By Robert Menta- 1/30/01

``We carried out market research among 20,000 Napster users. The willingness to pay is given''. Those were the words of Bertelsmann AG CEO Thomas Middelhoff at the World Economic Forum in Davos Switzerland. According to the man who broke ranks with the other major music labels and steered his company to acquire the popular service, Napster should begin to charge subscription fees by June or July.

The move is one that has been anticipated for some time now. With the acquisition, Bertelsmann has to both come up with a profitable model for the company as well as a consensus among it's partner/competitors over how Napster will protect the digital copyrights of the music industry.

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The service presently has 56 million users and it continues to grow. Slightly over 1 year old Napster already has more users than America Online (27 million) and Yahoo (54 million). It is to the Internet what Louis Armstrong is to the evolution of jazz into swing, in other words epochal.

When Bertelsmann swooped in to grab the company, still besieged by litigation from the music industry, they were not purchasing a music file transfer product. They were buying the largest customer base ever accumulated on the Net. The next step was to make the free service pay. Their first move was brilliant. The recent addition of a CDNow button onto Napster is a smart marketing maneuver in that it exposes that part of Napster's audience that IS willing to purchase the CD after sampling the tunes on Napster. Essentially a free ad to 56 million users, a similar button on AOL would cost several times more than the purchase price of Napster itself and AOL only has half the audience.

The subscription model is one that Napster CEO Hank Barry has been trying to sell the music industry on for several months now. He proposes a reasonable $4.95 a month as the subscription price, though word is Bertelsmann may be looking to double or triple it to $10-$15 per month or a pricey $120 - $180 per year.

With CD sales significantly up since the introduction of Napster, there is still the effect that the service may be the best promotional tool for the industry since radio. If CDNow makes a lot of sales to Napster users, it is well worth it for the Bertelsmann to preserve as much of Napster's user base as it can. Lower subscription prices would scare off fewer consumers.

Many analysts feel that only about 10% of users will subscribe to the service. That would come out to 2.8 million users at $5.00 a month each generating a tidy income of $168 million a year. Market research firm Webnoize did a study that showed up to 70% of Napster users would pay, but only if all music is available not just what Bertelsmann controls.

That may be the hardest part. Napster is still in court against the other major labels who were blind-sided by Bertelsmann's acquisition. Much of this suit had to do with control, control that Big Music now has but not as a group. That power is now in the hands of Bertelsmann alone and industry support for Napster now only feeds the coffers of a single competitor. Such domination will not go unanswered.

Not that the company is intimidated by a fight. Bertelsmann has the money to take this to the US Supreme Court. They also have the money to move the whole operation to Germany whose recent additions to copyright law could favor such a subscription service as long as a percentage is immediately set aside for artists. Bertelsmann could arguably leave Napster in its present state when it begins to charge for the service and rake in billions before any court can render a final trial decision. The traffic to CDNow alone over that time could bring in huge revenues should the company try to retain that 70% of its present audience that will pay if the service is left as is. Of course, all this potential income gives Bertelsmann every reason to settle this ahead of time and come to terms with the rest of the industry.

There is one fact. Napster is now a part of the established music industry. Even if it is not shared power (and that is the new struggle the Napster court case may morph into), Big Music has taken significant control of Net music. What dictates future events from this point on are simply what will make it the most money.


Copyright MP3 Newswire 2001

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