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The research compiled here will attempt primarily to answer the following questions for the layman: "What is digital music distribution and why is it significant?" "Who are the stakeholders in digital music distribution?" and "What are the primary drivers of the imminent changes in the music industry?" Formal reference material on this subject is in short supply. As a result, opinions, facts, and statements made by stakeholders and industry observers have been gathered from various articles published both in print and on the Internet will be quoted as sources.

What's at Stake?
Traditionally, music has been recorded to physical media, like CD or cassette now or like vinyl in the past, and distributed to music consumers through retail stores. "Digital music distribution" simply involves the transport of the product, recorded music, to the consumer via a non-physical, digital method According to Mark Hardie, a senior analyst at Forrester Research, "consumers want a digital music format that allows a great deal more control of the content they choose…it is inevitable that we will have a music industry that distributes it products digitally." Music recording industry - annual worldwide revenues of $65 billion In 1998, nearly 20 million Americans visited music-related sites3 In 1999, Americans will spend $35 million on CDs; $1.6 billion by 2002 In 1999, piracy cost $10 billion in lost sales, according to the International Federation of the Phonographic Industry. The future of the industry Economic fortunes

Source RIAA 2000

Ten year record sales Source RIAA 2002

MP3 (MPEG Audio, Layer 3)
Fifteen years ago, in 1987, the Fraunhofer Institut Integrierte Schaltungen (Fraunhofer Institute for Integrated Circuits), a developer of microelectronics circuits and systems, began a project known as "EUREKA project EU147, Digital Audio Broadcasting". The institute worked in conjunction with Professor Dieter Seitzer of the University of Erlangen at Nuremberg to produce the powerful audio signal compression algorithm that would eventually become known as "MP3". Without data reduction, digital audio signals typically consist of 16 bit samples recorded at a sampling rate more than twice the actual audio bandwidth (e.g. 44.1 kHz for Compact Disks). So you end up with more than 1.400 Megabit to represent just one second of stereo music in CD quality. By using MPEG audio coding, you may shrink down the original sound data from a CD by a factor of 12, without losing sound quality. Factors of 24 and even more still maintain a sound quality that is significantly better than what you get by just reducing the sampling rate and the resolution of your samples. Basically, this is realized by perceptual coding techniques addressing the perception of sound waves by the human ear. A year later, in 1988, the Moving Pictures Experts Group (MPEG) was formed as a working group of the ISO/IEC [International Standards Organization/International Electrotechnical Commission]. MPEG is charged with the development of international standards for compression, decompression, processing, and coded representation of moving pictures, audio, and their combination, in order to satisfy a wide variety of applications. The membership of MPEG consists mainly of individuals involved in academics or research. In 1989, Fraunhofer IIS patented its compression algorithm in Germany. In 1992, the algorithm was included into the specification produced by MPEG for its standards for "coding of moving pictures and associated audio for digital storage media at up to about 1.5 Mbit/sec". In 1993, the specification was published as "ISO-MPEG Audio Layer 3", thus "MP3". In late 1996, after having applied in early 1995, Fraunhofer IIS was granted patent protection (US5579430) in the United States for its "digital encoding process". In 1998, Fraunhofer began to contact companies and individuals that were developing utilities based on its source code. Fraunhofer informed the...
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