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Q&A with Napster CEO Chris Gorog


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December 17, 2005

Q&A with Napster CEO Chris Gorog

Peter Burrows

When it comes to making money on digital music, Apple Computer is by far the greatest show on earth. It?? sold nearly thirty million iPods since 2001, and should pass the one billion mark in songs sold via its iTunes Music Store in early 2006. But what about other companies? Record companies have added a lucrative, if relatively small, new sales channel by selling through iTunes--a bright spot in an otherwise dismal industry. But a seemingly endless parade of would-be digital music companies, from device makers to iTunes rivals to legal peer-to-peer providers, have so far failed to cash in on what looks like an inevitable mega-trend: from sales of physical media such as CDs, to digital distribution of music.

No doubt, Apple developed its iPod goldmine the old-fashioned way: it earned it. Before Apple CEO Steve Jobs convinced the labels to support his approach, with its elegance, ease of use and a simple $.99-per-song pricing scheme, legal sales of digital music were almost non-existent. But now, critics from various parts of the industry charge that Apple is not pushing the industry forward as much as it should??hat it is focused on defending its current success in selling iPods, rather than on expanding ways for consumers to buy music so as to make sure that inevitable mega-trend happens as quickly as possible. One of these critics is Chris Gorog, CEO of Los Angeles-based Napster Inc. Sour grapes? Certainly, that may be part of it. Certainly, Apple is the only company that has proven an ability to create a mass market for digital music--and it may very well lead the way in the future with new innovations. Still, Gorog insists Apple holds the key to growing the digital music business, to the benefit not only of Napster, but for the rest of the industry and for consumers, as well. His views may sound ludicrous, given Napster's meager success relative to Apple. But his views, which come from a Dec. 6 interview as I was preparing an article that ran a few days later, do reflect those of many other sources I've spoken with--though many of them refuse to do so on-the-record.

BW: There are reports out there that suggest digital download sales are slowing??nd in fact are not growing at all from last quarter to this quarter. What do you think is happening?

Gorog: If there?? a slowing of online sales??nd that means a slowdown in iTunes sales (given Apple?? huge market share)??t shows the fragility of the a la carte download model. We??e said from Day One that selling songs for $1 to devices that can hold thousands of songs is a very consumer-unfriendly model??I??e always said that a la carte services are the training wheels of the digital music business. After consumers get familiar with digital music, they begin to recognize those frailties??uch as the fact that it?? ungodly expensive. Nobody is going to spend $5,000 to fill an MP3 player. For that kind of money, they?? rather spend it on a car or something.

BW: What can be done to increase digital music sales for the industry?

Gorog: The villain in the story is the iPod. You have this device consumers love, but they're being restricted from buying anything other than downloads from Apple. People are bored with that??Clearly, consumers are rejecting the iTunes business model in droves. Until they open the iPod up to other services, the industry is going to have an artificial restriction on its growth.

BW: That?? a big statement. What evidence is there of that?

Gorog: We??e found that many consumers don?? know when they purchase an iPod that they can?? use it with a service such as Napster. By the time they get it home, it?? too late??Right now, digital music is still in early adoption. There?? one single thing that?? preventing it from moving into mass adoption: all the confusion about the interoperability between devices and services. And the most dramatic case in point is that the maker of the market leading device won?? let anyone go anywhere other than to its own limited [service] offering. If [iPod owners?? only choice is to purchase digital downloads, they??e going to stick to ripping their CD collections or worse, to piracy. In fact, a recent survey shows that piracy has doubled since September 03.

BW: So you claim that iTunes is not the solution most people want, but what is?

Gorog: We think we have a model that effectively works for consumers: portable subscriptions (in which customers pay an extra $5 a month, for a total of $15, to be able to move music downloaded via subscription services to a portable player). It?? the single best replacement technology for piracy. Until it is facilitated broadly by hardware manufacturers, including Apple, we do not believe the industry has an effective way to compete with piracy.

BW: But this was supposed to be the year that portable subscriptions took off, and yet most of the talk has been about all the glitches consumers run into when they try to use these services, almost all of which are based on Microsoft?? PlaysForSure program?

Gorog: Over 20% of our 500,000 subscribers are taking our portable offering, for $14.95 vs $9.95. And they??e sticking with it. We??e reduced our churn rate. (He later admitted that the hardware makers still had work to do to improve the quality of their firmware, to ensure a smooth user experience).

BW: Have you approached Apple, about opening up the iPod?

Gorog: We??e approached Apple in the past. As everyone else has found out, they won?? license their technology to third parties.

BW: While Napster would obviously benefit if your service ran on the iPod, what do music executives think about this? Executives from Sony and others have been critical of Apple?? position in some areas, while others, particularly market leader Universal, are very supportive.

Gorog: I can?? think of an executive at any of the labels that isn?? excited by the potential of the subscription model. Look, if the record companies could preserve the days when customers just bought CDs, they?? prefer that. But there is a volume of evidence that consumers are demanding a different model. And the all-you-can-eat model is what they??e demanding.

BW: But Apple has sold has sold almost 1 billion songs!. How can you say they??e not successful?

Gorog: According to the numbers we??e seen, the average iPod owner has purchased just $23.57 worth of music onto their iPod. That?? a colossally unsuccessful model. The consumer loses. The record label loses. The only ones making money are the guys at the Cupertino computer company.

BW: So do you think the overall dream of a digital music revolution is stalling? Is it still likely that digital distribution will replace physical distribution via CDs?

Gorog: It?? inevitable. Global sales of music is a $40 billion a year industry, but it?? dysfunctional for consumers. In just 24 months, 10% of that has gone digital. That shows a very passionate interest from consumers. As soon as the hardware issues are resolved, it?? ?nleash the hounds? I think physical distribution could disappear almost overnight.

BW: Of course, it’s in your self-interest to say that Apple should open up the iPod. But what about Apple’s self-interest? Why would it be in Steve Jobs’ interest to do this?

Gorog: Nobody wins by restricting what consumers want to do...Right now, I have half a milliion subscribers that would love to use an iPod with my service, but who have been forced to find replacements for the iPod. So sure, he’d sell more iPods.

BW: Another point of contention has been on pricing. Some label executives have said that the industry could increase digital revenues by charging different prices for different songs.

Gorog: There’s one squeaky wheel on this. The rest of the labels respect that it is too soon to start creating more confusion for consumers. Hopefully, pricing will remain the same for [all songs] for a while.”

11:34 PM

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Napster will be out of cash by year's end and DEAD for the final time.

Consumers have three choices - four if they are not so picky about ethics or the law.

Subscription music is a pointless format. Who wants to waste all that ytime shuffling, choosing, arraagning and re-arranging songs they don't like enough to own?

For a few dollars more, they can clivk on satlitte radio where all the stations are PROFESSIONALLY prgrammed and the portable player costs the same/.

AND that subscription is good in the car & on the go. If there were no illegal downloads or "free" internet radio streaming satations, there might be a business but after four years, they have a toal of all services of 1.5 million subs including the university giveaways - so we're probably talkiang about a million real subscribers divied by three/four companies - not a real business.

It's DEAD.

Posted by: jbelkin at December 19, 2005 01:43 AM

Gorog isn't a champion of the consumer....he thinks pay per song (and Ipod) is a failed model beceause we are only spending $20 / year on music ?

What about all the CD's people allready own that are simply (and legally) loaded on the Ipod ? He doesn't even mention it ! This represents the protection of thousands of dollars in investment for most people.

Gorog wants us to pay a monthly fee forever to listen to music we probably allready own. What a joke.

Sloppy job by Buisnessweek for not highlighting this.

Posted by: GSmith at December 19, 2005 02:17 PM

Let's see. I buy a song for 99 Cents and don't have the buy the other 11 songs on the album that I don't like? So, I save over $10 on not buying the album and then I actually OWN the music. How is that bad for the consumer?

So, if I rent my music miss a payment. I just lost all my playlists that I spent countless hours putting together and that is a benefit? On top of actually owning the track I know it will work. I know too many people that have come to find that "Plays for sure" mean "It Plays most of the time" I wonder which is truly best for the consumer. It sounds like to me that the rental model is really great for the people at the napster company but not the consumer. I think those guys in Cupertino just might be onto something.

Posted by: war at December 19, 2005 02:44 PM

Sorry Mr. Gorrog, but I want to OWN my music, and do whatever the *bleep* I want with it, not be a forever slave to the music industry so they can continue to put out the bubble-gum junk they do now. If I download only what I want, the artists I like ONLY are supported, I don't want to support others I can care less about.

Why does anyone think TV stinks so much? Cable subscription! Can't choose a chanel al a carte.

Posted by: Ken at December 19, 2005 04:29 PM

"Clearly, consumers are rejecting the iTunes business model in droves."

Ha ha ha. Gorog is quite the comedian. What was Napster's profit last quarter? $13.6 million, you say? Oh, that was a loss of $13.6 million. Clearly, as Gorog says, consumers are demanding the subscription model.

"If [iPod owners’] only choice is to purchase digital downloads, they’re going to stick to ripping their CD collections or worse, to piracy."

Ripping one's own CDs to iPods is just a terrible thing. How can the record industry make any money if can't sell us the same albums all over again? That's why the labels love the subscription model. We own nothing so we have to keep paying forever to keep listening. Their greatest fantasy come true.

"According to the numbers we’ve seen, the average iPod owner has purchased just $23.57 worth of music onto their iPod. That’s a colossally unsuccessful model."

This is bogus use of statistics, since people still buy CDs and rip them to iPods. The success of the iPod, and its effect on total music sales, is not measured by digital downloads alone.

Gorog would love to get access to all the iPod users out there. Instead, he may get his greatest nightmare: Apple starts a subscription service of its own. Those iPod owners (or prospective buyers) who want a subscription service -- and there are some, surely, though nowhere near as many as Gorog claims -- would get what they want. Napster's silly argument about the cost of filling up an iPod, which is disingenuous, would disintegrate, and Gorog could cry in his soup.

Posted by: Jon Hanson at December 19, 2005 04:39 PM

How did this guy become a CEO? I love him pretty much repeating the Napster ads that said it would cost you $10k to fill your ipod with music. Did he not remember how that ad bombed?

They should Q&A with him next year, when he is jobless...

Posted by: geno at December 19, 2005 05:10 PM

The average iPod user may only have purchased $23 worth of iTMS (iTunes Music Store), because they just became the "average". The big number of iPod users are Windows folks who just came into it this year. The iPod aisle at the local Apple retail store is packed with customers buying pods and accessories. Let us wait and see what the iTMS numbers are next quarter.

Personally I spend a lot more than $23 a year from the iTMS, probably that much a month. It is more than just music, this morning I purchased an audio book of Shakespeare's "Merry Wives of WIndsor" which I will enjoy on my road trip this week.

Posted by: Seth Bullock at December 19, 2005 05:19 PM

Most of the iPod critics I've read seem to overlook that you can load any MP3 (and various other format) files into the iPod via iTunes (which operates the same on both the Mac and Windows OS). Sources can be CD, vinyl, or audio tape. Plus, there are scores of other (free) legal sources on the net. Take a peek at Archive.org!

Posted by: BillW at December 19, 2005 10:06 PM

I agree completely with Mr. Hanson. Gorog and record labels want slaves, not customers.

Apple satisfies customers' needs without insulting them as Gorog does. Buy if you want. Rip your CD's if you want. It's your music, and it's legal.

I too would love to see Apple offer a subscription service. I wouldn't use it, but those half million Napster users would have a great option for their music AND could also get an ipod. Only problem is that this would nail Napster's coffin shut. BooHooHoo.

Some people will get publicity any way they can get it. You'd think Napster's Gorog could do it with something innovative and not just whining.

Posted by: HJM at December 19, 2005 11:11 PM

Sounds like the ipod folks are very supportive of their device. I can appreciate Apple for creating such passionate ipodsters, but it is concerning to me that you are blinded by the ipod. Wake up! It is a consumer driven world. If 1 product creats a monopoly, like apple and ipod, it is bad for consumers. We should all want choices and we all have choices. Apple should be forced to open their ipod up to other forms of digital music, if not we all lose. We rent our tv, we rent our internet access, we rent phone, but you guys all want to buy music because change is to difficult to understand at first, just like cable tv. Eventually, we will all rent music and that isn't neccessarily a bad thing. For the price of 1 cd a month you get access to all the music you want and you don't have to worry about losing the music or damaging the music or someone stealing your music (ipod thefts happen). Open your eyes!

Posted by: WCF at December 20, 2005 10:49 AM

WCF, could you be any more condenscending? "Change is difficult to understand at first." Please.

Oh, and explain to me how renting my music is going to prevent someone from stealing my iPod. That's a good one. Okay, so you meant that if someone stole my iPod my music disappears. Nope. It's still on my computer.

"Apple should be forced to open up their ipod to other forms of digital music."

You like consumer choice and say the world is consumer-driven. Great, so show some respect for the choices they are making. Consumers are choosing the iPod in droves, but it is not for lack of alternatives. If Apple were somehow fooling people into thinking that the iPod is not linked to the iTunes Music Store, that would be one thing, but Apple is not. No one has any business "forcing" Apple to change the iPod. It is not a monopoly. Plenty of comparable alternatives exist for those that don't want to use it.

By the way, with respect to cable TV, I would love to drop a subscription and just buy the shows or channels I want a la carte. That would be far better deal. Can't wait for that to become available to me.

Posted by: Jon Hanson at December 20, 2005 02:53 PM

One historical note: when first introduced, the various LP speeds were NOT compatible with different players: you needed different turntables for 78-, 33-, and 45-rpm discs.

Also, as mentioned above, Gorog conveniently leaves the fact that there are other legal sources of music files for an iPod out of his argument. You could easily fill an iPod with the free downloads available at Amazon.com. And eMusic now has more than 1 million songs available for download, for a monthly rate that works out to 25 cents or less per song. Plus, the mp3 files aren't hampered with a DRM system. (No, I don't work for eMusic, but I am a happy subscriber...)

Posted by: David Harrell at December 20, 2005 04:03 PM

If people were as unhappy with the iTunes model as Gorog suggests, then they would be looking for alternatives like Napster, and wouldn't care that Napster-compatible players are not as "sexy" as the iPod. But the reality is that Apple is still selling as many iPods as they can make, while stores are offering rebates and other deals to try and sell other devices.

Also, he suggests that Napster would be compatible with the iPod if only Apple would license its technology. That's bogus for 2 reasons:

(1) There's nothing stopping them (or anyone else) from putting MP3s on an iPod, other than the record companies requiring some sort of DRM.

(2) Gorog says that a subscription model is superior, but implementing a subscription model in the iPod is not just a matter of Apple licensing FairPlay. There would have to be a lot of development work to implement a subscription model: time limits, periodic subscription checks, etc.

Posted by: Larry at December 20, 2005 09:20 PM


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