Napster: Could it threaten Net strongholds?
By Bill Burnham, Inter@ctive Week
Few software programs have generated as much controversy as Napster. Napster, in case you've been living under
a rock, is a software program that allows individuals to freely trade files using the Internet. Napster has attracted a
lot of attention because most of the files that people happen to be trading are illegal copies of songs that have been
recorded in the wildly popular MP3 format.
As such, much of the debate and discussion around Napster has focused on Napster's implications for the
recording industry. Fanning the flames of this discussion have been numerous high-profile lawsuits filed by the
recording industry against the small company behind Napster.
While Napster and its various copycats will no doubt have a tremendous influence on the music industry, the real
importance of Napster has nothing to do with music, but has to do with the very structure of the Web itself.
Napster's brief but important history
Before elaborating on the broad implications, let's first review some background on Napster and what it's doing to
the music industry. For several years now, the recording industry has been fighting a losing battle to prevent the
illegal copying and distribution of copyrighted music over the Internet. Such copyright infringement really didn't start
to take off until the advent of the MPEG-3, or MP3 standard, which made it possible for just about anyone to
easily create and play relatively high quality copies of recorded music.
It wasn't long after MP3 gained popularity that thousands of web sites started posting collections of illegal, or
copyrighted, MP3 recordings. In response to this trend, the recording industry began an aggressive campaign to try
to shut down the sites that were offering the biggest collections of illegal MP3s. Lawsuits were the biggest threat,
and in some isolated cases, offenders were actually dragged to court.
For a brief point in time early last year, the recording industry seemed to be bringing the MP3 problem somewhat
under control. Sure there was still a lot of illegal copying going on, but most of it was limited in scale. Almost all of
the major MP3 sites had either been shut down or forced to dramatically scale back their operations.
Then came Napster. Unlike the centralized sites that posted collections of MP3s, Napster was a software program
that enabled individuals to share their personal collection of MP3s with anyone else on the Internet. Thus, Napster
instantly created a giant network of MP3 files, the sum total of which was far higher than any single Internet site.
For teenagers everywhere, Napster made it almost laughably easy to find and instantly download almost any piece
of recorded music. For the recording industry, Napster seemed to signal the advent of the apocalypse. Unlike big
centralized sites that were relatively easy to target, Napster created a network of tens of thousands of smaller sites.
Even if the industry wanted to shut these sites down, there would be almost no practical way to do it.
Suing is better than doing
Desperate to do something, the recording industry decided to sue the software firm that created Napster, despite
the fact that this firm has no control of how their software is used. (It's like suing a word processing firm because
someone wrote a death threat on it.)
While the music industry may succeed in shutting down Napster (copyright laws are, thankfully, pretty strict), they
can't put the genie back in the bottle. Already there are several software programs similar to Napster being
circulated. If Napster is put of business, something else will simply take its place.
While they would never admit it, Napster is doing the record industry a huge favor. Napster is demonstrating that
the only way to control copyright violations is to protect their content before they release it to the public. The
technology to do so, called Digital Rights Management, is new but rapidly maturing. Companies like Microsoft,
Xerox, Preview Systems, Intertrust, Wave Systems, Reciprocal, and others (Softbank has investments in Preview,
Intertrust, and Reciprocal) have all been focused on building this technology. The recording industry, however, has
failed to adopt it, largely due to political in-fighting and poor communication. Perhaps Napster will force the music
industry to be more proactive with technology.
Napster's real importance
Perhaps the greatest shame of the whole Napster debate is that the focus on MP3s and the recording industry
obscures the real issue. Napster's fundamental architecture has the potential to destabilize many of the accepted
premises that underpin the Internet.
At its core, by independently connecting computers across the Internet, Napster enables the creation of a
distributed, disembodied marketplace. This marketplace has no center and no owner, just a shared group of
participants. This idea of a decentralized marketplace runs counter to much of the thinking behind many Internet
marketplaces both in the consumer and business-to-business sectors. After all, companies are spending hundreds
of millions of dollars creating centralized marketplaces founded on the premise that customers need a single, central
destination.
However with software, such as Napster's, the need for a centralized marketplace is greatly diminished, and in
some cases possibly eliminated. Just look at the MP3 sites. Prior to the advent of Napster, numerous sites
flourished as centralized marketplaces where consumers could download/trade MP3s. One of them, MP3.com
even went public. However, with the advent of Napster, marketplaces for MP3 files were instantly commoditized.
Original MP3 marketplace sites have either gone out of business or have hastily repositioned themselves.
Napster everywhere
Taking the idea of Napster a step further, what's to prevent someone from creating the Napster of consumer
auctions. If the Napster approach hit auctions, how could the existing auction players such as eBay, Amazon.com
or Yahoo! hope to compete? For that matter, what's to prevent someone from creating Napster-like programs that
take on the numerous players currently creating business-to-business exchanges?
The short answer is nothing. There's nothing to stop programmers from adapting Napster to a wide variety of
applications, each of which will challenge the site-centric thinking that predominates on the Internet today.
The death of network effects?
In some cases Napster's architecture fundamentally undermines one of the crown jewels of Internet stock valuation
theory. This theory holds that Internet marketplaces generate network effects as they grow in size. These effects in
turn accelerate the growth of the marketplace and make it almost impossible for competitors to catch up. As it
stands, the network effects generated by sites such as eBay are thought to be so powerful that it is almost
impossible for these sites to be unseated. However, Napster's fundamental architecture and its impact on the MP3
market suggests that network effects are much more fragile than suspected.
If this is indeed the case, some of the premium valuations that are enjoyed by both consumer and
business-to-business marketplaces could come under pressure. Investors may begin to fret that they too will feel
the powerful, distributed sting of Napster.
Whatever happens, one thing is clear. The impact of Napster will be felt far beyond the confines of the record
industry's executive suites. Indeed, Napster and its offspring are only in the early stages of a revolution that will
likely impact boardrooms and stock markets across America.
Bill Burnham is a General Partner at Softbank Capital Partners and was a former Wall Street e-commerce analyst. |
