The digital-music era entered a new phase three years ago this week, when Liquid Audio Inc. introduced a system capable of mastering and downloading high-fidelity music tracks over the Internet in a secure, copy-protected format.

On March 10, 1997, more than a year and a half before the major record companies realized they needed to copy-protect their catalogs when selling them as downloadable files, and at least a year before the open-format MP3 entered the mainstream consciousness, Liquid Audio provided the music industry with the means to encode digital music so that only authorized copies of songs would play.

The Liquid Music System consisted of Liquifier Pro, which encoded music into high-quality digital files; the Liquid Music Server, which managed the delivery of digital tracks to customers over the Internet; and the Liquid Music Player, which customers used to play back downloaded tracks.

In 1998, Capitol/EMI Records sold more than 100,000 downloaded copies of the Duran Duran single "Electric Barbarella" (RealAudio excerpt) using the system. Other big-name customers include Yahoo!, Amazon.com, BMG Direct Download Central and CDNow.

By the end of 1999, Liquid Audio's music-distribution network was being used by more than 6,000 artists and 1,000 record labels. Unlike the MP3 format, which allows for unlimited duplication of files and has a perpetual shelf life, Liquid Audio has built-in protection; it also can be used to give away free music that expires and becomes unplayable after a given length of time.

But even with that protection, some in the industry were worried about its implications.

In December 1997, Liquid Audio founder Gerry Kearby, who worked with Diana Ross and the Grateful Dead as a recording engineer, told CIO Magazine that his musician friends said he was crazy to try to sell music over the Internet. "I called a guy I know who is a famous rock star about a year ago," he told the magazine. "He said, 'You're opening the gates of Jurassic Park.' We are asking these people to consider a new distribution channel that is fraught with real and imagined perils."

Liquid Audio received numerous awards but incurred significant losses. Revenue in 1999 was $4.4 million, up 57 percent from the previous year. However, the net loss for the same period topped $24 million. The company said in a recent SEC filing that "we expect to incur additional losses and continued negative cash flow from operations through at least 2002."

In recent months, the company has shifted its focus away from the Liquid Music System and toward the delivery of digital-music services such as in-store custom-CD machines and online music try-and-buy sites. The in-store kiosk systems are in operation in stores in Japan and Korea.