Commentary: Now, Napster Can Get Down to Business

Severe Blow To Napster. Slam Dunk For the Recording Industry. Napster Suffers A Rout. So announced the headlines of the nation's papers, referring to the Feb. 12 U.S. Court of Appeals for the Ninth Circuit ruling that Napster Inc., the free music-sharing site, facilitates massive copyright infringement.

But for all the brouhaha, the ruling may actually be a healthy development for what has become the youthful symbol of consumer empowerment--and keeping Napster alive may actually be good for the music industry. Why? By ending the legal uncertainties that surround Napster and forcing it to the negotiating table, the ruling could well force the upstart to quickly nail down a business model that would benefit both it and the music biz. "[The ruling] could end up speeding up a deal" with the entire industry, says Matthew Bailey, a senior analyst at research firm Webnoize Inc.

LET'S MAKE A DEAL. At first glance, the ruling seems to shift the balance of power to the record companies. By clearly establishing their intellectual-property rights, the decision gives them firm ground to put Napster out of business. The company is also now open to massive lawsuits for copyright infringement.

Moreover, as Napster has dawdled in coming up with a viable pay-per-use model, many record companies have been busy trying to come up with their own online sites. They're also looking at alternative ways of delivering music online that would bypass Napster. Warner Records, for instance, can now look forward to using AOL Time Warner Inc.'s huge marketing muscle and built-in consumer base to deliver music online. Meanwhile, Universal Records already downloads music on their farmclub.com site. They have also tested the waters to see how users respond to being charged for songs.

But none of those efforts has had much success. That's why it's clearly in the music industry's interests to make a deal. Napster has huge brand recognition--its users now total an astonishing 58 million--and many people believe it has the easiest-to-use file-sharing software of any of the free-music sites. Since the industry's online efforts are so immature, it would be much better off if it could find a way to monetize Napster's popularity.

The question is, what would a successful subscription model for Napster look like? Record execs have already stressed that Napster's proposed $4.95-a-month fee for an all-you-can-download subscription service isn't economical. According to one industry insider, once the music company, music-publishing house, artist, and the rest get their royalties, there will be nothing left.

What are the alternatives? Napster could charge more. The risk, of course, is that record execs force Napster to charge such a high price that many of its users switch to other free-music sites, such as Gnutella. But for now, no one knows what price would earn Napster enough revenues to keep the music industry happy while still keeping most of its users coming to the site.

There is one way out of this dilemma: Napster's management should convert as quickly as technically possible to a system in which a menu of prices would be offered depending on usage. The pricing at a joint venture between Sony Music Entertainment Inc. and Universal is being discussed at $9.95 a month. Napster might start by undercutting that price for basic service. Then, heavier users could be charged progressively higher fees. That would let Napster test different pricing schemes to see what best maximizes profits for all while keeping users online.

But can Napster get such a system up quickly enough? Since signing a deal with Bertelsmann last Oct. 31 to create a paid-subscription service, it hasn't made much progress. Bertelsmann Chief Executive Thomas Middelhoff would like to introduce Napster 2.0, a paid-subscription service, sometime this summer. Napster creator Shawn Fanning says he's aiming for yearend. But that's not soon enough. The court, rather than handing Napster a death sentence, may have handed it an opportunity. Napster had better move quickly to snatch it.

By Spencer E. Ante

Ante covers online music from New York

With reporting from Ronald Grover in Los Angeles.

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