Napster’s New Boss – and Uncertain Future

German media giant Bertelsmann has given Napster a chance for an encore by agreeing to acquire its assets. But two Wharton researchers say it may not matter much because the Napster brand name has been damaged and the company may be yesterday’s news.

However, marketing professor Peter Fader and lecturer and doctoral candidate Sheen Levine, both of whom have conducted studies on Napster, agree on one thing: It is time for the music industry to change its litigious tune and stop viewing Napster and similar music-sharing services as threats.

Ever since the birth of Napster, an upstart company that allowed millions of people using its software to download and swap music files on their computers, Fader has argued that the industry should embrace Napster as a technologically innovative way to enhance album sales, not as an entertainment pirate out to pilfer industry profits. Fader has examined and conducted multiple research studies showing that Napster, in allowing music fans to share songs, can actually boost album sales.

“Bertelsmann’s move makes perfect sense, especially in a case like this where tremendous liabilities were hanging over Napster,” Fader says. “It’s a shame that this wonderful brand name has to play this silly game to stay alive.” However, Fader adds, “I’m afraid [Bertelsmann’s move] may be too little, too late. The music industry has tarred Napster’s good name and it will be hard to bounce back from that. But if the industry tomorrow were to legitimize Napster [by dropping its lawsuit against the company], Napster could survive and the industry would help itself tremendously.”

Levine paints a gloomier picture of Napster’s future. He asserts that the company is unlikely to regain its immense popularity because if Bertelsmann converts it into a music-subscription service, Napster will have lost its identity.

“It will be very difficult for Napster to be a going concern,” says Levine, who conducts research on the social implications of technological change. “Napster was founded on a non-capitalistic premise of sharing, not of profiting. The fascinating thing that many [Napster analysts] have missed is that the company was based not on trading but sharing. You cannot take Napster and turn it into a for-profit operation.

“I think it will just become another online music distribution service and will not be the Napster it used to be,” Levine adds. “Bertelsmann is a conservative corporation that wants to say it’s young and hip.”

Fader says Bertelsmann should use Napster as a vehicle to promote album sales. Just as DVDs have done for movies, music CDs can add value to fans’ experiences by offering a variety of special features, such as extensive liner notes, artwork, interviews with recording artists and links to “members only” websites. By embracing Napster as a distribution arm, Bertelsmann may also change the minds of its fellow record companies.

The other record companies that have sued Napster, Fader suggests, “should view individual, downloaded songs as advertisements for the albums they come from and for the artists in general. Record companies should encourage people to download songs. Part of it is just a change of mindset. Instead of viewing songs as protected property, companies should view them as commercials that help promote the album as well as other profitable products and services that the labels have to offer.”

Five major music companies sued Napster in 1999, alleging that the Redwood, Calif., company was engaged in copyright infringement by giving people the ability to download songs for free. The five companies are BMG Entertainment (a unit of Bertelsmann), AOL Time Warner, EMI, Sony and Vivendi International. A court ruling in 2001 required Napster to shut down its service while the lawsuit proceeded.

Napster and Bertelsmann, of Guetersloh, Germany, agreed on May 17 that Bertelsmann will acquire Napster’s assets and make available $8 million toward the payment of Napster’s creditors, Bertelsmann said. The surprise deal capped a roller coaster week and months of negotiations. Earlier, when the negotiations appeared to have collapsed, Napster’s whiz-kid founder and chief technology officer, Shawn Fanning, CEO Konrad Hilbers and other executives resigned. But they returned when the agreement was made final on May 17, with Hilbers taking on the additional title of chairman.

Napster, as a condition of Bertelsmann’s injection of cash, is expected to file for protection under Chapter 11 of the U.S. Bankruptcy Code. Chapter 11 will allow the company to reorganize its finances.

“We are very committed to providing artists the best possible distribution opportunities for their work, and to providing consumers more choice and control,” Joel Klein, chairman and CEO of Bertelsmann, said in a prepared statement. “Creating new ways of doing business is never easy, but Napster will be at the forefront of finding business models that respect copyright, reward artists, and deliver entertainment value to consumers. Peer-to-peer is a transforming technology and we’re proud to have Shawn Fanning continue to work on its development.”

Napster became a cultural phenomenon almost overnight and had more than 60 million registered users at the peak of its popularity. Since the court order shut it down, however, other music-sharing services have emerged. They include Audiogalaxy, Kazaa, LimeWire and Morpheus. In addition, the music industry itself has launched its own music-subscription services. One is pressplay, which is controlled by Sony Music Entertainment and Universal Music Group, a Vivendi subsidiary. None has been as popular as Napster.

“The industry-funded services, like pressplay, are just terrible,” says Fader. “They give you very limited selection and only let you listen to songs a few times. They treat you more like a potential criminal than a valued customer.”

Fader has been a critic of what he sees as the music industry’s intransigence in the Napster case. In May 2000, he testified as an expert witness on Napster’s behalf in the lawsuit filed by the record companies, which he calls “five backward firms that are completely against progress and against their own customers’ needs.” In his testimony, he presented the results of his own research, as well as a review of existing studies, which showed “consistently, almost without exception, that Napster was associated with an increase, or at least not a decrease” in the sale of CDs.

In the music companies’ fear of Napster, Fader sees a parallel to the way other entrenched interests have responded to technological change in recent decades. “It’s akin to FM radio in the 1960s, when record companies feared that the sound quality would be so good that people wouldn’t buy albums anymore,” he says. “For a time, music companies were against audio cassette tapes for the same reason.” Film companies also were once fearful that videocassettes would reduce the number of theatergoers.

But Fader says there is an important distinction to be made between audio and video cassettes and Napster-type music files. The music that is downloaded is highly compressed and the sound quality often is not as good as that of a CD. Hence, record companies should not be as apoplectic as they are about Napster and other so-called peer-to-peer file sharing services.

The music companies, he adds, “have such an archaic management structure they can only do things the way they have always done them. More than two years after they sued Napster, they haven’t changed one tiny bit. They’re very creative and progressive when they’re looking for new artists, but not in the way that they run their business operations.”

Although websites like Kazaa and Morpheus are not as popular as Napster was, they demonstrate that music companies should “finally come to the realization that the genie is out of the bottle,” Fader says. “They thought if they went after Napster, these other P2P sites would go out of business or consumers would be afraid to use their services. But that hasn’t happened.”

Indeed, Levine points out that these newer music-sharing services have captured the attention of music fans who have no reason to pay attention to a Napster that sells songs for a price rather that allowing people to trade tunes for free. “Napster is long gone but there is a myriad of other services,” he notes. “Give me the name of a song and I will have it in five minutes on my computer. No one is sitting waiting for Napster to come back.”

Fader and Levine say the music industry has not sued other music-sharing services because the way that these services function technically makes it easier for them to avoid tangling with the law. “These services are designed cleverly,” Levine explains. “Napster was set up as a central database operation, which included all songs and the computers on which the songs were located. Morpheus and Kazaa have no central database so there’s nothing [for a judge to order shut down]. The music is stored on every computer on the network. It’s technically impossible to shut it off. In the Netherlands, where Kazaa has offices, a court ruled that Kazaa is not responsible if people offer copyrighted materials on the service. Kazaa just supplies a vehicle, just like a newspaper is not responsible if you try to sell stolen goods through the classifieds.”

According to Levine and Fader, the industry’s decision to sue Napster illustrates that its strategic thinking has not adapted to shifts in technology. “I think the lawsuit is a good tactical tool to curb [the downloading of recorded music],” Levine says. “But the industry’s entire strategy is legalistic, not technological or marketing. When I buy a CD I want to play it wherever I want – on a computer, in my car or on my stereo. I want this song and I do not care who owns the copyright to the song. Building the copyright into a CD means I can’t play the CD on my MP3 player. A historical precedent for this approach is when the train industry tried to stop the airline industry by seeking legal barriers to airlines. That didn’t work because people wanted to fly.”

Fader also says the industry must change, but he holds out some hope that Napster can still be a major player in music distribution. “The water is just flowing over the dam and the industry can’t stop it. The industry has to give people good value for their music dollar. It’s largely up to the industry as to how it will change. If they stick to their current practices, they will continue to lose sales. Napster, for better or worse, still is the flagship. Whether it sinks or stays afloat will be a strong indicator of how well this entire industry will perform for the foreseeable future.”

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