacle they were ready to try something different.

Ohga, seeing Sony’s engineers couldn’t solve certain problems on their own, like reducing the cumbersome size of every disc, decided to team up with one of his company’s top competitors. He renewed an old friendship with Philips technical executive L. F. Ottens, and the two decided to collaborate. Soon a group of eight Sony and Philips engineers began meeting monthly in Tokyo and Eindhoven. At first they didn’t get along. They haggled over who got to patent which technology, how many bits they should graft onto every disc, and whether the disc should match the length of a cassette tape or fit into the pocket of a suit jacket. They argued over maximum storage—an hour was considered standard, but Ohga would not budge on seventy-five minutes. “Ohga had a long discussion with [company founder Akio] Morita, and they both agreed: You could not introduce a CD that could not play Beethoven’s Ninth in its entirety,” recalls Mickey Schulhof, the American executive whom Sony sent to Eindhoven to work with lead Sony engineer Toshitada Doi and his Philips colleagues.

One October day, in Eindhoven, the engineers were in a conference room squabbling when the clear skies outside suddenly went gray. Thunder started blasting. One of the Philips scientists joked that the thunder represented their superiors’ disapproval with all the arguing. Discussion wasn’t quite so heated after that. The Philips people introduced the Sony people to Dutch gin. The Sony people introduced the Philips people to hot and cold sake. As anybody who owns the Red Hot Chili Peppers’ epic Bloodsugarsexmagik on CD can attest, Ohga got his way on disc length—74 minutes, 42 seconds. Philips won on the physical width of the disc—12 centimeters.

“The meetings were absolutely fantastic,” says Kees Immink, a member of the Philips team. “Our management let us just sit in one room and come out with ideas. You have coffee together. You have lunch together. We are still friends. Even after twenty-five years we have good days.”

Ohga declared October 1982 the final deadline for introducing the disc and a joint Sony-Philips player to the consumer market. The deadline meant the team had to solve all kinds of tricky technical problems at the last minute, but they persevered. Sony’s audio engineers brought bedding to their labs so they could work day and night. One...