The whole idea of peer-to-peer mp3 file sharing has been around since the beginning of the Internet. In 1999, a college kid named Shawn Fenning decided he would put some code together and start a network. This network would allow for users to go online and share music files, which eventually led to videos and movies. This new service was a neat idea because now people had access to music they may not have had access to before. This now meant that they now had access to previously un-released songs, and bootleg versions that would never make it to the retail market. It also meant that each user could find another user through the means of personal computers, directories, and databases. Once the record industries got wind of this new file sharing service, lawsuits started coming down from all around. This paper will describe those lawsuits in depth, and also the type of market techniques, and structures used by Napster to become an Internet legend.
The first thing that needs to be discussed is the story of this nineteen year old that turned the newly developed Internet on its head with a cloud of controversy. Shawn Fenning had put his nose in his personal laptop, and after sixty straight hours of knocking out code, he had come up with his new creation. This creation would be called Napster. It would be called Napster after its creator who was called that certain nickname because of his appearance in public. He always had a baseball cap on and had nappy hair hanging out the sides. His friends and family started calling him Napster after a nappy looking cat. This is where the Napster logo of a cat came from also. He worked feverishly to finish this code because he knew that someone else had this same simple idea, and if he didn’t act now, someone else would beat him to the punch. He combined the simplicity of instant messaging with some file-sharing capabilities of Microsoft Windows and the
advanced searching capabilities of certain search engines. This eventually ended up being a pretty unique and cool piece of software. He knew that he would eventually be battling the RIAA and the rights of the first amendment but he figured it was worth it. He never knew that his newly created Napster program would propel him into Internet file-sharing infamy. After dropping out of Northeastern University, he produced the Napster service and after many battles in court, ended up capitalizing on his fame and notoriety. He ended up pulling down a high five-figure salary as a lead programmer of client applications for the company he created then sold, Napster. He ended up with a 9% ownership in the company, and still works for them to this day. Not bad for a nineteen year old college dropout with an idea that he came up with while drinking beer with his friends.
The next thing that this paper will discuss is the many different evolutions that Napster has gone through. As mentioned before, Napster started off as a file-sharing database for users to share music. From looking at this case, you could say that Napster was a content provider and that they used a get it right first strategy. I am sure that when Shawn Fenning first started Napster, he did not have a strategy in place to get as big as Napster eventually did. He just decided he wanted to put an mp3 file sharing service on the Internet so he could share files with other users all over the world. The only down side to this free service was that along with the free downloading of files, there were potential threats of things like viruses coming in with the files. Many users started getting viruses that would wipe out all the files on their computers. It kind of made people weary of using Napster in the beginning. But things eventually took off, and Napster got big so fast that it eventually blind-sided the record industry. That same
record industry took the case to the courts where they deemed this illegal and immoral. So after long litigation, Napster was eventually shut down in September 2002. This was after a failed attempt to sell the rights of the site to the media company Bertelsmann was blocked by a Delaware court. Napster turned out to be a money pit for Bertelsmann, because the company had pumped a lot of money into Napster before the courts forced them to shut down. They did this in a hope that Napster would eventually win against the record industry and become a secure commercial file sharing application. Although Napster was forced to shut down, they were a long way from being dead. In July 2003, the owners of the Napster name and logo, Roxio, planned to re-launch Napster in the form of Napster 2.0. This would be done just in time for the 2003 holiday season. In an ironic twist though, Napster now would sell music on behalf of the record industry. This is the same record industry that had succeeded in shutting the file sharing service down just a year earlier. The biggest difference this time around was that the user now had to pay for the download service. The fee was $9.95 a month and was relatively small compared to going out and buying records or cds. This $9.95 was for unlimited
downloads of a database containing over 750,000 songs and files. This service also came with 40 commercial free radio stations that made $9.95 a month even more of a bargain. The customer service was even better which was available from the site or over the phone. This whole transformation of Napster compares it to a cockroach, because although they have tried, they just cannot kill it. Napster could now be somewhat compared to the transformation of the VCR, the tape player, the CD player, and DVDs. All of the aforementioned innovations were also battled by the movie and record industry the same way that Napster was. After taking a look at this case study, one could
conclude that the record, and music industries are large corporations that are more worried about being left behind then about losing money. It sounds like what they are really worried about is the fast pace and ever changing digital music technology of today.
Next I will discuss the management structure of Napster from the Chief Executive Officer to the Chief Financial Officer. Like I discussed before, Shawn Fenning was the creator of the Napster idea. After the Napster namesake went global, a more suit and tie structure was put into place. It starts with the Chief Executive Officer, Chris Gorog. He had vast experience with the media and tying that into the ever-changing world of technology. He has been with the company through the many changing faces, and in 2005 he took the company public. And not surprising, Gorog was Chairman and CEO of Roxio who eventually ended up buying Napster. The next in the chain is the President Bradford Duea. He is in charge of the business operations of Napster and the strategic direction of the Napster service. Duea has worked with high-level VCs his whole career and had closed some big deals while working with his previous company People Support Inc. A few of the companies he had closed deals with were HP and Siebel Systems Inc. The Chief Operating Officer Laura B. Goldberg is responsible with operating the day to day business operations of Napster and making sure the company is heading in the right direction with it’s strategies and product development. The Chief Financial Officer Nand Gangwani directs the overall financial plans and accounting department of Napster. His career has spanned over twelve years of financial planning and accounting management for several different companies. All of the management team of Napster has one thing in common though, and that is they were all somewhat involved in the music industry or has ties to some company in the music industry.
The next topic that will be discussed will be the lawsuits, and how justified the record industry was to file those types of lawsuits. The RIAA, Record Industry Association of America, was the driving force behind these lawsuits. The RIAA
represents five major music labels and many smaller music labels. They started handing down lawsuits that were first filed against Napster for copyright infringements, but after some progress, these lawsuits started targeting individuals for the large user databases that existed. Their main argument was that they were annoyed with the new file-sharing program that illegally stole their copyrighted songs and movies. They stated that they were losing money from things like CD sales, and copyright infringements. In 2000, Napster CEO Hank Barry fired back when he told the courts that he was fighting for freedom. He then went on to say that the trade laws and copyright infringement laws were not needed anymore because we were now living in the information age. This fell on def ears and the courts did not buy it. By this time though, there were many other file sharing sites popping up all over that had the same basic idea as Napster. One of the more popular of these sites was Gnutella. The software company Nullsoft briefly released Gnutella. The problem that Gnutella presented was that some of the smarter users were starting to tap the software used to create the site. This now produced fourteen new knockoff sites that served the same basic purpose as Napster. Some of these file sharing sites created from Gnuttella included Bear Share and Morpheus. This now posed a bigger threat to the RIAA and would prove to be costly for both sides. It would be costly not only for the RIAA, but also for individuals who refused to stop using the service. Napsters placement in the file sharing industry was now one of forefather, and all these new models were off chutes of the original.
In August of 2002, Forrester Research predicted that by 2007 digital music sales would reach $2 billion, as long as, record companies made it easy to purchase music without paying the flat subscription rates. This research also produced facts that stated that music sales were not down due to Napster at all. In fact the reason for the drop was the booming video games sales, the new DVD market, and the recent recession. These three things accounted for a 15% drop in digital music sales. This was just more evidence that the music and movie industry was blaming everything on Napster. They just wanted to kill the service because they had no stake in this new idea of swapping digital music through the means of the Internet.
As mentioned before, another battle the RIAA had was with individuals who were downloading music. In 2003, this resulted in the RIAA and their lawyers saying they would use pirated music software to seek out individuals and start handing out
indictments. Since then, there have been many indictments handed down to individuals with vast libraries of illegal files. Although many have gotten busted to date, there are still millions who download mp3s and share music illegally through many different existing file sharing sites.
Along with the record industry, there were now major artists filing their own lawsuits against Napster. One of the greatest known of these is the hard rocking group Metallica. This would prove to have a negative affect on the band because Napster was now more popular than ever, and anyone that spoke up against this would be looked at as unpopular. Metallica was one of only a few bands speaking out against Napster. There were now many bands speaking out for this new service because they indeed saw this as the future of music. One of those outspoken artists was the band Limp Bizkit. Their
main argument was that these file sharing services would expose new people to their music, and looked at this service as a way of taking some the power back from the record industry for control of their music. Limp Bizkit and the other bands that were for Napster had a valid point because now they could argue against the record companies and were not scrutinized for it. They stated that companies like Napster were creating new fan interest in the acquisition of music, as well as, establishing an infrastructure that previously was non-existent for unknown artists. They thought that this was a prime opportunity for artists to understand that they can now operate from out of the shadows of the greedy record companies and now they had more say in what they were making and releasing to the public. This eventually formed many new independent artist labels and many new artists started making their own music and started searching for new talents. For the first time, the artists had the say in most of the matters dealing with the music. Of course, this just pissed the record companies off even more and made them more
determined to end this type of service.
Next, when talking about file sharing and illegal downloading, the most important things that needs to be discussed is if sharing mp3 files is an illegal or an immoral issue? When someone uses these file sharing sites, there are those that say they are stealing. Those in opposition will compare it to going into a record store and stealing cds or DVDs. These people have a valid argument because in fact you are taking music without paying. Others say they have the right to share their music with other people without it being illegal. I guess it can be argued until both sides are black and blue in the face and may never be resolved. It is all of matter of the individual’s opinion and where each person stands on the issue. More than half of the users of these file-sharing sites are
usually teenagers so it is hard to hand out punishment or argue the moral issue. Many teenagers don’t usually know the difference between immoral and illegal. There is a fine line between the two and sometimes it is not clear where the line is crossed.
Napster was eventually bought out by the digital music pioneer Roxio in 2003, and began selling music to its customers. This next evolution of the Napster saga is the newly formed service called Napster To Go. It is Napster’s answer to services like ipod, and Rhapsody. This new service includes over 1.3 million files that can be accessed for $15 per month. Some of the major competitors against Napster’s new service are the before mentioned and famous Apple ipod, the Dell Pocket DJ, the Creative Zen Micro, the iRiver’s new H10, and Rhapsody. The thing that makes Napster To Go different from the rest is that you can load the chosen tracks into a compatible player and hit the road. The only thing you have to do is dock to a computer once a month to verify
enrollment. It costs the user $9.95 a month if you only want to listen to Napster’s library on your computer. It then costs you another $4.95 to transfer those files to devices to allow you to download these files for purposes like making cds. The biggest downside is that Napster To Go uses the code called Janus from Microsoft. The problem with Janus, like most Microsoft products, is that they are not always compatible with other brands. These new service offered by Napster, are just the latest in the many transformations by the site to stay alive.
Another important partnership that Napster has just recently formed is with XM radio. The service is called XM + Napster and it is aimed for XM users to be able to download music that is heard through satellite radio by the Napster software. It was
launched on 21 November 2005 and just in time for the busy holiday season. Many industry analysts say this is a brilliant idea, and this that the service will really take off.
Napster has a weak to moderate network effect because although it is considered a connectivity based network and offers its users many features for ease of use, it also has gotten away from the free file-sharing service it provided before. Now users are being treated as customers and if you want to use this service, you have to pay a monthly subscription fee of $15. This produces a cost to participate in the service and may turn many users away. It may also force users to go to other sites that offer what Napster offered at one time, and that is free file sharing. The economics of scale would be great because the contribution margin is greater than 85%. The software and website is already in place and the cost to maintain and upkeep the site is minimal. The customer retention rates would be weak because of what was mentioned earlier. This is the fact that now Napster is a pay service and if a user wants access to the database of files, they have to pay a monthly fee of $15. From April 2003 through the end of March 2005, Napster lost an estimated $97 million selling digital music. This just proves the fact that Napster has lost customers in the transition of a free service to a subscription service. Another factor is a great majority of Napsters users are teenagers and most of them cannot afford the monthly rate. They will just start searching deeper in the Internet to find free file sharing sites because, although many have been shut down, there are still hundreds available.
One thing that may hurt Napster as in the future is the market maturity of this type of online service. File sharing started with Napster, then many others sprang up, and now a lot of these sites have either died or followed Napster into the pay subscription market. There are still many rogue sites out there that still allow free file sharing but how long
will it be before these sites are sniffed out by the record industry and then forced to shut down? Another key question to ask is how many times can Napster transform to keep up with the times? We have seen it survive many changes over the last six years, but how many times can it get knocked down and still get back up. You may be seeing the maturity of this type of Internet service. There will be a new idea pop up and I think you will see Napster transform into wherever the industry goes, but for now the peak has been reached.
In conclusion, Napster is considered an Internet pioneer as a content provider. Today Napster is recognized as the leading innovator of digital music, and has
established a great working relationship with all of the music labels. It has also become the pioneer in music subscription services. With the many attempts of the RIAA to shut down Napster, this will be looked at as just another chapter in the ever-changing
technology revolution of the music and media industry. Wherever this industry heads next, it is guaranteed that there will be something similar to Napster to push the limits and challenge authority to think harder to conform or be left behind.
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