Case 11

Reinventing Napster: How Many Lives for the Cat with Headphones?

Napster and other Internet companies opened the proverbial Pandoras Box when they introduced peer-topeer (P2P) networks. P2P applications changed the way people used the Internet by creating an environment where millions of users could share various types of files, including ones that hold a copyright, such as digital music files called MP3s (i.e., Motion Picture Engineering Group Audio Layer 3). Napster rapidly became one of the most popular P2P applications, amassing a file-sharing community with millions of registered accounts. At its peak, in March 2001, Napsters servers were enabling users to copy more than 165 million music files per day. At least 87% of those les were copyrighted and therefore not theirs to copy. Napster.com originally provided its services and interface programs to make the exchange of MP3s more straightforward and convenient. This convenience fomented a controversy over the legality of using music without permission from the owner. The Napster P2P application, in conjunction with the continuous improvement of Internet connectivity and speed, enabled users to have unrestricted access to music and to copy limitless les for free. Napster was so terrifyingly efficient at connecting consumers with one another to share their music that anyone with a computer could quickly find any song with a simple Web search. Music no longer was a physical product made of plastic; it was now an ethereal concept that could be stored on a hard drive and shared at will, broadcast to anyone with a few moments to do a Web search.

Napsters Fall from Glory

The file-sharing technology developed by Napster and other companies impacted several groups in society, most notably the music industry. Dr. Dre, a concerned music artist, summed up his feelings toward Napster this way: Im in the business to make money, and Napster is ____ing that up! Both popular artists and lesser known songwriters and composers rely upon music sales for their livelihoods, and they were affected negatively by the filesharing technology. The corporations that provided financial and marketing support to recording artists and songwriters were also affected by le-sharing technology. Warner Brothers Music, Sony, Bertelsmann Music Group (BMG), Universal, and EMI Group, all members of the Recording Industry Association of America (RIAA), settled lawsuits with MP3.com for distributing copyrighted materials without their consent over the Internet. The suits were targeted toward protecting the rights of copyright owners and recording artists to be compensated for their works.

According to Ethan Smith, a reporter for the Wall Street Journal, the violation of the rights of artists and copyright owners through digital-music piracy allowed many wouldbe music buyers to fill their CD racks or digital music players without ever venturing into a store. After the settlement with MP3.com, the focus was no longer on who would distribute the music over the Internet, but rather how. The same plaintiffs who led lawsuits against MP3.com also led lawsuits against Napster, claiming that the companys music-sharing application encouraged copyright infringement by facilitating the exchange of songs over the Internet for free. Napster users had a much different view of freely exchanging MP3 les over the Internet. Market research indicated that young people who traded MP3 les had signicantly different values than their elders when it came to the legality and morality of downloading. Appeals to younger consumers by the RIAA to equate the trading of MP3s with shoplifting fell at. In its legal battles, Napster had both its supporters and detractors. Limp Bizkit was one of the first musical groups to adopt Napster and its file-sharing service. The bands lead singer, Fred Durst, publicly supported Napster, saying the file-sharing service both provided an amazing way to market music to a mass audience and a great opportunity for fans to sample an album before buying it. Courtney Love, another recording artist, was a Napster supporter. Artists opposing Napster included Elton John, Puff Daddy, Dr. Dre, and Metallica. Both Dr. Dre and Metallica sued Napster for copyright infringement. By mid-2001, Napster lost its court battles with the music industry, and Napsters free music file-sharing service was shut down.

Reinventing Napster
Napsters name, some intellectual property, and hardware were sold at auction to Roxio Inc., a software company that developed and sold CD-burning applications. Roxio later sold its consumer software division and renamed itself Napster Inc. in 2004. The reinvented Napster focused its online music sales on single-song purchases as well as subscriptions for unlimited access to its music list. Registered Napster members could listen to any track in its catalog up to three times for free. They could then purchase the tracks Ia carte for 99, or become a Napster To Go subscriber or $14.95 a month and listen as often as they like. However, if Napster subscribers stopped paying their monthly fees, they no longer had access to the music they had purchased.

To protect their financial interests, the major record labels required online music stores like Napster to sell les saddled with digital rights management (DRM), the industrys euphemism for encryption designed to limit copying. However, because of the embedded DRM technology, any Napster To Go customer who decided to try out the service and then discontinue it couldnt play any of the music that he or she had already purchased.

Reinventing Napster Again

Subsequent to its commercial reinvention as a seller of digital music on either a single-song or subscription basis, Napster has reinvented itself again. The first change was the use of advertising to give customers a limited opportunity to listen to songs in the Napster music catalog for free. The second change was to enter into mobile music partnerships, and the third was to convert all the music in the Napster catalog to MP3 les so the music could be played on any portable music player. Limited Free NapsterSupported by Advertising In May 2006, Napster began offering an advertising supported free version of its subscription service; the free version permitted consumers to listen to as many as five tracks free while they view advertising. However, users could only listen to a song three times a month, and couldnt load the songs onto a portable player or copy them. The goal of the free service, according to Laura Goldberg, Napsters Chief Operating Officer, was to convert users into paid subscribers. Napsters free version attracts four million unique visitors each month. Napster hasnt disclosed how many users of the free service have converted to paid subscriberswhich numbered at 518,000 in November 2006. Mobile Music In November 2007, AT&T announced that it was making Napster Inc.s entire music catalog of more than five million songs available for purchase and wireless downloading. Songs would cost $1.99 each, or $7.49 for ve per month. Users who downloaded a song directly to their phones would automatically get an e-mail allowing them to put a second copy on their computers. Customers who had songs through Napster could also transfer them to their phones. Although Napster had similar though smaller deals with other companies in the United States and overseas, this new arrangement with AT&T created an enormous U.S. customer base for Napster. Brad Duea, Napsters president, held that the new arrangement with AT&T would enable Napster to compete more directly with Apples iTunes. MP3 Files for Music Player Flexibility In an August 2007 article in Kiplingers Personal Finance, Phil Leigh, president of the market-research firm Inside Digital Media, was reported as saying that unrestricted music is on the horizon. Leigh predicted wholesale DRM-free downloads within a year or two

because [m]ainstream consumers will not pay to complicate their lives. Just a few months later, in early January 2008, Napster announced that it would begin selling all its downloads without the software that limits how buyers can use them. Downloads would be sold in the MP3 format that lacks digital-rights-management (DRM) software. Previously, songs sold by Napster came with DRM software that let them be played only on devices that use Microsoft Corp.s Windows Media DRM. The shift doesnt affect Napsters subscription music service, which will continue to work only with a handful of specialized devices. The new format also would enable file sharing. The primary advantage of MP3 les for both consumers and Napster is that they can be played on virtually any digital music player, including Apple Inc.s market-dominating iPod. Although the shift to MP3 les was scheduled to take place between April and June 2008, Napster was still working developing or finalizing agreements with four major music companiesSony BMG Music Entertainment, Warner Music Group, EMI Group, and Universal Music Groupas 2008 began. All but Sony BMG Music Entertainment had already begun selling MP3s on Amazon.coms new download service. By midyear 2008, the agreements had been consummated, and Napster was touting its MP3 catalog as the worlds largest, with over 6 million songs. According to Chris Gorog, Napsters chairman and chief executive officer, even though the move to MP3s is expected to boost the companys download sales, the move has a much greater significance in its potential to break down the dominance of the closed iPod-iTunes system.

Beyond the Current Incarnation of Napster

Producers in the music industry appear to be caught in a conundrum in their approach to digital music. In past years, Sony BMG Music Entertainment, Warner Music Group, EMI Group, and Universal Music Group have gone overboard in their resistance to digital music. On the other hand, The music industry has been banking on the rise of digital music to compensate for inevitable drops in sales of CDs. . . . It hasnt worked out that wayat least so far. Overall, sales of all musicdigital and physicalare down. . . . Meanwhile, one billion songs a month are traded on illegal le-sharing networks, according to Big Champagne LLC. As CD sales continue to decline at a massive pace, the music industry has reached a crisis point; and thats creating a good-news story for the digital space, because [the labels] have to make these other things work. Now the major music labels are slowly becoming more open to experimenting digitally because they dont have a choice, experts say meaning a host of innovative new music services have a future. Record labels have no choice but to invest in digital music. But the industry still has a ways to go to win over todays music fans, especially the

younger ones. Few of the new innovative services are iPod-compatible, and digital-rights management software, which limits where and how songs can be played, still factors into most [digital music]not the best way to reach consumers raised on illegal downloading. How will this shift toward embracing digital music affect the future of Napster? One cannot help but wonder if another reinvention of Napster is in the offing. Coupling previous incarnations of Napsterwith its logo of a cat wearing earphonesbrings to mind the adage of a cat having nine lives! Indeed, how many lives does Napster have?