MusicNet Naps with Napster

By Robert Menta - 6/07/01

The news that Napster has come to an agreement with three of the major record labels and their new MusicNet service is not all that surprising. Once it was acquired by Bertelsmann AG it became part of the traditional music industry. Yes, the ballet in the courts continued, but that had now changed into a pressure move on the part of the other labels to make sure Bertelsmann didn't hog all of Napster's traffic for themselves.

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Once Bertelsmann became a full fledge participant in MusicNet, the first of two industry download services coming this summer, it was a foregone conclusion Napster's audience would be on the bargaining table. Sure, in the ongoing trial Big Music is making it look like it's the industry against music piracy, but in reality it is all about big business taking control of a new market opened by others.

This means transforming Napster, not eradicating it. Napster still has tens-of-millions users. MusicNet has none. Research has shown that a percentage of Napster users are willing to pay for the service - providing it is priced reasonably and offers access to more than just the music of one or two labels. MusicNet needs to tap into those people willing to pay and can offer access to three major labels, enough for a start.

A problem lies in the pricing and conditions both MusicNet and Duet plan to apply to their services. What they announced seems less than compelling, overpriced is a better word, and Napster will not help that.

MusicNet and Duet

MusicNet is an alliance between Bertelsmann AG, AOL Time Warner, EMI, and Real Networks. Duet is a competing service formed by a Universal and Sony alliance. Even though Duet is the product of only two labels, it may have acquired the upper hand thanks to Universal's purchase of both and EMusic.

Remember when settled their court case with all five major labels for $130 million dollars? That gave them licensing to the music of all five labels, a right Universal acquired with the sale. Before its purchase, EMusic acquired the digital rights to the music of hundreds of independent labels. Universal now owns those contracts too.

With Universal at the helm Duet could possibly offer a full Napster range of music from all the labels, a clear competitive advantage over MusicNet which is limited to only three. That is what makes Napster even more important as Napster has tens-of-millions users. Duet has none.

It's amazing how quickly things have changed in Net music. Within a year, the recording industry is poised to take over the online distribution industry, but MusicNet and Duet are not the product of comrades at arms, they are the progeny of aggressive rivals who will go at any length to see that their service is the one that dominates.

The industry's goal is to grab/retain as many of Napster's users as paying customers as it can. MusicNet has Napster, Duet does not. Napster can serve as a trump card to help compel Sony and Universal to license their music to MusicNet and give up Duet's biggest competitive advantage. To do that they will have to share Napster's audience, something the MusicNet alliance is reluctant to do. Will these services work together?

Even if they do we are forgetting one important element, the consumer who needs to buy into it. Earlier we said the pricing and conditions both MusicNet and Duet plan to apply to their services seems less than compelling. That is very true.

We did the math in our May 17th article "MusicNet and Duet: downloads expire after 30 days" and discovered a CD's worth of music on these services will cost $20 to hold for only a single year (the files actually expire every 30 days unless a $10 monthly payment is continued. The service allows you to download up to 75 songs - equal to six 12-13 song CDs - for $120 a year). That is considerably more than the $8.99 standard that EMusic set for an MP3 album with no expiration date. It is even more than what a CD costs at the local record store and digital downloads don't have printing and disc pressing costs, shipping costs, or the record stores markup (record stores pay $11.99 for a CD). After a year you have nothing to show for your money. You can extend the life of that CDs worth of music for an additional year if you wish...for an additional $20. Once you do the math, it seems like a sucker deal.

The Industry Needs to Remember That Consumers Have a Choice

With the likes of MusicNet, Bearshare (Gnutella), and others to come, consumers have choices that provide file sharing with no strings attached. The prices mentioned above only gives them incentive to search out alternatives and avoid industry offerings. They also have the choice to walk away from digital downloads completely. As NY Times reporter Matt Richtel stated in his article New Economy: Curdled Musical Romance Gets Couples Counseling:

There are some 70 million music-consuming Napster users, and many of them say they don't trust the recording companies. The music companies lash back, complaining that Napster users have no appreciation of their hard work. Each party accuses the other of not listening. Both feel betrayed.

The Napster trial has not been good PR for the record industry, it has made them look bad in front of their customers. They are perceived as a cartel that is severely overcharging consumers for music. Too many consumers feel the record companies are the real thieves and P2P programs are just tools that empower the consumer and bring a skewed system back into balance. This perception will effect how they spend their money on the Net.

We don't know for sure if Napster will be kept as a separate entity or rolled fully into the MusicNet system. Hank Barry, Napster's CEO, told Associated Press writer Ron Harris that MusicNet would require an additional fee from Napster users, on top of a separate subscription fee. That seems to hint that consumers will not be able to use Napster unless they already subscribe to the overpriced MusicNet. Not very appealing, if you ask us.

There is another wrinkle in the story that could make the new Napster even less appealing to consumers. It looks like Napster will no longer trade in MP3 files.

Barry promised the new Napster service will not deal in trafficking unprotected music files, and would instead rely on technology to protect and track the ownership of songs. Since MusicNet's technology member is RealNetworks, we can probably assume that means Napster will turn to Real's music format, a format that in its present incarnation is inferior to MP3, though it will probably be improved when pay Napster is released..

EMI and Warner Music Group have already stressed that protective technology is a significant hitch in the deal, but with so much invested on the users part in collecting and storing MP3s, will consumers easily shift?

As we stated in the beginning, Napster joining the MusicNet enclave is no surprise as the support of at least three of the five big labels is needed for its survival. The company brings a lot to the table, but it looks like the labels may blow it because it all is geared to serve the politics of the recording industry and not needs of the consumer. As Janelle Brown wrote in her on-the-mark article for Salon: The music revolution will not be digitaized:

The digital music start-ups were hardly saints or true freedom fighters by any measure -- many were plagued by greed and blithe disregard for the rights of artists. But they were all focused almost entirely on customer-friendly innovation -- personalization, portability, interactivity, access to hard-to-find tracks, exposure to new music. Wooing customers was a requirement for the start-ups.

The power, [now], is consolidated squarely back in the hands of the same record industry executives that held the reins before. Everyone with a good idea that doesn't fit into what the music moguls have already deemed appropriate is out of luck. That personalized radio station will be shut down, that peer-to-peer network will be decimated before it even has a chance to offer a subscription plan, prices for music downloads will be set sky-high, and new music-exchange services will contain only limited catalogs.

Is anyone wooed by MusicNet or how they plan to handle Napster? Napster is a music industry product now. What are they offering the consumer to give us incentive to buy their wares?

We do suspect this, if you are going to charge for Napster, as a separate entity it can serve as a junction for singles, eschewing the inclusion of the entire album and just offering the hits and non-hit singles for say $2.99 a month with no expiration. That would allow the MusicNet troika to cover their bases with a lesser-priced sister service. The service would also be priced much more reasonably and under more encouraging terms. It's not as compelling as the free-for-all Napster we had before, but at least the files could remain in the MP3 format.

CD and cassette singles are money losers for the industry, important as a tool to promote sales of profitable albums, but no longer able to collect enough money to cover the printing, shipping, and promotional costs mentioned earlier. A "singles only" Napster would allow the industry to again profit from singles and without the need for expiring files (They are losing money giving you a permanent copy of a song on CD. The need for files that expire is moot). Free trading of just these files on rival services would serve to promote the full album in all formats; CD, cassette, and digital download. That's a good thing, not a bad thing, for the labels involved.

Even in this scenario there is potential for abuse. With jurisdiction over which singles are made available for download, the new Napster will more approach the promotional focus of payola radio - bad for the consumer but good for the record industry marketing departments.

We are quite confident the record industry will dismiss our vision of a pay Napster, they want to charge you, the consumer, as much money as they can for a song and multiple times if possible. That is how they think they will make the most money, egregious pricing.

As for the consumer, how many are willing to accept even a reasonable $36 a year for a limited Napster when it contains music they can still pick up for free elsewhere? Many would think our price plan sucks too.

A limited Napster that is free would compel users and still accomplish the promotional goals of the music industry by removing some of the financial pressure caused by those money losing CD and cassette singles. This is exactly what we have now in the filtered Napster but without the hits. Despite lacking the music of the most popular artists there are still some 70 million users who continue to use the program, even if only occasionally now. What the record industry now owns can grow and be very productive for them if they do it right. Opening up the filter to allow the latest singles from popular artists is compelling to the user and is exactly the content Napster needs from MusicNet to remain viable, whether free or for a charge.

Research company WebNoize released the lastest figures on Napster today. The number of simultaneous Napster users has fallen to an average of 844,000 in May, down 46 percent from the peak of 1.57 million simultaneous users in February. That is still a heck of a lot of simultaneous users for any company, still more than what America Online does.

Napster's audience is power and that power is something MusicNet can leverage successfully - But at these prices?

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