Byline: David McGuire

Kelly is the type of person who gives music industry executives hives. She arrived at college in 2001 having never downloaded music -- illegally or otherwise -- in her life. Within a week of her arrival, a classmate turned her on to Kazaa and she was well on her way toward building an illicit library of 500 songs.

"I've watched enough MTV to know that most of the rock stars whose songs are being stolen the most live so comfortably that I can't possibly feel sorry for them," said Kelly, a college senior in Maryland, who asked that she not be identified further for fear of legal reprisal.

Dislodging Kelly and millions of her peers from services that give them all the copyrighted music they want, free of charge, is challenge enough, but the record labels realize that it's also only half the battle. Entertainment-industry leaders know they'll never stamp out illegal file swapping on the Internet, but they hope they can tarnish the experience enough to drive otherwise law-abiding users off of the underground peer-to-peer -- or "P2P" -- services and into the waiting arms of licensed digital services like the remodeled Napster, Rhapsody and Apple's iTunes.

Kelly, who said she has "absolutely no qualms" about downloading the major labels' latest releases, is a little uneasy about all the lawsuits that are being filed against song swappers, and about the nasty "adware" that's been gumming up her computer since she started downloading. For all the fun she's having, Kelly said she'd probably quit stealing music after college, in large part to avoid the mounting dangers and hassles that go along with it.

The entertainment industry is doing everything it can to encourage that sort of thinking. In a multi-pronged campaign against illegal downloading, the industry has taken on everyone involved with file sharing, from the companies that distribute the software to the people who use it.

Meanwhile, the options available for licensed downloading, including the size and quality of online music catalogs, are getting more attractive for potential users. Consumers can buy or rent their songs, pay as they go or in one lump fee, and pick from more than a million tracks, all for less than a dollar apiece. But as far as the licensed services have come, they still have to clear some major hurdles if they are going to evolve into the vibrant alternative to online piracy that the record labels need them to be.

"It's not realistic for anyone to think that they can eliminate piracy online," said Cary Sherman, president of the Recording Industry Association of America. "The ultimate success of the online marketplace is going to be, first and foremost, a matter of marketing and business models. Control of piracy is imperative to support that, but in the end it's the business model that has to work."

In a phone survey of 2,201 U.S. adults, the Pew Internet & American Life Project found that 11 percent owned digital music players. This means at least 22 million players are in the hands of Americans over 18 years old, while millions more are likely blasting tunes into adolescent ears. Spurred by the enormous popularity of its iPod players, Apple Computer Inc. has seen its iTunes Music Store sell more than 250 million songs as individual downloads for about 99 cents apiece since its April 2003 launch.

And while Apple is the nascent industry's undisputed 800-pound gorilla, other companies are posting impressive growth. Several competing services, including RealNetworks Rhapsody, the reformed Napster, Yahoo's MusicMatch and MusicNet, all of which offer unlimited "tethered" music downloads for about $10 a month, combine for more than 1.5 million subscribers.

That upward trend will continue, according to a 2004 report by JupiterResearch, which predicts that online music sales -- both subscriptions and individual downloads -- will top $1.7 billion in 2009, or about 12 percent of consumer music spending.

For all the growth, the volume of unlicensed downloads continues to dwarf that of paid transactions. In January alone, file swappers traded more than 1 billion tracks over the most popular networks, according to Atlanta-based BigChampagne LLC, a company that tracks file-sharing activity. That figure has remained fairly steady throughout the entertainment industry's anti-piracy campaign, BigChampagne President Eric Garland said.

Still there are indications that the digital market may be slowly swinging in the industry's favor. In a survey of 1,112 people conducted earlier this year by Ipsos-Insight, 11 percent said they'd paid to download a song at least once. An identical percentage of respondents said they'd downloaded at least one song from a file-swapping network. In 2002, the first year of the survey, only 2 percent of respondents said they'd paid to download a song, compared to 19 percent who said they'd downloaded songs for free.

"I think that everyone agrees it's headed in that direction. It's just a question of when is it going to be a significant slice," said Matt Kleinschmit, Ipsos-Insight's vice president.

Finding the Right Carrot

To feed the new distribution engine, record companies are shoveling their catalogs into the electronic furnace as fast as they can.

"We've licensed any piece of music that we have the rights to," said Thomas Hesse, president of global digital business for Sony BMG Music Entertainment. "The total number of tracks that we're licensing is 200,000. We generally make our releases available [when they're cleared for radio play] and we sometimes make available B-sides from singles or live recordings that haven't actually been released 'on record.'"

Ted Cohen, EMI Music's senior vice president for digital development and distribution, said the labels' efforts to throw open their catalogs to the online stores have paid dividends for consumers. "I think over the past year there's been a tremendous increase in the amount of variety. You have virtually unlimited choice and you can take it with you."

Like Sony, EMI offers unique "digital box sets" and will often license tracks from foreign artists for sale electronically, even if the CD isn't being sold in U.S. stores. Cohen said EMI has licensed 60,000 songs for online distribution in the United States -- more than 99 percent of its U.S. catalog, according to the company.

For nearly a year, EMI has also been in the process of reorganizing its internal structure to interface more smoothly with the digital marketplace. The company abandoned its CD pressing plants, and Cohen said the firm is spreading the gospel throughout its operation. "We're integrating digital into the operational business units. ... It was never going to be a real business if we kept it sitting on the side."

According to EMI spokeswoman Jeanne Meyer, that means the digital side of the business isn't "three guys in a garage," but the responsibility of every employee in every department. When the hip-hop artist Chingy put out his second album, his first single was made available as a cell phone ring tone before it was released on radio.

The download services, meanwhile, are racing the unlicensed P2P operators --and each other --to find the magic formula that will attract and keep users. Earlier this year, Napster offered users of its basic service -- which allows users to download as much music as they want, but prevents them from listening to it away from their computers -- the chance to pay a little extra for the privilege of taking their playlists with them on an approved portable player. RealNetworks' Rhapsody service will soon be offered in portable form as well, said Richard Wolpert, the company's chief strategy officer.

So far, bulk-subscription or "rental" models like Rhapsody and "Napster to Go" have lagged behind iTunes' pay-per-download model. But devotees say it offers an experience closer to that of the illegal services, in that users can download songs on a whim without adding to their bill. JupiterResearch predicted that the subscription market would eventually eclipse the market for a la carte songs.

Consumers may soon have a third option in the form of licensed file sharing. Using technology developed by Shawn Fanning, who created the original Napster in the late 1990s, several companies are planning to launch file-sharing services that let users swap songs with one another, just as they would if they were using one of the unlicensed services like Kazaa or eDonkey. The technology simply requires users to pay for the trades that were once free.