Part 17. The War between CD and MP3 — The First Shock of Digital Transition

The Genealogy of Payment Habits — A Historical Hint Book for New-Content Business Models Volume 2 · Part 17

How Does a Golden Age End?

In the mid-1990s, the record industry was earning more money than at any other point in its history. The global market reached roughly $25 billion in 1994, a figure almost unimaginable only twenty years earlier.

The CD stood at the center of this golden age. The way the golden age ended also began with the CD’s defining characteristic.

A CD was a digital format that recorded and read sound as zeros and ones. A computer could read that data; if it could read it, it could copy it; and if it could copy it, it could transmit it over the internet. Napster stood at the end of that logic.

CD — When Sound Quality Became a Reason for the Entire Market to Pay

The Compact Disc, jointly developed by Sony and Philips, was first launched commercially in Japan in 1982. The first CD title sold to consumers was Billy Joel’s 52nd Street, released in Japan with Sony’s CDP-101 player on October 1, 1982. ABBA’s The Visitors was the first CD manufactured, in Germany on August 17, 1982, but consumer sales began in 1983. Sony’s first player, the CDP-101, cost ¥168,000—about $730 at the time—and was far more expensive than an LP player.

Even so, it took less than a decade for CDs to replace LPs because the reason to pay was clear.

“No scratches. No noise. Consistently perfect sound.”

An LP reads sound through physical contact. Repeated play wears the record, while dust creates noise. A CD uses a laser without contact. In theory, its thousandth play sounds the same as its first.

That difference moved consumers. When an LP album cost $8, a CD cost $15–17, yet buyers willingly paid nearly twice as much. There had been precedents for paying for sound quality, such as hi-fi audio and repurchasing stereo LPs, but the CD was the first format to drive an entire market to buy the same music again for better sound.

Labels exploited the opportunity by reissuing their entire LP catalogs on CD. Owners bought the same music again. Repurchase demand exploded for Michael Jackson’s Thriller (1982) after its CD release. It had sold more than forty million copies by the mid-1980s, and the total kept rising. It became possible to sell the same music twice.

The Beatles’ catalog arrived on CD in 1987 and immediately climbed the charts. Listeners already knew the music, but the new format made them purchase it again.

From the perspective of payment habits, the CD’s success is straightforward. The upgrade motive of “better sound” inherited the LP-buying habit intact and induced greater spending. It did not create a new habit-space; it attached a stronger reason to an existing one.

The same shift appeared in Korea. Shin Seung-hun’s first album, You Reflected in a Smile (1990), surpassed one million cumulative sales. As million sellers followed in the early 1990s, Korea’s primary medium also moved from LPs and cassettes to CDs.

Failure Case: Sony MiniDisc — When Good Technology Fails to Become the Standard

During the CD era, Sony challenged the market with another format: MiniDisc, launched in 1992. It was a 64 mm magneto-optical disc, far smaller than a CD, with comparable sound, recording capability, and strong durability. The first portable unit, the MZ-1, launched at ¥79,800, about $650.

MiniDisc was technically superior to CD in several respects and remained a mainstream portable recording medium in Japan until the early 2000s. It failed to establish itself in the United States and Europe.

There were two reasons. First, CD inertia was too strong. Hundreds of millions of CDs and tens of millions of players had already been sold, so consumers lacked a compelling reason to switch.

Second, Sony’s proprietary strategy backfired. MiniDisc used Sony’s exclusive ATRAC format. Other companies could not participate, and third-party content was restricted. By contrast, CD was a standard jointly developed by Sony and Philips, allowing dozens of companies to make players and records.

Sony ended production of MiniDisc equipment in 2011, effectively withdrawing a format it had sustained for nearly twenty years. The company experienced its own CD ecosystem blocking its newer format.

The Vulnerability of a Golden Age — Prosperity Is When Danger Grows

The global record market was worth about $25 billion in 1994. Growth continued, and the United States alone peaked at roughly $14.6 billion in 1999. Ten years later, it had fallen by half. According to the Recording Industry Association of America, the US music industry was worth about $7.2 billion in 2010.

The golden age made the industry complacent. Labels behaved as if the existing business model would last forever. CD prices did not fall: one disc cost $15–18 in the United States during the 1990s, more than an LP, even though production costs were much lower. Consumers were dissatisfied but had no alternative.

This pricing policy produced two things: maximum short-term profits for labels and accumulated resentment among buyers. That resentment was one reason consumers switched so readily when Napster appeared.

The arrival of MP3 players. As MP3 files spread, devices appeared to play them. The world’s first commercial MP3 player was the MPMan F10, launched by Korea’s Saehan Information Systems in March 1998. Its 32 MB of storage held roughly eight to ten songs, and it cost $250. iRiver, founded as ReignCom in 1999, followed. From 2002 to 2004, iRiver ranked first in the US flash-memory MP3 player segment. A Korean company led the market before Apple released the iPod in 2001.

The spread of MP3 players also enabled the consumption of pirated music. An MP3 file was useless without a device that could play it. Player adoption grew alongside illegal file sharing.

Korea faced similar conditions. Its record market grew each year during the 1990s, but albums were expensive relative to income, and a copied-cassette market existed alongside legitimate sales. Once digital file sharing appeared, a rapid shift was inevitable.

MP3 and Napster — How a Payment Habit Collapsed

Two technologies converged in the late 1990s: the MP3 compression format and increasing internet bandwidth.

MP3, or MPEG-1 Audio Layer 3, was an audio-compression technology developed by Germany’s Fraunhofer Institute. An ISO draft standard passed in 1991, it was officially published within MPEG-1 in 1993, and it began spreading over the internet in the mid-1990s. It compressed near-CD-quality sound to one-tenth the file size. Even a 56 Kbps modem could download one song in a few minutes.

Napster appeared in 1999. Its developer, Shawn Fanning, was an eighteen-year-old college student. It was a peer-to-peer file-sharing service: users placed MP3 files in shared folders, and others searched and downloaded them. At its 2001 peak, it had about eighty million registered users, exchanging more than two billion files a month. Napster traffic clogged university networks.

The labels declared war. The RIAA and an alliance of the five major labels filed suit in December 1999. German label BMG tried to acquire Napster and relaunch it legally, but a court order arrived first in 2001. Napster filed for bankruptcy in 2002.

Closing Napster did not solve the problem. Decentralized P2P services operating without a central server—Kazaa, LimeWire, and BitTorrent—followed. Legal action failed to eliminate sharing and instead provoked users. Lawsuits filed by labels against thousands of individuals became a public-relations disaster.

Napster demonstrated something simple: once a way to obtain music without paying exists, the old payment habit begins to shake. The habit did not disappear completely. The real problem was that no convenient, legal way to buy digital music existed. While labels refused to build digital distribution platforms, consumers used illegal routes.

Soribada — Korea’s Napster and a Different Ending

Korea saw the launch of Soribada in 2000, a domestic P2P service developed by brothers Yang Jung-hwan and Yang Il-hwan. It secured more than four million Korean users within six months.

Korea led the world in high-speed internet adoption in the late 1990s. By 1999, many homes already had connections of 512 Kbps or faster, making file sharing easier.

Labels filed criminal complaints and sought an injunction in 2001, and a court order suspended the service in 2002. Soribada nevertheless survived longer than Napster. It argued that it stored no files on its servers and merely mediated direct user-to-user sharing. It continued by changing its architecture through Soribada 2 and 3. The first criminal trial against the developers ended in dismissal in 2003, though civil decisions continued to recognize liability for infringement.

Soribada converted to a paid music service in 2006. It lost the market to Melon, backed by SK Telecom, continued operating a music service, and was delisted in 2022 after financial difficulties.

The episode left a legacy. After the illegal-sharing era, Korea’s digital music market moved directly to paid streaming. Consumers had already formed the habit of consuming digital music; the remaining question was whether they would pay.

iTunes at $0.99 — Recalibrating the Existing Unit of Habit

Apple opened the iTunes Store on April 28, 2003: $0.99 for one song, about ₩1,200 at the time, or $9.99 for a full album.

Labels wanted a unit price of at least $2. Steve Jobs secured the $0.99 agreement. One million songs sold in the first week, seventy million within a year, and more than ten billion by 2010.

Consider what Apple did. It did not create a new habit-space. Napster had already established the habit of downloading music one song at a time for free. Apple attached a price of $0.99 to that habit.

All five major labels joined iTunes in 2003. Before then, they had insisted on their own joint services, such as pressplay and MusicNet, while resisting an integrated outside retailer. Napster forced the strategic change.

Integration with the iPod created synergy. The iPod launched in October 2001. It sold about 125,000 units in the fourth quarter of 2001, but roughly 4.4 million in fiscal 2004. The slogan “1,000 songs in your pocket” explained the combination. Listening on an iPod required iTunes, and music purchased through iTunes played immediately on the device: hardware, software, and content linked together.

The $0.99 price mattered psychologically. “Less than one dollar” made buying easy—a song cheaper than a cup of coffee. When choosing between an illegal download and a legal $0.99 purchase, many people chose the legal option.

iTunes demonstrated a principle: even illegal users will pay when the legal option is convenient enough and reasonably priced. Napster created the habit of obtaining music by the song; iTunes priced that habit.

Melon 2004 — The Invention of Flat-Rate Streaming

Purchasing individual songs in the iTunes model did not become dominant in Korea. Melon, launched by SK Telecom in November 2004, chose another path: unlimited music streaming for ₩4,000 a month.

Spotify did not launch until 2008. Melon was four years earlier. In 2004, no large-scale success for monthly music streaming existed anywhere in the world.

Melon’s success was tied to Korea’s particular environment. First, SK Telecom’s mobile carrier foundation allowed subscription charges to be added to phone bills, reducing payment friction almost to zero.

Second, Korea’s high-speed internet made streaming practical. Its broadband penetration rate was among the world’s highest in 2004, enabling uninterrupted streaming anywhere.

Third, Soribada had already formed the habit of listening to digital music online. Melon transferred the habit-space of illegal sharing into legal streaming.

Melon reached ten million members by 2007, about 25 percent of Korea’s internet users at the time. Loen Entertainment, now Kakao Entertainment, acquired it in 2009. Kakao acquired Loen for ₩1.87 trillion in 2016. As of early 2023, Melon had about 6.77 million monthly active users and ranked first among Korean music apps. Korea’s market reorganized around streaming.

Universal Music’s IP Portfolio Strategy — Copyright Becomes an Asset

During the digital transition, the record industry found a new source of revenue: turning copyright into an asset.

As record sales declined, Universal Music Group began managing its copyright portfolio as a core asset. Revenue shifted from record sales to licensing: one song could earn through film placements, television advertising, streaming royalties, game-music licenses, and other routes.

Universal Music listed on Euronext Amsterdam in 2021 at a market capitalization of about $53 billion, roughly €45 billion. Much of that value came from the copyrights to millions of songs in its catalog.

Copyright became a financial asset. Rights to Beatles music, Taylor Swift’s early recordings, and the Elvis catalog are valued like real estate. They are bought and traded.

In 2021, Hipgnosis Songs Fund invested a total of $1.7 billion in music rights portfolios. Universal Music Publishing Group purchased part of Bob Dylan’s copyrights for about $300 million. Music became an investment product.

This transition sends an important signal to new-content planners. Creating IP can be viewed not only as short-term revenue, but as building a long-term asset.

This Part’s Hints — Checkpoints for New-Content Planners

Checkpoint 1: What is the piracy risk for my content?

Digital content can be copied. If it can be copied, someone will distribute it for free, and stopping that is nearly impossible. Labels tried litigation and failed. iTunes instead showed that people pay when the legal alternative is convenient and cheap enough. If your content is digital, making legal purchase easier is more effective than trying to prevent every illegal copy.

Checkpoint 2: Can you ride an existing platform’s distribution network?

Melon used SK Telecom’s subscriber base as its distribution network. Independent platforms without a carrier foundation fell behind in payment convenience and customer reach. Even with the same content and price, distribution determined market share. How can you use a platform that already has distribution to deliver your content?

Checkpoint 3: Is content IP short-term revenue or a long-term asset?

Universal Music’s portfolio strategy treated music not as a product for short-term sale, but as a long-term asset. What value might the IP created by your content hold in five or ten years? Can it earn through film placement, advertising music, or licensing to other platforms?

The next part asks whether streaming saved or ruined the music industry. Spotify succeeded in reducing illegal sharing, yet artists’ income fell. The paradox of more listening and less earning.

Kim Dongeun WhtDrgon@MEJE.kr 2026