Making a Ruckus in the Music Business

An upstart run by a former Napster executive aims to change how people get songs online—and give Apple a run for its iTunes money

by Catherine Holahan

Mike Bebel has a plan for inducing young people to pay for downloaded music: Give them all the songs they want for free while they're still in college, then start charging them a fee when they're out of school and gainfully employed. Bebel, a veteran of Universal Music Group and Napster (NAPS), is putting that plan to the test at Ruckus, a media download service he now runs.

Since February, 2006, the company has offered students at participating colleges access to a library of movies and more than 2 million songs, including the latest releases from major music labels, generating sales through ads. On Jan. 22, Ruckus is expanding its offering to let anyone with a valid ".edu" e-mail address gain access to the service and participate in the site's social communities.

Listen Now, Pay Later

Bebel believes students will opt to build a music collection of complete, licensed tracks through Ruckus instead of stealing songs via popular peer-to-peer networks that can be plagued with adware, spyware, and incomplete tracks.

The catch: When they graduate and drop the ".edu" for a ".com," students will need to start paying $8.99 a month or risk losing access to that vast collection they built up while in school. If subscribers also want to listen to songs on their portable music player, they're looking at an additional $4.99 a month.

Ruckus' business model might sound like a pipe dream in a market dominated by piracy and iPods. But Bebel has recently found a sympathetic ear both with investors and music industry executives who are struggling to wean customers off the illicit services that make up an estimated 90% of the music download market. "It has taken a bit for [the music industry] to get comfortable with the notion of it being free and being ad-supported," says Bebel. "But now there is recognition that the piracy problem is not going away and further recognition that a lot of this is happening on college campuses."

Legit Sales Declining

According to market research firm NPD Group, nine songs are downloaded illegally for every digital track purchased legitimately through a service such as Apple's (AAPL) iTunes. Russ Crupnick, a senior industry analyst at NPD, estimates that more than 45% of music is acquired for free through illegal downloading, ripping friends' CDs, and sharing copyrighted files. Conversely, compact disc sales, which make up the majority of record labels' revenue, comprise about 50% of the market. Less than 5% of music is acquired through legitimate, paid download or subscription services. "A huge portion of the pie is unpaid content," says Crupnick. "The record labels are faced with, 'How do I preserve the business that pays the mortgage for the industry?'"

It's a question that the recording industry is under increasing pressure to answer. Though the number of legitimate digital music purchases has steadily increased in recent years, the growth has failed to make up for losses in album sales. Digital track sales grew 65% in 2006 from 2005, reaching just under 582 million, according to Nielsen SoundScan. But total album sales, including both digital and physical CDs, decreased nearly 5%, to roughly 588 million.

The decline is all the more worrisome, coming at a time when actual music consumption is growing at a healthy clip, says Crupnick. People are listening to more music than ever before. They're just not paying for it. "As many as 15 billion songs are acquired for free in an unrestricted MP3 format each year," says Eric Garland, chief executive officer of research firm BigChampagne. Apple's iTunes, by comparison, has sold about 2 billion songs since it started in 2003 (see BusinessWeek.com, 1/17/07, "Apple: What Options Scandal?").