Commentary: Why Napster Is Good News

Record company executives have been likened to everything from sharks to street urchins. So perhaps it's fair game to suggest that when it comes to Napster Inc. and digital distribution, they could learn something from that '80s operator: the crack dealer.

Stop snickering. There's a lesson here. During the '80s, crack dealers liberally doled out free samples to prospective customers. It was, of course, a fine investment: Users eventually ponied up, because the product was profoundly addictive. So, it seems, is Napster, which has been known to suck hours--if not semesters--from Gen Xers and college students who use it to swap thousands of songs for free, everything from Metallica to Mahler.

Record companies have, understandably, been horrified by what amounts to a global ripoff scheme. But if they were to take a longer view, they might recognize that Napster is doing them a favor: Overnight, this controversial upstart is conditioning millions to begin digitally downloading music. That's important because long-term, digital downloads could be far more profitable for record labels than traditional CD sales.

FINICKY LOT. In fact, a Billboard breakdown of a typical $17 CD shows that distribution, shipping, and store markup account for more than $9.50 of the retail price. The cost to send a song directly over the Net is $1 and dropping rapidly, to close to zero, according to Yankee Group. If labels claimed just half of that $9.50 themselves, they would clear nearly eight times their current profit--now just 59 cents per album, according to Billboard.

Historically, technology buyers have proved to be an incorrigible lot. They're finicky about new formats. (Would users of the miniDisc, Digital Compact Cassette, and 8-track tape please raise your hands?) Even technologies that do take off require expensive marketing dollars to change day-to-day behavior. It took 10 years for CDs to penetrate more than 50% of U.S. households, according to the Consumer Electronics Assn. Sony Corp. has tried to resuscitate its MiniDisc format two times, most recently with a failed $30 million campaign pitifully branding 1998 "The Year of the MiniDisc." When Thomson Consumer Electronics Inc. launched its successful RCA DirecTV satellite service in 1995, it had to earmark $200 million for marketing, says Tricia Parks of Dallas consultancy Parks Associates, which studies emerging consumer technologies. Retraining consumers takes "time and money," says Parks. "New systems require whole new ways of thinking. It's a hard process."

Thus the beauty of Napster: It's not costing record companies a penny to change users' habits. More than 20 million Netheads are estimated to now use the software. That's up from 1 million a year ago. And more than 1 million users are joining each month. "We see piracy as being a huge market enabler. Piracy has created the market for portable music players," says Gene Hoffman, CEO of eMusic, a Web music company that sells MP3s. Before Napster, says Hoffman, most music downloaders were members of a small group of hardcore aficionados and pirates. Now, he says, "more customers are ready, willing, and able to download." Indeed, the number of adults going online to get music content jumped 48% from December, 1999, and March, 2000, according to research firm CyberDialogue.

Sure, record companies may be foresaking some short-term profits. And none of this helps them a whit unless they develop the technology that prevents the rampant free distribution of music once its sold. Already, some labels are getting comfortable with the concept of a flat-fee subscription service. For now at least, they should consider Napster the best product marketing that money didn't have to buy.

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