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’s 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—that 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 , 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—and in fact are not growing at all from last quarter to this quarter. What do you think is happening?

Gorog: If there’s a slowing of online sales—and that means a slowdown in iTunes sales (given Apple’s huge market share)—it shows the fragility of the a la carte download model. We’ve said from Day One that selling songs for $1 to devices that can hold thousands of songs is a very consumer-unfriendly model…I’ve 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—such as the fact that it’s ungodly expensive. Nobody is going to spend $5,000 to fill an MP3 player. For that kind of money, they’d 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’s a big statement. What evidence is there of that?

Gorog: We’ve found that many consumers don’t know when they purchase an iPod that they can’t use it with a service such as Napster. By the time they get it home, it’s too late…Right now, digital music is still in early adoption. There’s one single thing that’s 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’t let anyone go anywhere other than to its own limited [service] offering. If [iPod owners’] only choice is to purchase digital downloads, they’re 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’s 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’s PlaysForSure program?

Gorog: Over 20% of our 500,000 subscribers are taking our portable offering, for $14.95 vs $9.95. And they’re sticking with it. We’ve 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’ve approached Apple in the past. As everyone else has found out, they won’t 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’s position in some areas, while others, particularly market leader Universal, are very supportive.

Gorog: I can’t think of an executive at any of the labels that isn’t excited by the potential of the subscription model. Look, if the record companies could preserve the days when customers just bought CDs, they’d 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’re demanding.

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

Gorog: 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. 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’s inevitable. Global sales of music is a $40 billion a year industry, but it’s 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’s ‘unleash 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.”

Before it's here, it's on the Bloomberg Terminal.