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Call it a billion-dollar leap of faith. On Feb. 20, Napster interim CEO Hank Barry offered that lofty sum to the recording industry in exchange for five years worth of licensing rights to their song catalogs. He's betting the farm that Napster users will pay for the service.
Under the scheme, Napster will garner subscription fees from all of its users by summer and will pay out $150 million each year for the next five years to the five major recording labels in exchange for a nonexclusive license to use their songs on the file-swapping system. The independent labels would collectively split $50 million each year. Any revenues above that amount would be split between Napster and the recording companies.
The math sounds doable. Barry says he thinks he can convert at least 1 million of the 64 million existing registrants over to the paid service. With monthly charges likely ranging from $2.95 to $4.95 for basic service and $5.95 to $9.95 for a premium service, Napster could conceivably pay off its obligation with subscriptions alone, not to mention advertising or e-commerce opportunities. But that assumes that the labels won't ask for more money up front.
TOO MANY HOLES. So is this the end of mass file-sharing on the Net? Hardly. A natural for the Digital Age, file-sharing is here to stay. The seeming capitulation of Napster -- its survival apparently hanging in the balance -- may be fleeting. The entertainment industry can stick its fingers in only so many holes in the digital dike. "The real fear is five years from now, when broadband is out there and downloads are fast," says Jonathan Potter, the executive director of the Digital Media Assn.
It could be that people, so accustomed to getting information for free over the Internet, will never be willing to pay even $5 or $10 a month for their music. Hard to say, really. But this much is clear: Record labels and their movie brethren ultimately will have to relinquish some control of their content because of the Internet. This loss of control might even be mandated into law. It's no secret that Senator Orrin Hatch (R-Utah), chairman of the Senate Judiciary Committee, would like to make file-sharing easier and more standardized. The next round of decentralized file-sharing systems could dwarf Napster and prove far more difficult to track.
The erosion of copyright-holder control springs from a harsh reality. For years, consumers have paid $15 for a compact disk that often contains only two good songs. That may be a sweet deal for the labels, but it also says loads about the high-margin but slow-growth nature of the recording biz.
HAMFISTED EFFORT. Today, millions of people understand that a blank CD can be purchased for $1 or less and burned easily on a home PC for music. Soon, DVD disks you can record movies onto will be mainstream as well. The response of the two obvious losers in this case, the record and the movie industries? Hollywood has twisted the arms of cable companies to downgrade quality of digital broadcasts in a hamfisted effort to discourage piracy (see BW Online, 2/13/01, "Digital Hollywood: No Resolution"). And Barry says Napster won't support the transfer of super-high-quality music files, so as not to cannibalize compact-disk sales. The labels have responded by offering digital-music downloads on their Web sites -- albeit at exorbitant prices and wrapped in cumbersome digital security software that can crash machines.
Like the old record-label model of pushing dud songs on albums, all of these responses are inherently flawed in the same way: They hurt the customer in the name of maintaining control. In the case of the record industry, the old model has begun to erode around the edges. Last year, it saw a 40% decrease in CD single sales. The Recording Industry Association of America pinned the $200 million plunge on unauthorized Internet downloads. The guardians of digital TV might find themselves in the same boat shortly. Now that consumers have glimpsed the promised land of choice, it's only a matter of time before the labels will be forced to sell single songs to customers who would otherwise flee to the Internet.
A better model for the Net? Try cable TV. There, viewers pay a monthly subscription fee to get unlimited access to plenty of content direct from providers. In the process, copyright holders on creative material get compensated by deep-pocketed cable-TV companies, and most viewers are more than happy with what they pay for. Yes, you can steal it, but it's not worth the hassle. Consumers get what they want, which is 150 or more channels. Never mind that there might be nothing to watch. Think what TV was like before cable.
FIRST SALVO. Indeed, Barry's proposal has some of the elements of the cable-TV model. But it lacks the most important one: simplicity. Users will have to pay extra to burn songs they have downloaded onto compact disks, and Napster will have to figure out new ways to guarantee the quality of downloads. By giving the labels control, Napster's plan will discourage choice.
But Napster's fate is only the first salvo in what will likely be a protracted battle for control of entertainment. And it's a war the record labels and movie industry can only win if they figure out ways to give a better value to consumers using the new medium and stop working against the interests of customers. That could mean accepting smaller margins. But with every Internet browser as a storefront, the total pie could dwarf existing revenue models. It will take a leap of faith to get there. Alas, both industries remain glued to the floor.
Salkever is editor of the BusinessWeek Online's Technology channel Edited by Douglas Harbrecht
Copyright 2001 , by The McGraw-Hill Companies Inc. All rights reserved.
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