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by Arik Johnson

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Napster - Part II of II: Enemy of my Enemy is My Friend

Competitive Strategy: Competing with Free - to survive, Labels must embrace the Enemy

You say you want a revolution? Well, like it or not, the music industry is at a crossroads. As explained in last week's column, the horse is out of the barn on downloading copyright-protected digital media, "ripping" songs from CDs and "burning" them into availability in the myriad media formats available. The alternatives to Napster for music-lovers, thanks to the ham-handed legal action by the RIAA and spurred on by the threat of losing a good thing, have proliferated and will continue to do so in ever more threatening and difficult to control forms. Gnutella and Freenet are only two of the "no-one-to-sue/impossible-to-stop" variants becoming available to users, not to mention Napigator, which effectively negates the shutdown of even Napster itself. Napster is not the real enemy - Napster's alternatives are.

So, how does the music industry move forward? The only logical alternative, that considers all eventual scenarios, is for the music industry to partner with the likes of Napster. This is true for several reasons:

1. If Napster falls, more threatening alternatives will eventually develop similarly user-friendly interfaces to satisfy the consumer demand for cheap and/or free music on the Net. So far, the only reason Napster has attracted such a tremendous following has been the easy to use interface and word of mouth from first-mover advantage that makes intellectual property broadly available. Bigger threats will replace Napster if the RIAA shuts it down.

2. Napster's 20 million users are, arguably, the most rabid music fans on the planet, long since alienated by $18 CDs, churned out by artists, largely perceived as arrogant and spoiled, and marketed by money-hungry multinationals that could care less about creativity. Could the industry benefit from these music customers, shown in recent research to actually buy more music because of sampling on Napster, and a better understanding of what they're listening to? You bet it could.

3. Digital music on the Internet will never go away; and attempts to sue every infringing user who downloads a song without buying it is the information highway's equivalent of enforcing a speed-limit that everyone will break given the opportunity. However, research shows that, music fans don't want to break the law, and if presented with an appropriate price point (I think the sweet spot is between 25 and 75 cents per song), the majority of users will abandon the whole idea of stealing music and pay the pittance in licensing fees necessary to support artists creative efforts, if not record companies outright. The majority of today's music pirates don't want to be music pirates, but are also unwilling to pay market prices commanded by the music industry - given a reasonable alternative, they'll be customers.

4. The music industry has effectively built an oligopoly of a few major, parent labels that risk break-up through anti-trust regulation -- and rightly so. The industry has yet to offer a satisfactory alternative of their own to solve users desire to pay less than the monopolist prices extracted for CDs by the big five - c'mon, EMI, $3.99 a song?! Users simply don't think CDs are worth it at the prices music is currently sold; they haven't for a long, long time and there's considerable evidence the music industry is guilty of price fixing on a large scale. This is especially true when music-lovers are only after a single tune, or perhaps two, on each album purchased, but are forced to buy "filler" in a 10 to 15 song album. Also, potentially revolutionary developments are occurring lately, what with MP3.com's decision to move forward in partnership with Outernet to open a string of 15 music stores and entertainment complexes beginning in September where fans could use kiosks to burn custom CDs for as little as $1 per track.

5. Napster's concentration of music fans gives record labels an unprecedented opportunity to market music online and presents a perfect laboratory for testing subscription-based service experiments. Possibilities might even include using upcoming digital rights management technology to watermark each song and limit it to a certain number of free plays or basing subscriptions on a limited number of downloads plus unlimited streaming. It would also mean the users entire discography would be available to target market similar artists to those with certain demographic characteristics in their collections for future sales of new artists - meaning savings of millions of dollars in research to find out what users are listening to. Even if a majority of Napster users abandoned the service it would still mean millions of users helping the recording industry fine-tune their online approach to something that would be acceptable to at least a minority of users.

One possible industry solution that requires attention, and is a potential point of weakness in the labels' ongoing strategy, lies in the Secure Digital Music Initiative or SDMI (www.sdmi.org). Over 100 companies, many members of the RIAA, have supported the idea of stamping a special digital watermark on all music released on CDs. If someone makes a pirated digital version of this music, players equipped with SDMI protection features will prevent the illegal songs from being played.

Although it sounds like a fantastic idea, you'd have to get hardware makers to limit, voluntarily, the features of their products in an intensely competitive market of their own; a point which may ultimately come down to government regulatory action should the recording industry pursue this idea. Furthermore, how long do you think such a system would persevere in an age where armies of 19-year-old college students live for the opportunity of cracking such a scheme? I'll bet, not long. As a precedent, consider the fate of the supposedly unbreakable DVD format and the Motion Picture Association's attempt to stop the publisher of hacker periodical 2600 (www.2600.com) from distributing information about cracking DVD encryption (DeCSS). While Jack Valenti & Company are likely to win their case to shut down distribution on the site, I counted 443 "mirrors", or alternative sites, where the software is still available. Digital rights management is no solution when it can be cracked - an eventuality that'll require some pretty creative thinking on the parts of SDMI partners.

The fundamental issue is that, Napster would never have existed had the labels fulfilled demand for individual songs, in MP3 format, from major artists. Fans simply found their own solution -- stealing. In the old days, the industry used to sell singles without the filler of the rest of the album -- why can't an old idea be brought back for a new age? It would mean the reorganization of the entire business model - that's why. And that's what the industry is most afraid of - the uncertainty of fixing what "ain't broke". But the system is broke - that's why Napster and its clones have propagated so successfully. It's really a matter of the industry waking up to its own rip-off in selling products with little inherent value (the 10 out of 12 songs on the average album people don't care about) based on the demand created by a couple of hits.

It doesn't necessarily have to be Napster - in fact, that road may already be passed, although Hummer Winblad (www.humwin.com), the company's main backers, may disagree. At the very least, the music industry must license their libraries to some third party - Napster just has a head start in the form of an intensely loyal following, a database with a vast amount of user-information and an easy-to-use interface. But, until labels relax control over their music libraries, there is very little chance of building a viable online marketplace for legitimate music - most music consumers don't care, or even know, which labels distribute their favorite artists - so they all must do something that can compete effectively with free alternatives and offer users value over those alternatives.

For now, the strategy by many labels is streaming -- in partnership with former foe MP3.com (from whom the industry extracted some $150 million in defending itself from a similar lawsuit) and start-up Musicbank. Again, this offers advantages to the labels in the form of controlling their libraries because the stream is never actually downloaded. I should think this strategy is likely to attract some following, but will ultimately fail as consumers realize that portability requires a constant Internet connection in a pocket-sized package - alternatives only currently offered by MP3 players and some PDAs and smart wireless phones. And, if they handle the pricing structure like they have in the past, don't look for such services to catch on. We have no "Celestial Jukebox" as one writer refers to the invisible connections that will someday be a part of our digital lifestyles - micropayment transactions serving up copyrighted content to users in increments so tiny as to be imperceptible.

If you think music fans won't move to other services, consider this - within 60 minutes of the announcement of Judge Patel's anti-Napster ruling, more than 31,000 new users had logged onto the lesser-known service called Scour Exchange and had shared more than two million songs. Furthermore, the RIAA boycott, organized by Napster users, pledged users to stop buying CDs while Napster was shut down. That amounts to millions of music fans making their voices heard in the form of boycotting the very companies that want to be patronized. Napster too has been growing -- to the tune of a full million new users per month! That's more than 30,000 new users per day, at a clip of 60 percent annual growth, meaning when users have it taken away, they'll find an alternative -- Gnutella and Freenet, prominent among them. It might already be too late.

Don't think collaborating with Napster hasn't been considered before by the music industry -- one might argue the only reason for pursuing the legal route of injunction to shut down the service in the first place was so the industry could use that leverage to force Napster into a submissive role which the industry could exploit in negotiations. Whether my arguments above are accurate in predicting likely future competitive strategy, the music business has changed forever - not because of a revolutionary new service for piracy, but because of its own sloth and greed. And the industry must now figure out how to compete with free.