Napster's Effect on the Industry

Napster may have suffered a setback, but there’s no stopping the company’s effect on the music industry, experts say.

A federal appeals court ruled Monday that the wildly popular online music swap shop must stop dealing in most copyrighted music, pending a trial. But with Aimster, Gnutella, Rapster, BearShare and any number of other “peer-to-peer” music-trading networks out there, Napster’s just the tip of the iceberg, analysts say. (Click here for an explanation of peer-to-peer.)

The coming revolution won’t kill the music industry, they say. But it will cause publishers to think of new ways to make money, possibly give a new role to fan clubs and music-based communities, and cause a long, hard look at how we view copyright.

“There are going to be these thousands of parallel distribution universes,” says Rob Batchelder, an analyst with the Gartner Group. “The genie’s out of the bottle. The music business has to rearchitect itself.”

It Could Ad Up

Imagine a world where music companies don’t make their money from CDs. Instead, the big pop stars make money from concerts, T-shirts, merchandising deals and advertising. Smaller bands would make money from paid fan clubs, merchandise, ticket deals and opportunities to interact with the artists, Batchelder says.

“If they were smart, they’d be building a community for every act … and then having directories to those communities and marketing through those,” he says.

That marketing could include advertising, says Dan O’Brien, an entertainment and media analyst at Forrester Research. Newspaper and magazine prices are already subsidized by advertisers, he points out. Why not music?

Even Napster has ventured into this space a bit: In January an ad for the Dave Matthews Band single greeted Napster users logging onto the service. Promoting the band’s unreleased single “Everyday,” which isn’t due out until Feb. 27, Napster provided a link directly to the band’s Web site for a sneak peek of the tune and an opportunity to preorder the entire album.

Napster has yet to enter into the advertising space full thrust, but all that might change with its recent deals with German music publisher Bertelsmann, which owns BMG music, and indie label Edel. The companies are currently trying to put in place a subscription-based solution. For a small monthly fee, users would get access to a library of songs. But Napster and its new allies are having trouble convincing other big labels to join their music pool, most notably the four big labels — Universal, Warner Bros., EMI and Sony Music — still suing Napster. BMG says it will drop its part of the suit once a viable for-pay service is in place.

But many in the industry argue with a customer base some 50 million strong, according to Napster’s numbers, who wouldn’t want to get a piece of the action — especially when it might keep costs to the consumer way down?

“When you throw advertising on, it’s still free,” Michael Kassan, president of media/e-commerce at Massive Media, Los Angeles, a digital commerce company, told Advertising Age in November.

Forrester’s O’Brien agrees: “If you aggregate a large audience of people who care about something, there are marketing opportunities.”

Want a Music ISP?

Or try the music Internet service provider idea. That’s part of the business model of Aimster, a Napster competitor also in the throes of trying to go legit. Aimster is selling its software to ISPs, who might then try to license buckets of music from the record companies and include access to the library as part of their monthly access fees. They’d provide clear interfaces for searching and browsing music, and most every hit would be a good connection — unlike Napster, where browsing and downloading can be a crapshoot, and song file quality varies.

If offered a more convenient alternative to breaking the law, most people will take it, even though it costs a little, says Johnny Deep, president and CEO of Aimster.

“You know that the source is good, and the content is trusted, and [music is] very easy to find. Napster users themselves say they would pay for that,” he says.

Batchelder disagrees, saying people won’t pay a specific monthly fee just for the privilege of downloading music they can get for free. Any security features devised by the music industry will be broken by hackers, he said, and the music will be out there on the Net unfettered.

“I guarantee you there will be underground computing networks dedicated to hacking media security,” he says.

But quietly, major players are already pioneering the music ISP model. Music Choice, based in Horsham, Pa., is a partnership between Microsoft, Motorola, Sony, Warner, EMI and five major television companies, including DirecTV. By pressing a button on their remote controls, subscribers to certain cable or satellite systems can listen to up to 50 digital music channels through their TV sets. More like a radio or television broadcast, but mostly without commercials, these music channels offer CD-like quality music.

“We are looking at rolling out some advanced receivers that wil perhaps allow you to have more flexibility in terms of more personalized programming,” says Bob Marsoshi, spokesman for DirecTV — an idea not too far from the “music ISP.”

The CD Isn’t Dead

But all is not bleak for music publishers, law and business professors say, because most people don’t have the technical skill or free time of teenagers — and most people don’t want to break the law.

The recording industry’s fears of nobody ever buying another CD are overblown, says New York University economics professor Nicholas Economides. The reason: people want to obey the law. The music companies just have to make it a bit more affordable to do so, he said.

“The movie industry thought it would go bankrupt if videotapes were allowed; now the movie industry makes almost 50 percent of its revenue from videotapes,” he says.

The key is that the price of use is low. Rather than $16 for an hour of music, you can rent a movie for $3.

“In principle, people could do the same thing [with videos as with CDs]—buy one, and a hundred people can see it and resell it. People don’t do it because the price of renting is relatively low and they want to be within the law,” he says.

Piracy hasn’t killed the computer software industry, points out Vanderbilt University professor Steven Hetcher, an expert on copyright law. But the music industry, and soon the movie industry, will have to offer a system compelling enough to serve as a disincentive — like that music ISP, for instance.

“They can’t stop rogue teenagers, but nevertheless, your average sort of family doesn’t want to commit felonies if they can avoid it,” he says.

Copy What?

Part of the problem is that copyright law is so vague and confusing, says University of Virginia law professor Robert O’Neil. Between legal use, home recording, free speech, and inconsistent enforcement, it’s not easy to know when you’re breaking the law.

And young people are beginning to consider free music a right, says Hetcher. And that is bad news for the music companies. Copyright “theft” is just hard to connect with, he says. Unlike with stealing a can of Coke, for instance, copying music seems to have no “market impact”— you’re not taking music away from anyone else, and you can always make the excuse that you wouldn’t have bought it anyway.

“People don’t feel like it’s crime,” Hetcher says.

People are also disdaining music copyrights, O’Neil said, because they don’t feel the right people are getting the money. “The economic interest you see is entirely that of the publisher, the record company, and not that of the more deserving creator or performer,” he says.

Even many artists share this opinion and see the Internet as a way to capitalize directly on their own work.

“The copyright laws that were created in the last century, they’re definitely going to have to go through a revision period. ... I think copyright will be reformed to mean a whole other thing,” rapper Chuck D, leader of the music group Public Enemy, told ABCNEWS.com in July.

O’Neil agrees, saying this isn’t the end of copyright — it’s just a new chapter.

“Copyright has had to deal with some profound discontinuities in technology,” he says. “If you think what cable broadcasting meant, even radio, long before, I think this is yet another significant shift.”

ABCNEWS.com’s Erica D. Rowell contributed to this report.

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