Absolutely the best article I have read on the recording industry, Napster, and the future of downloadable digital music.
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Will a Win for Record Labels
Turn Into Their Nightmare?
By JASON FRY AND MEGAN DOSCHER
WSJ.COM
An 11th-hour legal rescue Friday let Napster Inc. keep breathing, but it certainly had a near-death experience this week as U.S. District Court Judge Marilyn Hall Patel granted a preliminary injunction requested by the recording industry ordering Napster to stop making copyrighted material available for download.
Despite a Friday stay of that injunction, the recording industry could soon get its wish and see Napster crippled. But if it does, the industry may learn the truth of the old adage that you should be careful what you wish for.
Few legal experts had expected Napster to prevail with its argument that users' swapping digital-music files back and forth was akin to copying a CD for personal use, and indeed Napster did not -- Judge Patel shot that one down at once. She had no truck with the argument that crippling Napster was unfair because there were legal uses for the service, saying that Napster's illegal uses far outweighed its legitimate functions. And she indicated out to Napster lawyer David Boies that the service's own internal documents had helped hang it -- documents from Napster's early days acknowledge its main use is pirating music. (One imagines Bill Gates got at least a momentary smile out of that.)
Judge Patel also neatly sidestepped the argument over whether Napster had hurt or helped music sales, seeing it as beside the point. Napster's continued operation, she said, would hurt the record labels by making it harder for their own online music businesses to compete once they're unveiled.
She's right. So was Hilary Rosen, the chief executive of the Recording Industry Association of America, when she said in a prepared statement that Judge Patel's injunction helped "pave the way for the future of online music." The record labels' online businesses -- which are variously newborn and yet-to-be born -- now move close to center stage in the digital-music world. What the labels do with them stands to determine what the future invoked by Ms. Rosen will look like.
Unfortunately for the recording industry, if those labels do get a chance to take the stage, they almost certainly will do the wrong thing. The labels won't lose the digital-music war because intellectual property is an outdated concept, or some other anarchist nonsense, but because their bricks-and-mortar backgrounds will make it far more likely that they'll make the wrong decisions.
Here are a few of the reasons why:
1. The labels are still competing with Napster. The service itself may be in dire trouble, but the concept isn't -- a host of Napster rivals have existed for some time, and if Napster is shut down, those rivals will immediately inherit an audience of 20 million Napster users who have grown to like downloading digital music and will now look elsewhere for it. (Several Napster alternatives reported huge jumps in traffic on Thursday.) Some of those rivals, such as Gnutella and OpenNap, rely not on centralized servers but on informal networks of users, meaning they'd be much harder to pin down in court and shut down. It's true that most of those services are currently difficult to use and can't handle the levels of traffic Napster is used to. But it's also true that the specter of a Napster shutdown handed the programmers behind those services a huge incentive for making them easier to use and more robust. The recording industry may soon find out that digital music is a hydra -- have the lawyers cut off one head and several more grow out of the stump and become big and nasty in their own right. Most importantly, those services will compete with anything the labels put together.
2. The labels will fall prey to the Pathfinder Way. The vast majority of people don't know what label their favorite band records for, what publisher sends their favorite author checks, or what conglomerate their favorite magazine belongs to. Yet media companies approaching the Internet persist in thinking that people do, or can be taught to do so. (This unique brand of corporate myopia is known as the Pathfinder Way in tribute to Time Warner's dimwitted umbrella site for its Web properties.) Digital-download experiments pursued by the record labels in isolation will fail because people, sensibly enough, won't bother learning to group their favorite bands by record label. To reach consumers, the record labels need to hang together. But they'll continue to go their separate ways, and the end result will be that they'll hang separately.
3. Channel conflict will paralyze them. If you want to see an example of how dismal the record labels' digital-download efforts are, visit Sonymusic.com's TheStore (thestore.sonymusic.com/thestore/music.asp). For $2.49 a pop, you can download songs from the likes of Mariah Carey and Lauryn Hill -- but calling the selection paltry would be too kind. (Yes, Sony's new to this -- but the digital-music services it's competing against aren't, and all the lawsuits in the world won't let the labels restart the clock.) Moreover, the labels will run into "channel conflict" between their Net outposts and the retailers that stock CDs. If the labels try to put entire CDs online, or offer the best songs from those CDs, retailers will cry bloody murder, concerned about their own business. Yet putting up sites that offer only a smattering of obscure tracks, B-sides and curiosities is a recipe for failure -- surfers will just go off to one of the download sites that the labels have yet to sue. Will the record labels really have the toughness to risk a fight with their physical-world retailers in order to make Web downloads work? Here's betting they won't.
4. They'll charge too much. Given the number of outlets that will still allow users to download pirated music for free, the record labels have to make their offerings cheap enough that Net users won't consider stealing worth it. The best way to do that is probably through an "all-you-can-eat" subscription plan -- people don't like knowing that the meter's running, and for every hardcore music fan who downloaded the equivalent of 20 CDs for $19.99, plenty of other users would find out that their eyes were bigger than their stomachs. If the record labels keep the meter running -- and at the wrong price -- odds are Net users will run back to the pirate services. If they charge the same amount for a digital download as they do for a CD single, Net users will probably do the same. (And if they charge less for a digital download, retailers will raise a ruckus.) Trying to pass along the cost of developing a Web business to Net users -- another favorite trick of old-world media companies -- won't work either. If the labels do defeat Napster, they'll think having done so means they can hang on to real-world pricing models. They'll be wrong.
It is possible to sketch what a successful digital-download service might look like. It would have cheap content from all the major record labels, and that content would include top singles, not just odds and ends. Ideally, it would already have a large user base, name recognition, and have proven it can handle heavy traffic.
If that isn't Napster, it sure sounds a lot like it. The recording industry, to its credit, has seen Napster's success not just as evidence that people steal but also as evidence that online music can be a huge business. But it's missing the crucial point that Napster also has the outlines of a great business plan for online music.
Napster has already figured out most of the recipe that the recording industry needs to brew up a Web success. The industry still has a chance to adopt that recipe for its own -- despite Napster's reprieve, it has the service on the ropes and is in an unmatched position to dictate the terms of a deal. But the industry may well not do that. Instead, it may try to finish the task of crippling Napster and then figure out whom it needs to sue next, while leaving it to the record labels to find recipes of their own. The labels will start with the right ingredients -- the Internet and music -- but they'll ignore the rest of the recipe. And because of that, the only thing they'll brew up is a mess. |
