Summary - University of Washington



Napster’s Lesson for the Labels

Overview

The use of the Internet as a distribution medium presents record labels with unique opportunities and challenges. The distribution network that has historically provided the record labels with a significant barrier to entry is being dismantled by the Napster phenomenon and subsequent companies such as Gnutella and Freenet. These companies are providing consumers with a more convenient, albeit illegal, distribution medium. The widespread adoption of Napster’s client software, which initiates a peer-to-peer (P2P) file transfer between individual users, signals that the record labels must address how they will market and distribute their products on the Internet.

However, any digital-distribution-based business model implemented by the record labels must begin with the right to control and be compensated for the distribution of their music, as a copyrighted work. Napster facilitates and encourages copyright infringement and its business model damages the short-term and future economic interests of the record labels – potentially up to $3.1 billion in the United States alone by 2005.[1] Notwithstanding their inevitable legal success in stopping infringement-based models, the Big Four record labels – BMG Entertainment, Universal Music, Warner EMI Music Group and Sony Music Entertainment – must utilize digital distribution through alliances and licensing and royalty agreements in order to provide consumers with the increased convenience and flexibility that Napster has introduced to them.

Right to Control Music Distribution

Music is copyrighted work under Title 17 of the United States Code, which affords protection and control to copyright owners in the use and distribution of copyrighted material. Through its client software and service, Napster facilitates the widespread infringement of the record labels’ copyrights held through contracts with artists. Napster’s client software is a niche File Transfer Protocol (FTP) client attached to a chat client.[2] Users download the client software, which enables them to upload to Napster’s centralized database a list of MP3-format files that they are willing to “share.” Users scan the database for music titles and are provided links to other users’ computers that have the music available to copy. Through the client software, users initiate a P2P transfer without the music touching Napster’s servers.

In support of its business and technology model, Napster erroneously contends that the federal Audio Home Recording Act (AHRA) of 1992 grants consumers an absolute right to create and transfer digital music for noncommercial purposes. The use of computers in copying and distributing music is not within the scope of the AHRA, which applies to digital audio recording devices.[3] The AHRA permits the transfer of copyrighted material between a household and its normal circle of friends, rather than the general public. Napster’s facilitation of widespread distribution of music between millions of anonymous strangers does not constitute noncommercial use as defined in the AHRA. Additionally, many Napster users copy music in order to avoid paying for the song or CD, a practice that constitutes commercial use and renders the AHRA inapplicable.[4]

While individual consumers copy the music in the Napster model, it is unreasonable to place the burden on the record labels to pursue economic damages against individual consumers. It is more reasonable to place the responsibility and cost of protecting against copyright infringement on the party that provides the system, i.e., the Napster client software, that facilitates infringement rather than on the copyright owner. The record labels are supported on this point by the 1998 Digital Millenium Copyright Act,[5] which makes it illegal to distribute a device or information that enables a person to circumvent copyright protections.

Economic Injury from Napster’s Illegality

Napster’s business model of facilitating piracy by enabling consumers to obtain music for free damages the retail sale of compact discs (CDs). Although CD sales are up 16 percent nationwide, Soundscan statistics indicate that in areas near colleges and universities, traditionally strong music buying areas, CD sales are down four percent.[6] The retail drop in college-student purchasing cannot be attributed entirely to students buying CDs on the Web, as online music sales account for merely three percent of music sales nationwide. In addition to the estimated $5 billion annual cost of non-Internet-related copyright infringement worldwide[7], market analyst Forrester Research estimates that music-sharing technology such as Napster’s will cost the record labels more than $3.1 billion by 2005 in the United States alone.[8] The United States’ $14 billion in music sales in 1999 comprised 36 percent of the $38.5 billion worldwide music market.[9]

More importantly, Napster threatens the record labels’future profits from the digital distribution of music, if Napster is allowed to enable that same music to be obtained for free. Most digital-based business models that the labels could pursue would be unsuccessful against “free.” The labels could not recoup the cost of development, manufacturing, tour support, promotion and advertising incurred in representing an artist.

Additionally, consumer interests are harmed in the long run by continued piracy. Record labels take risks on artists in order to expand the available musical genres, as well as their ability to profit in multiple segments. If the profit potential is removed, the labels will take fewer risks and drive music to the middle of the road where they are more likely to sell to the mainstream population – removing consumer choice.

Necessity for a Digital-Distribution-Based Model

Notwithstanding the fact that the record labels ultimately will win the legal argument surrounding copyright-infringement-based models, the labels must embrace the Internet as a distribution medium. The industry cannot rely solely on legal redress, as digital-age copyright laws are likely to vary across worldwide jurisdictions. Likewise, overemphasizing initiatives such as the Secure Digital Music Initiative encryption and anti-piracy technology escalates costs for the industry and puts it on a technological treadmill to stay ahead of hackers. Most importantly, these efforts miss the point of the Napster phenomenon.

The lesson from Napster is that consumers want convenience and the ability to tailor the product offering through single tracks, portions of CDs and mixes. The lesson does not necessarily include that this convenience must be provided for free, although free has helped spawn the 51 million registered users of the Napster client application.[10] However, a recent survey indicated that 68 percent of Napster users are willing to pay $15 per month for a subscription to the service.[11]

The record labels should utilize digital distribution through licensing and royalty agreements. For example, Napster should pay a licensing fee to the labels each time a consumer downloads its client software. Napster could charge its users a monthly subscription fee that includes a defined number of transfers. Napster maintains a list of transfers using a centralized database.[12] Napster would then pay royalties to the record labels akin to the $.03 paid by radio stations based on the list of transfers, which would indicate which songs (labels) are downloaded and how often. Additionally, the transfer list would include user accounts, in order to maintain the defined number of transfers. This may cause consumer privacy issues, but could also provide an opportunity for Napster or the labels to increase sales by personalizing offerings for individual consumers based on their preferences. This model would require the institution of tracking mechanisms for services such as Gnutella and Freenet which, unlike Napster, do not have centralized databases.

In order for the record labels to succeed with digital-distribution-based models, the labels must stop the free distribution components of services such as Napster, Gnutella and Freenet. Otherwise, consumers could pay for music on one service and post the recording for free on another, circumventing the model. It is difficult for a label such as Sony that offers downloads for $1.99 from its Web site to compete long term against free distribution of its music via Napster. Additionally, Napster has a threateningly large installed base, with more than 40 percent of home PCs and 20 percent of office PCs using its software.[13]

In addition to pursuing legal redress to stop free distribution and copyright infringement, the record labels should align with their offenders. recently settled with the Big Four labels and agreed to a licensing deal. Bertelsmann’s 40 percent investment in Napster is a strategy to legitimize the product and service, while protecting Bertelsmann’s BMG Entertainment. Likewise, Universal, Warner EMI and Sony should consider incorporating Gnutella and Freenet into their Internet models, if for no other reason than to shelve the technology. Gnutella’s and Freenet’s technology models could also be helpful in getting digital distribution to market faster and in avoiding labels’ proprietary interfaces, which may not be accepted as rapidly by consumers.

In conclusion, the Internet presents tremendous growth opportunities for the consumption of music. Whether the record labels will profit from this growth depends in part on their ability to control piracy by enforcing copyrights. Profitability also depends on their ability to develop economically viable models through the use of licensing and royalty agreements. Most importantly, their success hinges on the ability to provide consumers with the convenience and flexibility that Napster has introduced to them.

-----------------------

[1] Steadman, Daniella. “Breaking Records.” Director Nov. 2000: pp. 60-64. (Analysis by Forrester Research)

[2] Sherman, Chris. “Napster: Copyright killer or distribution hero?” Online Nov./Dec. 2000: pp. 16-28.

[3] 17 U.S. Code, § 1001 (3). The argument is that a computer is not commonly distributed to individuals for the primary purpose of making a digital audio copy. A closer call pertains to the use of read-write CD-ROMs in computers, but such components still do not have as their primary purpose the making of audio copies.

[4] With admitted influence from , an impartial artist site. See for more information.

[5] Pub. L. No. 105-304, 112 Stat. 2860 (Oct. 28, 1998).

[6] Levy, Steven. “The noisy war over Napster.” Newsweek Jun. 5, 2000: pp.46-53. See also for more information.

[7] “Wanted: A Survival Plan for the Music Industry – Napster and the Consequences.” Diebold Deutschland GmbH Jan. 21, 2001.

[8] Steadman, Daniella. “Breaking Records,” Director Nov. 2000: pp. 60-64.

[9] Great Britain, Japan, Germany and France round out the top five markets. “Wanted: A Survival Plan for the Music Industry – Napster and the Consequences.” Diebold Deutschland GmbH Jan. 21, 2001.

[10] Johnson, Margaret. “Future of music distribution debated at conference.” Jan. 11, 2001.

[11] Anonymous. “Leaders: If you can’t beat ‘em... .” The Economist Nov. 4, 2000: pp. 22.

[12] Sherman, Chris. “Napster: Copyright killer or distribution hero?” Online Nov./Dec. 2000: pp. 16-28.

[13] “Napster on the Rise.” PC Pitstop Reports Jan. 2001.

................
................

In order to avoid copyright disputes, this page is only a partial summary.

Google Online Preview   Download