Transcript Napster Case

Napster Case Study
► “Today’s
announcement underscores one key fact:
the real questions about Napster's future are
economic, not technical or legal”. (Napster CEO
Hank Barry, Feb 16 2001)
rulings have limited many of the features
that made Napster a social phenomenon, and the
► Court
prospects of venture funding have
diminished rapidly, forcing Naspter to act
decisively and quickly to leverage its key resources
to create a revenue-generating business.
► “Napster:
It’s the future, in my opinion.
That’s the way music is going to be
communicated around the world. The
most important thing now is to embrace
it…” (Dave Matthews band)
is nothing but a “Giant Online
Pirate Bazaar.” (Recording Industry
Association of America (RIAA))
► Napster
Recorded Music Industry
► Prime
candidate for restructuring
► Disruptive Technology
► Changes in…
 production process
 production technology
 distribution technology
 revenue sources
 roles
Traditional RMI Value Chain
► Composer/Performer
► Recording
► Manufacture
► Distribution
► Wholesaler
► Retailer
► consumer
► How
can Napster transform itself from a
file swapping resource with over 60 million
registered users to a revenue-generating
business operating under the guidelines of
the copyright laws that have limited its
utility recently?
Current Situation @ Napster
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Being forced to install filters on its servers to prevent
copyright violations has overshadowed the more
fundamental issue Napster has faced since becoming the
preeminent file sharing resource on the Internet.
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How can Napster transform itself into revenuegenerating business, let alone a profitable business?
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One can think of a profit stream as starting with the
development of innovative capabilities, then incorporating
those innovations into product attributes. These product
attributes generate value in the market through tactical
actions. The final and critical step, at least from the
standpoint of an enterprise, occurs when that value
generated can be transformed into profits through a
competitive offering.
► Obviously,
with 60+ million registered users
and over 5 million songs downloaded daily,
Napster is generating value in the market.
The question that remains, is how can
Napster appropriate some of the value
that at this point is entirely being given
away to its subscribers?
What is Napster's product / service
exactly?
► The
product itself is relatively simple, as evidenced
by the dozens of competitors who have entered
the market recently.
► The court ruling based on the copyright
infringement argument has decreased the utility of
Napster to millions of consumers who are in the
habit of finding and listening to high-quality music
for free at their own convenience.
► Yet, it has to be the same principle of copyright
protection that will enable Napster to transform
itself from a freeloader’s paradise to a revenue
generating business in the face of competition.
Market Forces
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The whole music market has split into an increasingly
obscure mass of sub and sub-sub genres at the beginning
of the 21st century.
The 'half-life' of individual music trends is thus significantly
reduced and record labels are faced with a flop rate of 8090%, i.e. less than 20% of new releases are at least
covering their marketing and production costs and
returning a profit on top.
As a result, the fixed costs and investments incurred are
shared among a noticeably smaller number of earners,
hence restricting the financial flexibility of the record label.
Market Landscape – Problems
of the Music Industry
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Forget digital downloads for a moment. What are some
non-technical trends in the music industry that set the
stage for Napster's rise and the industry's response?
Until the mid-nineties, the global music industry enjoyed an
uninterrupted boom. Due to the successful launch of the
CD as the new sound medium, the industry was
experiencing unheard-of success. Yet, by the mid-nineties,
the turnover figures in the most important markets
demonstrate clearly that the recording industry had
reached a state of market saturation.
There has been noticeable uncertainty in the industry in
the past few years with a lot of factors contributing to the
problems.
Problems of the Music Industry
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Another trend is the appreciably shorter life span of artists
and groups. A number of record labels are still feasting off
the acts launched almost forty years ago. In some cases,
they provide labels with constant sales figures even today,
without needing a significant marketing budget. For
example, the band Led Zeppelin (30+ years old)
contributes significantly to the revenues and profits of
Atlantic even today. In contrast, Warner Brothers'
expectations of the prematurely lauded REM, for example,
are currently not entirely fulfilled, in spite of excellent sales
for the group in the early nineties.
Distribution Media
► Since
the introduction of the CD approximately 15
years ago, the music industry has de facto failed
to anchor a new audio medium comprehensively in
the market.
► A significant factor in the recording industry boom
at the beginning of the nineties was precisely the
new investment in CDs, which were rapidly
penetrating the market. It has been impossible to
repeat a similar development since then.
Problems of the Music Industry
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Given these circumstances, sales in the music industry's
five biggest markets (USA, Japan, Germany, UK and
France) are growing slowly, if not stagnating. It will be
difficult to implement new growth initiatives from the
previous business alone.
Copyright infringements (excluding the effect of Internet) bootlegging, piracy and counterfeits - are costing the music
industry approximately $5 billion per year. Many industry
experts see the influence of the Internet, as confirmation
of their fears that the losses incurred by copyright offenses
will rise exponentially in the next few years.
Technological Landscape –
Seeds for a Digital Revolution
► The
seeds for Napster’s success were sown
a few years before the actual event.
Expanding frontiers in technology as well as
changing competitive landscapes were the
primary driver of this innovation. Starting
with the widespread adoption of the
Internet, a whole new spectrum of products
and services has emerged to complement
and enrich the Internet experience.
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MP3 Format: Technology that allows digital music from CD to be
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Dedicated MP3 Players: Another critical factor has been the
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Internet Relay Chat (IRC): This technology was incorporated into
converted and compressed into a digital format that can be stored on
traditional disk drives. Another critical feature of this technology has
been the lack of a security layer that prevents the effective copying
of MP3 files. An MP3 file, once generated, can be copied, sent and
played by anyone with a device connected to the Internet having
software that can translate this format into music.
development of portable MP3 players. These players have dedicated
drives, which can both store and erase music, allowing unprecedented
convenience. The increased convenience afforded by the portable MP3
player led to its emergence as a viable and serious alternative to
traditional forms of portable music (portable CD-player/cassette
players).
what came to be known as Instant Messaging. Particularly popular with
teenagers, it allowed a group of people to interact with each other in
real time over the Internet. AOL Instant Messenger and ICQ
popularized this technology.
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These technological changes have facilitated and fostered two other
underlying market forces – the growing globalization and a general
dissatisfaction with content providers, especially Record companies.
People, goods, services and ideas diffuse across the globe much faster,
causing demand for valuable services and products to become
ubiquitous.
As a result, the time required to reach critical mass of acceptance has
become much more compressed than ever before in the history of
innovation.
The increasing penetration of the Internet and the availability of
content traditionally found only in tangible goods, has brought to light
the minuscule variable costs in reproducing content (both books and
music).
Given that the market price for this content is much higher than its
variable costs, the general public has come to the conclusion that they
have been overcharged over an extended period.
These factors have led to the development of new competitive
landscapes, which have blurred traditional boundaries in the music
industry value chain and led to the risk of disintermediation of the
recording industry.
► Innovations
are a function of technology push and
demand-pull. These technology advances have
been critical to the development of Napster.
Additionally, the significant changes in competitive
landscape have created a market demand for
innovations such as Napster.
► Moreover,
at this stage in Napster’s lifecycle at the
point of the case, this demand element is more
important because of its continuing nature. While
these market forces were important to the
development and initial success of Napster, the
demand
that
continually
broadens
the
entertainment boundaries (competitive landscape)
will form an even greater reason for the survival of
this type of technology.
Broadening Entertainment
Boundaries
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How has the Internet changed the entertainment sector?
How has it affected competitive boundaries of the music
industry?
While the Internet is a fairly new medium for
entertainment, it has already expanded the traditional
boundaries of entertainment. Unlike primarily passively
consumed media such as TV, radio, film, and print, the
Internet has enabled highly interactive activities, such as
stock trading, auctions, search functionality, and filesharing to enter the sphere of entertainment. This new
sphere of entertainment, symbolized by services such as
Napster, has the following characteristics:
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Utility: Consumers view sites that are based on utility and
function as entertainment online. They require intuitive
navigation and fast, dependable service from their online
entertainment destinations. Not only is Napster the first of
its kind, it is easy to use, reliable and offers a breadth of
selection not available among any of its competitors.
Engagement: The Internet is more advanced than is the
traditional media on the scale of participation. Services
such as Napster provide the ability to create communities
where users can contribute, control and connect to others
with similar passions and interests as themselves and
enable them to engage in entertainment at a whole new
level.
Novelty: The Internet has also allowed the consumer to
overcome the rigidity of scheduled programming. This
unleashes an inherent human desire to find new sites,
products, and activities, and invites consumers to keep
coming back to enjoy the rush of finding something new.
Napster’s discussion boards and quick access to new,
unknown music caters exactly to this sentiment.
These trends in the entertainment experience are highly visible
in Napster and were critical to its huge success. Napster has
over 60 million subscribers spread across the world. This is an
unprecedented feat in the history of technology innovation.
► While the primary reason behind the phenomenal success is the
free access, there are powerful design features embedded in
Napster that make it particularly successful in the face of strong
opposition from record companies and stiff competition from a
number of clones. While the user interface is not particularly
sophisticated, it is deceptively powerful from the user
standpoint. Napster provides users with control. It is easy to
navigate and allows the user to be functional within minutes of
downloading the application.
► The high installed base provides the user with increasingly
positive network externalities. As the user base has grown, it
has become increasingly easy to locate and download even the
most obscure music.
► Finally, there is no limitation on time and place when someone
can use Napster to find a particular music file. This is a
convenience value never before seen in any entertainment
channel.
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Technology Appropriability
► Now
we come to the question that we
addressed at the beginning. Can Napster
(or any business like Napster) ever be a
profitable business? How imitable is
Napster's invention?
As the proliferation of competitors would indicate, the
technology behind Napster is neither exceedingly complex nor
highly protected.
► Napster is the first success story of distributed computing.
Distributed computing has long been a vision for some of the
leading technologists who desired to see the unused capacity of
the millions of computers on the Internet be an efficient source
of processing power. Napster, with its central servers, is not the
purest form of distributed computing, but is an important step in
that direction.
► A number of hackers and computer enthusiasts have embraced
this technology and developed competing models that range in
distribution model, from the loosely distributed “rolling horizon”
models of Gnutella and Freenet to the Napster clones like iMesh
and Bearshare. Thus, there are very low barriers to entry for
providing this service.
► The fact that this market is easy to enter and easy to imitate
implies that it is an efficient Market, indicating that attractive
situations do not last long and will require quick and decisive
actions to appropriate above-average rents.
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Complementary assets
► How
much of the complementary assets
does Napster control? Can they acquire
control over any critical assets and still be
profitable? How?
Before considering the viability of Napster as a revenuegenerating business, further analysis of the important
technology drivers that double as complementary assets is
presented. The development of MP3 format as well as
portable MP3 players (Rio, Sony MemoryStick) has played a
major role in success of Napster. Additionally, penetration of
other consumer technologies, including writable optical storage
drives (CD-R, DVD-RAM), and the adoption (albeit slow) of
broadband Internet access has also contributed to the
widespread adoption of Napster. The majority of music files
distributed on the Internet originates from consumers' use of
software such as RealJukebox to "rip" CDs - converting songs on
CDs to RealAudio or MP3 format.
► Consumers burn their own CDs using a CD recorder (CD-R) or
CD rewritable (CD R/W) drive and associated software, which is
available in existing digital audio jukebox software or as
standalone audio production. CD burning software can output
audio formats from Red Book (standard audio CD format, which
allows playback on all CD systems) to MP3 formats, which allow
up to 12 hours of music on one 650MB CD and must be decoded
on playback.
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one can conclude that technically
proficient consumers are driving the current
excitement surrounding distribution of
digital audio. They are making music files
available to be traded on engines such as
Napster and their demand for sophisticated
complementary technologies is driving up
the utility of services such as Napster.
Finally, beyond the technology based
complementary assets there is the issue
actual copyright protected content that gets
traded on Napster.
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Napster owns none of the complementary assets mentioned
above. Since most of these complementary assets are industry
standards that are not held tightly by any organization, few of them
pose any real threat to the viability of Napster.
The two notable exceptions are the MP3 standard and the legal
ownership of copyrighted material. While MP3 is the industry standard
at this point, there is no guarantee that it has achieved dominant
design status. Since recording companies own most of the copyrighted
material being traded on Napster, the free availability of music is
closely tied to the lack of copyright protection in the MP3
format. If the MP3 format had strong security features, or
alternatively if the industry standard for digital audio had strong
copyright protection features, trading files would present no value to
Napster users. There is significant inertia towards maintaining MP3 as
the standard for digital audio. This inertia is rising out of switching
costs to users who currently own complementary assets dedicated for
the use of MP3-formatted digital audio, and the sheer volume of audio
files currently in MP3 format.
Yet, if content providers and software companies were to
collaborate to no longer support the MP3 format, there is a possibility
that a more secure digital audio standard might emerge in the near
future.
Subscribers continue to use Napster despite the blocking of over
1.6 million copyrighted titles, indicating that there is still a
demand for non-copyrighted material. But crucially, there is little
opportunity for Napster to charge for these services.
► Therefore, in order for Napster to profit from its innovation, they
need to tightly align themselves with the complementary asset
essential to their value proposition - the copyrighted material
owned by the record companies.
► In this case, copyrighted music is tightly held by the recording
industry and the cost to acquire those assets are extremely high.
Given that copyrighted music is tightly held and the limited
nature of Napster’s financial resources, Napster can only
hope to acquire these assets through alliances.
► Moreover, an alliance will not be useful unless a minimum
number of record companies commit to this alliance. Having one
partner (as they do now) or even adding another will not ensure
a revenue generating business, as subscribers will be unable to
take advantage of the network externalities, one of the
strongest features within Napster.
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Napster needs to form alliances
with a majority, if not all, of the record
companies, in order to have their music
distributed on its service. It will take
considerable effort for Napster to persuade
record companies who are fearful of
unchecked piracy as well as business
models that can put their existence in
jeopardy.
Competition
► How
is Napster positioned relative to its
own competitors?
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The difference between Napster and some other online file sharing
technologies is that Napster has a central index of users and their files.
While some competitors without a central index can track users with IP
addresses (iMesh, Bearshare), others are just protocols (Gnutella,
Freenet).
A few competitors encrypt all information and files to protect the
identity of the sender and receiver and hence cannot be targeted for
copyright violation. The particularly compelling competitors are those
based outside the United States and those that do not have centralized
servers but instead serve as protocols.
One significant file-sharing clone is iMesh, headquartered in Israel, and
outside US judicial reach. It allows trading of a variety of digital audio
and video files. It asks visitors to respect copyrights and informs them
that complying with the law is their responsibility. Gnutella and other
such protocols are not as well developed and robust as Napster.
Moreover, their highly distributive nature has resulted in limited
network externalities due to bandwidth constraints and limitations of
recognition technology (algorithms to find the fastest connection
between search and target computers). Finally, like Napster, these
platforms are dependent on the existence of MP3 as the digital
standard. Greater security on digital files would reduce the
utility of these file-sharing platforms.
Napster SWOT Analysis
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Strengths:
Installed Base – Over 60 million subscribers
Strong Contagion effects – Driven primarily through word of mouth
and interpersonal networks and the feeling of community among the
members.
Highly Positive Network Externalities – Installed base leads to positive
externalities that have resulted in continued membership even after
the blocks of copyrighted material was imposed.
High Market Profile- No marketing expenses required because the
revolutionary nature of the innovation and the public dispute with
RIAA. Public opinion generally in favor of Napster.
Powerful Design Features – Simplicity of design allows for easy
adoption. The presence of central servers allow Napster some control
over files and virus protection. Learning effects from 2 years position
them well to transition to a for-pay model.
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Lack of critical complementary assets – Complementary
assets required to appropriate rents from innovation tightly
held by record labels.
File selection greatly reduced – Court-mandated blocking of
copyrighted material, which resulted in reduced selection,
thereby lowering utility for subscribers and making it
difficult to transition to a for-pay model.
Antagonistic relationship with record labels – The court
battle makes it difficult to have constructive relationships
with record companies. In light of the court decision,
record labels are less inclined to reach an agreement with
Napster.
Peer-to-peer computing – Implementing the filtering
mechanism against illegal file downloads is more difficult
than the courts assume.
Transition from “free” to “pay” model – Neither the
traditional business world nor the new Internet economy
can offer up many examples of companies that have
successfully made the transition from “free” to “pay”
model.
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Opportunities:
Online entertainment trends – A new generation of technically savvy
consumers is looking increasingly online for their entertainment
choices. Content providers are generating both online-exclusive and
online-convertible content. Users looking for ease of use, flexibility and
comprehensive selection in online entertainment. Continued
development and penetration of flexible and high quality PC
peripherals will sustain and increase demand for digital music in the
future.
MP3 standard – Lack of security in the digital music standard allows for
some utility to remain in Napster as courts impose blocks on
copyrighted material.
Potential for alliances with record labels – Leverage alliance with one
major record (Bertelsmann) to form relationships with others.
No focused strategy for record labels – In light of the many
unregulated competitors trading copyrighted MP3 files, Napster might
be the best alternative for record companies to not miss the boat and
to gain a new revenue stream.
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Threats:
Large number of competitors – Numerous competitors, many
unregulated, will result in dissipation of subscriber base.
MP3 file format – While this is a strength in the free model, it will be a
liability in for-pay model.
Entry of the record labels – If they decide to enter the market either at
an individual level or by forming an alliance, the market profile of
Napster will decline slowly.
Entry of major online brand names – If AOL, Yahoo or some other
premier online brand decide to enter this market, there is a possibility
that Napster’s customer base will dissipate faster as many of these
online heavyweights have the brand/market presence and financial
clout to influence recording companies.
Possibilities of huge liability – If RIAA secures an outright win in the
courts, Napster might have to pay huge fines for copyright violations
that can cripple Napster or might force it into bankruptcy.
What does the market need?
► What
do people want? What will the market
demand as digital distribution arrives for the
masses? One should be able to deduce a lot
of information from Napster’s success about
these essential questions. Whether the
service gets shut down or not, it has over
60 million users, who signed on in little
more than a year, a truly staggering growth
rate. Some of the essential features people
look for:
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Music on Demand: Napster became wildly popular because it
provided something that customers really want and that was not
available anywhere else: convenient, on-demand access to everything.
No Internet service, no record label, no retail store, no flea market, no
radio station has ever before provided people with this opportunity,
and the fact that people flocked to use it in record numbers shows
clearly that this on-demand access is something of great value.
Entertain-Me - Personalized Programming: Even with on-demand
delivery, people like to listen to radio for two reasons. First, it provides
them with effortless, relevant entertainment and second, it provides
exposure to new music. New technologies have tremendous potential
to improve the level of personalization and interactivity on the web. As
distribution and promotion become even more similar, listeners will
come to expect personalized packaging and recommendations with
every music experience.
Easy Access: People spent tremendous amounts of money to replace
LPs and tape collections with CDs not only because of improved sound
quality and durability, but mainly because of the increased convenience
(ability to quickly, easily and precisely skip to any song on an album).
Technology is making possible another quantum leap in people’s ease
of access to their music collections, by allowing storage of all their
music in one place and to access entire collections with phenomenal
speed and facility.
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Ownership: This is a hotly debated topic. While the consumer
sentiment on ownership is changing to accept more forms of digital
media, the personalized nature of music would indicate that digital
music consumers have strong preferences for ownership over rental
formats such as “listen on demand”.
Quality: With interconnectivity increasing, the concerns about quality
and protection from computer viruses will take on an increasingly high
profile. Consumers will pay for services that ensure quality and
protection from disruptive agents.
Access to Everything in One Place: Unlocking large libraries of
music for a consumer on the basis of a single transaction benefits all
parties involved:
Consumers: Aside from the obvious appeal of the volume discount,
subscriptions offer consumers the ubiquity and transparency that are
the hallmark of online music. The secure distribution of music via
networked file sharing practically mandates subscriptions—otherwise,
consumers would have to individually unlock every file they download.
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Record labels: Subscriptions give labels something they have always
lacked: an ongoing relationship with consumers. This relationship will
yield an important stream of consumer data, and aid in marketing
efforts and the broadening of their overall revenue strategies.
Destination sites: For the first time, media and commerce players
will have the ability to create a product format out of major label
content uniquely formatted to the visitors on their sites. Because MTV
knows more about its visitors than BMG does, it will be a better judge
of its users' tastes, and will thus sell more music than it did under the
regimented album format paradigm. A rise in total sales means
increased revenue for all concerned.
Overall benefits: The maturity of the third-party service landscape,
and the advent of subscriptions means that the format issues that have
plagued the industry thus far become almost moot. Additionally,
services will absolve labels and destination sites of the burden of
technical expertise required in their absence.
Any company in the music industry will do well to recognize these
needs and focus on providing innovative solutions to these needs.
Strategic Alternatives
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Let's discuss what Napster should do at the time of the
case. What are their strategic options?
Convergent handheld and home entertainment devices will
drive consumer acceptance of digital media. With the belief
that over time, the PC will evolve as a point-of-purchase
media and storage hub connecting consumers to an online
distributor and enabling them to off-load digital assets to
dedicated devices for quality playback, one can analyze the
strategic alternatives available to Napster.
Revenue streams for Napster can be from advertising or
from subscriptions or some combination of both. The two
models are based on very different ideas.
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Advertising-based revenue model: A business model driven
primarily on advertising revenues would imply that Napster
would be offering high quality content or peripheral services that
would bring the consumer to the website/service. Given the lack
of any copyrighted material at Napster and the potential
negative associations present in site advertising, it will be
extremely optimistic to expect advertising to form the primary
source of revenues at Napster. Therefore, while the possibilities
of advertising revenues will be considered, it is only seen as a
supplementary source of revenue that augments the primary
subscription based model.
► Subscription-based revenue model: Despite the reluctance
to pay for online content, more than two in 5 acknowledge that
content cannot remain free forever[1], driven by awareness of
financial problems that Internet companies are having as well as
by recognizing that content creators must receive compensation
for their work. The key to any subscription-based model is to
understand the features that the consumer values (demand),
and to offer those features with level of exclusivity (scarcity).
[1] Jupiter Finding the Elusive Winning Formula Vision Report Volume 7 / December 11, 2000)
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A June 2000 survey by Jupiter MediaMetrix found that 22%
of digital music consumers stated they would be willing to
pay a monthly subscription fee and 20% stated they would
be willing to pay per use[2]. This would indicate that
demand for online digital music exists in a variety of forms.
To succeed in the dynamic music market, Napster must
offer a tiered set of subscriptions with different levels of
payment and commitment.
Service options could range from pay per download models
to mid-range limited access models and full service,
unlimited download models. Mid-range models might
include access to particular libraries of popular songs such
as “Billboard top 100” or artist-based or even a genrebased access.
[2] Jupiter Consumer Survey (6/00), N = 2,258 (US ONLY)
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Pay per download: Small cost to downloading a particular song.
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Unlimited access to all content based on limited time
commitment: Something that can take the form of $14.99 for 3
Offers all kinds of control and flexibility to user. Would require
registration with site. Micropayments[3] might be useful here.
► Unlimited access to specific Napster defined libraries: This could
mean access to the popular content or even artist based access.
months or $9.99 for 6 months.
► Unlimited commitment: $4.99 per year for a minimum of 1 year.
► The sustainability of a subscription-based service is possible only
if Napster can align itself with all the major record labels to have
their content available on their site. The other key variable is the
need to develop a more secure format that may ameliorate
indiscriminate casual piracy. This can be achieved only with a
concerted effort among the record labels, distribution outlets
such as Napster and software developers such as Microsoft and
is easier said than done.
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Payment method capable of handling arbitrarily small amounts of money –
e.g., for sale of non-tangible goods over the Internet.
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These subscription based revenue models can exist under a variety of ownership
structures for Napster:
Independent: Napster stays independent and aligns with record labels. Not
particularly viable, considering the recent defeat in the court and antagonistic
relationship with the record labels. Not much value in partial libraries. A key success
factor for Napster has been the high level of network externalities.
Sell majority ownership to Bertelsmann: Napster can get investment from
Bertelsmann to implement a subscription fee-based model and in turn giving away
ownership.
Sell majority ownership in Napster to record labels: Make record labels the
primary beneficiary to potential success of subscription-based model, by recognizing
the value of the installed base in Napster.
Align with AOL: AOL - AOL already provides a subscription-based service. They
have direct marketing know-how. They would also realize the value of Napster's
installed base and recognize a potential audience for their existing service. It would
be relatively easy to add on Napster subscription on top of AOL current revenue
models. Time Warner and Bertelsmann, when combined with the might of AOL and
Napster, will induce other labels to join an alliance.
Exit completely: “Hope cannot be the basis of a strategy”. At the end of the day, if
everything fails and nothing seems to be working out, the best option would be to
exit completely. A business cannot be sustained mainly on the glimmer of hope that
events might correct themselves. With the possibility of big fines for copyright
violation if RIAA scores a complete win in the courts, it is probably prudent for
Napster to examine the option of declaring bankruptcy and closing down the
operation. This option is considered not simply for the sake of completeness with
regard to all options available to Napster, but also to signify importance of the
option, given the weak positioning of Napster. These subscription based revenue
models can exist under a variety of ownership structures for Napster:
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Independent: Napster stays independent and aligns with record labels. Not
particularly viable, considering the recent defeat in the court and antagonistic
relationship with the record labels. Not much value in partial libraries. A key
success factor for Napster has been the high level of network externalities.
Sell majority ownership to Bertelsmann: Napster can get investment
from Bertelsmann to implement a subscription fee-based model and in turn
giving away ownership.
Sell majority ownership in Napster to record labels: Make record labels
the primary beneficiary to potential success of subscription-based model, by
recognizing the value of the installed base in Napster.
Align with AOL: AOL - AOL already provides a subscription-based service.
They have direct marketing know-how. They would also realize the value of
Napster's installed base and recognize a potential audience for their existing
service. It would be relatively easy to add on Napster subscription on top of
AOL current revenue models. Time Warner and Bertelsmann, when combined
with the might of AOL and Napster, will induce other labels to join an alliance.
Exit completely: “Hope cannot be the basis of a strategy”. At the end of the
day, if everything fails and nothing seems to be working out, the best option
would be to exit completely. A business cannot be sustained mainly on the
glimmer of hope that events might correct themselves. With the possibility of
big fines for copyright violation if RIAA scores a complete win in the courts, it
is probably prudent for Napster to examine the option of declaring bankruptcy
and closing down the operation. This option is considered not simply for the
sake of completeness with regard to all options available to Napster, but also
to signify importance of the option, given the weak positioning of Napster.
► So,
going back to the question we posed at
the beginning, what should Napster do?
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Creating an appealing pay service will be a steep hurdle, particularly
with the fact that the users have got accustomed to the free service
and the presence of competitors who can provide the same service
free. In addition, the sentiment that they have been charged
excessively by the music industry is prevalent among the consumers
and needs effort from all sides to correct this problem. Napster has
sown the seeds of a digital revolution where the consumers have
become tired of the traditional distribution model and have started
expecting more.
But it’s hard to deny the compelling advantages provided by these new
technologies. As technology advances across the board and online
digital delivery slowly replaces CD sales, these issues will become more
and more pressing for the major labels. Napster needs to make
recording companies realize a vision of a digital future. Recognizing
and planning for future market needs now will allow these major labels
- or anyone else who responds well to these market needs - to survive
as the future of the music industry.