Business Model of Napster

The Napster brand has had a varied history. Its initial incarnation was as the

first widely used service for free peer-to-peer (P2P) music sharing. The record

companies mounted a legal challenge to Napster due to lost revenues on music

sales which eventually forced it to close. But the Napster brand was purchased

and its second incarnation offers a legal music download service in direct

competition with Apples iTunes.

The original Napster

Napster was initially created between 1998 and 1999 by a 19 year old called

Shawn Fanning while he attended Bostons Northeastern University. He wrote

the programme initially as a way of solving a problem for a friend who wanted

to find music downloads more easily online online. The name Napster came

from Fannings nickname.

The system was known as Peer to Peer since it enabled music tracks stored on

other Internet users hard disks in MP3 format to be searched and shared with

other Internet users. Strictly speaking, the service was not a pure P2P since

central services indexed the tracks available and their locations in a similar

way to which instant messaging (IM) works.

The capability to try a range of tracks proved irresistible and Napster use

peaked with 26.4 million users worldwide in February 2001.

It was not long before several major recording companies backed by the RIAA

(Recording launched a lawsuit. Of course, such action also gave Napster

tremendous PR and millions of users used the service. Some individual bands

also responded with lawsuits. Rock band Metallica found that a demo of their

song I disappear began circulating on the Napster network and was eventually

played on the radio. Other well-known artists who vented their ire on Napster

included Madonna and Eminem. However, not all artists felt the service was

negative for them. UK band Radiohead pre-released some tracks of their album

Kid A on to Napster and subsequently became Number 1 in the US despite

failing to achieve this previously.

Eventually as a result of legal action an injunction was issued on March 5th

2001 ordering Napster to cease trading of copyrighted material. Napster

complied with this injunction, but tried to read a deal with the record

companies to pay past copyright fees and to turn the service into a legal

subscription service. In the following year, a deal was agreed with German

media company Bertelsmann AG to purchase Napsters assets for $8 million as

part of agreement when Napster filed for Chapter 11 bankruptcy in the United

States. This sale was blocked and the web site closed. Eventually, the Napster
brand was purchased by Roxio, Inc who used the brand to rebrand their Press

Play service.

Since this time, other P2P services such as Gnutella, Grokster and Kazaa

prospered which have been more difficult for the copyright owners to purse in

court, however, many individuals have now been sued in the US and Europe

and the associations of these services with spyware and adware has damaged

these services, which has reduced the popularity of these services.

New Napster in 2008

Fast Forward to 2008 and Napster now has around 830,000 subscribers in the

United States, Canada and United Kingdom who pay up to 14.95 each month

to gain access to about 1.5 million songs. The company is seeking to launch in

other countries such as Japan through partnerships.

Revenue for financial year 2008 is expected to exceed $125 million,

representing growth of 17%.

The online music download environment has also changed with legal music
downloading propelled through increasing adoption of broadband, the success

of Apple iTunes and its portable music player, the iPod which by 2005 had

achieved around half a billion sales.

Napster gains its main revenues from online subscriptions and permanent

music downloads. The Napster service offers subscribers on-demand access to

over 1 million tracks that can be streamed or downloaded as well as the ability

to purchase individual tracks or albums on an a la carte basis. Subscription

and permanent download fees are paid by end user customers in advance
either via credit card, online payment systems or redemption of pre-paid cards,

gift certificates or promotional codes. Napster also periodically licenses

merchandising rights and resells hardware that its end users use to store and

replay their music.

BBC estimated that the global music market is now worth $33 billion (18.3

billion) a year while the online music market accounted for around 5% of all

sales in the first half of 2005. Napster , quoting Forrester Research estimates

that United States purchases of downloadable digital music will exceed $1.9

billion by 2007 and that revenues from online music subscription services

such as Napster will exceed $800 million by 2007.

BBC reports Brad Duea, president of Napster as saying: The number one

brand attribute at the time Napster was shut down was innovation. The second

highest characteristic was actually free. The difference now is that the number

one attribute is still innovation. Free is now way down on the list. People are

able to search for more music than was ever possible at retail, even in the

largest megastore.

The Napster online music service

Napster subscribers can listen to as many tracks as they wish which are

contained within the catalogue of over 1 million tracks (the service is

sometimes described as all you can eat rather than a la carte). Napster users

can listen to tracks on any compatible device that includes Windows Digital

Rights Management software, this includes MP3 players, computers, PDAs and

mobile phones. Duea describes Napster as an experience rather than a

retailer. He says this because of features available such as: Napster

recommendations Napster radio based around songs by particular artists

Napster radio playlists based on the songs you have downloaded Swapping

playlists and recommendations with other users

iTunes and Napster are probably the two highest profile services, but they have

a quite different model of operating. There are no subscribers to iTunes, where

users purchase songs either on a per track basis or in the form of albums. By

mid 2005, over half a billion tracks had been purchased on Napster. Some feel

that iTunes locks people into purchasing Apple hardware, as one would expect

Duea of Napster says that Steve Jobs of Apple has tricked people into buying a

hardware trap. But Napsters subscription model has also been criticised since

it is service where subscribers do not own the music unless they purchase it

at additional cost, for example to burn it to CD. The music is theirs to play

either on a PC or on a portable player, but for only as long as they continue to

subscribe to Napster. So it could be argued that Napster achieves lock-in in

another form and requires a different approach to music ownership than some

of its competitors.

Napster Strategy

Napster describe their strategy as follows. The overall objective is to become the

leading global provider of consumer digital music services. They see these

strategic initiatives as being important to achieving this:

Continue to Build the Napster Consumer Brand as well as increasing

awareness of the Napster brand identity, this also includes promoting the

subscription service which encourages discovery of new music. Napster

(2005) say We market our Napster service directly to consumers through

 an integrated offline and online marketing program consistent with the

existing strong awareness and perception of the Napster brand. The

marketing message is focused on our subscription service, which

differentiates our offering from those of many of our competitors. Offline

marketing channels include television (including direct response TV),

radio and print advertising. Our online marketing program includes

advertising placements on a number of web sites (including affiliate

partners) and search engines

Continue to Innovate by Investing in New Services and Technologies

this initiative encourages support of a wide range of platforms from

portable MP3 players, PCs, cars, mobile phones, etc. The large technical

team in Napster shows the importance of this strategy. In the longer-

term, access to other forms of content such as video may be offered.

Napster see their ability to compete depend substantially upon our

intellectual property. They have a number of patents issued, but are also

in dispute with other organizations over their patents.

Continue to Pursue and Execute Strategic Partnerships Napster has

already entered strategic partnerships with technology companies

(Microsoft and Intel), hardware companies (iRiver, Dell, Creative, Toshiba

and IBM), retailers (Best Buy, Blockbuster, Radio Shack, Dixons Group,

The Link, PC World, Currys, Target), and others (Molson, Miller,

Energizer, Nestle).

Continue to Pursue Strategic Acquisitions and Complementary

Technologies This is another route to innovation and developing new

services.
Napster mobile

During 2007, Napster launched a wireless music service branded Napster

Mobile. In conjunction with Ericsson, this offers ringtones, OTA (over-the-air)

downloads and wallpapers via a variety of mobile carriers in the United States

and Europe, including Cingular/ATT, O2 Ireland, TMN in Portugal, SunComm

and Dobson. Using Napster Mobile, customers are able to purchase music

downloads from our full music catalog using their mobile phone handset and

have the songs delivered OTA to their handsets with a copy sent to their PC as

well.

Napsters Customers

The Register reported that in the UK, by mid 2005, Napster UKs 750,000 users

have downloaded or streamed 55m tracks since the service launched in May

2004. The company said 80 per cent of its subscribers are over the age of 25,

and half of them have kids. Some three-quarters of them are male. Its

subscribers buy more music online than folk who buy one-off downloads do

and research shows that One in five of them no longer buy CDs, apparently.

Describing its marketing strategy Napster says in its SEC filing: We primarily

focus our marketing efforts on online advertising, where we can most cost

effectively reach our target audience of 25-40 year-olds, as well as strategic

partnerships where we can market our service with complementary products.

In the United Kingdom and Germany, we also market our paid Napster service

directly to consumers through a predominately online marketing program,

consistent with the existing strong awareness and perception of the Napster

brand. The marketing message is focused on our subscription service, which

differentiates our offering from many of our competitors. Our online marketing

program includes advertising placements on a number of web sites (including

affiliate partners) and search engines.

Napster distribution

Napsters online music services are sold directly to end users through the

website (www.napster.com). Affiliate networks and universities that have

procured site licenses (In the US, a significant proportion of subscribers are

University users). Prepaid cards are also available through retail partners such

as Dixons in the UK, who also promote the service.

Napster also bundle its service with hardware manufacturers such as iRiver,

Dell, Creative Labs, Gateway and Samsung.

Distribution partnerships with mobile providers are a key aspect of its strategy

and Napster has pursued agreements in this this are. In 2008, Napster

launched Mobile music service with Telecom Italia which serves more than 35

million subscribers; Entel PCS, the leading Chilean mobile operator with more

than 5.5 million subscribers and in Japan Napster Mobile for NTT DoCoMo.

Napster Competition

Napster see their competitors for online music services in the US as Apple

Computers iTunes, Amazon, RealNetworks, Inc.s Rhapsody, Yahoo! Unlimited,

Sony Connect, AOL Music, MusicNet and MusicNow. In the UK, in 2005, new

services with a subscription model were launched by retailers HMV and Virgin.

They expect other competitors such MTV Networks to enter the market soon.
Napster believe that the main competitive factors affecting their market include

programming and features, price and performance, quality of customer

support, compatibility with popular hardware devices and brand.

Intellectual Property

We may be unsuccessful in prosecuting our patent applications or patents

may not be issued from our patent applications. Even if patents are issued and

maintained, these patents may not be of adequate scope to benefit us or may

be held invalid and unenforceable against third parties.

While we rely on patent, copyright, trade secret and trademark law to protect

our technology, we also believe that factors such as the technological and

creative skills of our personnel, new product developments, frequent product

enhancements and reliable product maintenance are essential to establishing

and maintaining a technology leadership position. We cannot assure you that

others will not develop technologies that are similar or superior to our

technology.

Employees

As of March 31, 2005, Napster had 135 employees, of which 10 directly

supported the online music service (maintaining content and providing

customer care), 25 were in sales and marketing, 63 were in engineering and

product development and 37 were in finance, administration and operations.

The costs of managing these staff is evident in the table.

Napster Risk factors

In their annual report submission to the United States Securities and

Exchange Commission, Napster is required to give its risk factors, which also

give an indication of success factors for the business. Napster summarises the

main risk factors as follows:

1. The success of our Napster service depends upon our ability to add new

subscribers and reduce churn.

2. Our online music distribution business has lower margins than our
former consumer software products business. Costs of our online music

distribution business as a percentage of the revenue generated by that

business are higher than those of our former consumer software

products business. The cost of third party content, in particular, is a

substantial portion of revenues we receive from subscribers and end

users and is unlikely to decrease significantly over time as a percentage

of revenue.

3. We rely on the value of the Napster brand, and our revenues could suffer

if we are not able to maintain its high level of recognition in the digital

music sector.

4. We face significant competition from traditional retail music distributors,

from emerging paid online music services delivered electronically such as

ours, and from free peer-to-peer services.

5. Online music distribution services in general are new and rapidly

evolving and may not prove to be a profitable or even viable business

model.
6. We rely on content provided by third parties, which may not be available

to us on commercially reasonable terms or at all.

7. We must provide digital rights management solutions that are acceptable

to both content providers and consumers.

8. Our business could be harmed by a lack of availability of popular

content.

9. Our success depends on our music services interoperability with our

customers music playback hardware.

10. We may not successfully develop new products and services.

11. We must maintain and add to our strategic marketing relationships

in order to be successful.

12. The growth of our business depends on the increased use of the

Internet for communications, electronic commerce and advertising.

13. If broadband technologies do not become widely available or widely

adopted, our online music distribution services may not achieve broad

market acceptance, and our business may be harmed.

14. Our network is subject to security and stability risks that could

harm our business and reputation and expose us to litigation or liability.

15. If we fail to manage expansion effectively, we may not be able to

successfully manage our business, which could cause us to fail to meet

our customer demand or to attract new customers, which would

adversely affect our revenue.

16. We may be subject to intellectual property infringement claims,

such as those claimed by SightSound Technologies, which are costly to

defend and could limit our ability to use certain technologies in the

future.