Online Music

MARGARET WARNER:

Early last year, Napster was a cultural phenomenon. Nearly 60 million people used the site to swap music files from each others' computers for free. But the record companies sued Napster for copyright infringement, and the courts forced it to suspend its operations last March.Today Napster filed for bankruptcy.

For more on that and the state of the online music business, we're joined by P.J. McNealy, media department research director for Gartner G2, a technology research consulting firm in California. Welcome, Mr. McNealy. So tell us, was it the court rulings that drove Napster into bankruptcy?

P.J. McNEALY:

Well Napster drove in essence itself into bankruptcy by building a business model based on the intellectual property, the copyrights, in this case, the music industry, building their business on their copyrights without really launching a legitimate music service.

MARGARET WARNER:

In its heyday when it had these 60 million users when it didn't face lawsuits, was it making money? If people were downloading for free, how did it make money?

P.J. McNEALY:

Sure. Napster actually wasn't making any money. That's one of the problems. They didn't have any sources of revenue because they didn't charge for their software that you downloaded. And there was no advertising revenue from traffic on their site, which was a problem because when they got sued, there was no revenues to recoup unless a new Napster was launched after the lawsuit got settled.

MARGARET WARNER:

So once the record companies went after Napster, did that end this kind of illegal music sharing, this pirated music sharing on the Internet?

P.J. McNEALY:

No. Actually not at all. There's a near theory out there that piracy will be eradicated and no one will ever share a music file. But that's really a pipe dream for getting the Internet under control. What we've seen from piracy is that after Napster became popular and shut down that people went to other music-sharing software, such as Line Wire, Morpheus, Nutella, Music City, things like that.

What we've seen is that while Napster started in the United States and got sued, we saw some file sharing services open up in Europe and got sued and then got shut down. Now the eyes of the music industry are really looking toward Asia Pacific where intellectual property is more difficult to protect and hoping that more file sharing services don't pop up over there.

MARGARET WARNER:

I gather though that the record companies have tried to set up their own music. It's not sharing because they want people to pay a fee but a sort of competing service where they would actually protect their copyright and make money?

P.J. McNEALY:

Sure. We've seen two music services that have been launched in the past year called Musicnet and Pressplay. They're both partially or wholly owned by the five record labels. And these are services where you can pay a monthly fee and download some songs and stream quite a bit. What we've seen is that, a, they're still competing against free, which means their service where they want you to pay money for it has to be pretty compelling. And b, we've seen the consumers really like some of the benefits they saw with Napster meaning when you got a file, a music file from Napster, you could burn it to a CD and bring it into your car or you could move it on to an MP-3 player or take it with you. What we're seeing from these music services is you can't really do much of that. You can pretty much listen to it only on your desktop or at your PC, so consumers are not screaming with their credit cards to buy music at this point.

MARGARET WARNER:

How are they doing?

P.J. McNEALY:

They've been very, very reticent to talk about numbers. We're taking that to be a strong indication that they're not happy about them. Pressplay has said they may talk about subscribers in the second half of this year but we'll wait and see. We're really seeing there's a bigger issue here not just subscriber numbers but the music labels in order to get more subscriber numbers and big subscriber numbers, the music labels have to change some of the ways they've done business. They need to embrace selling digital music files over the Internet and come up with more creative licenses as they're called to allow people to sell a song that allows you to then burn it to a CD or move it to a hand held player.

MARGARET WARNER:

Back to Napster. If the state of on-line music sharing particularly pirated music sharing is so bleak why does the big German media company Bertelsmann want to buy Napster?

P.J. McNEALY:

That's a very popular question. Why would Bertelsmann spend more money on Napster at this point? Two things here. Well, three things. One Bertelsmann has spent $91 million investing in Napster and added another $8 million to pay off their initial investors two weeks ago. So, they have a lot of money invested in it. Two, they think that the Napster brand, the name Napster still resonates with music fans and that they can launch a new service and when they launch a new service, everybody who loved the old Napster will come over and pay in the new Napster world. And the third thing is that they believe that Napster has some fundamental technology. They have a software program that is compelling that allows people to easily trade music, find new music, do it securely so that artists still get paid for their music files and that they will be able to somewhere down the road re-launch a service launching this new technology.

MARGARET WARNER:

Does all of this have wider implications for instance for downloading movies and the fear of that becoming a big enterprise?

P.J. McNEALY:

Absolutely. There's a real fear of anybody who wants to sell any kind of digital content over the Internet whether selling a movie or a music file or things of that nature. No matter what they try to sell they'll always be competing against free and some of the file sharing services. That's true. But at we're really seeing now is that the movie industry is getting nervous and it's been nervous now for a couple of years.

But while you can easily download a music file using a dial-up connection over the Internet, you can't easily download a movie because the size of that file to download a whole movie is very, very difficult and time consuming and something that the average PC user, average person on the Internet won't stand for. But as more and more households get broadband, the easier that becomes. And the easier that becomes, the more nervous the music… the movie industry really starts to get worried that people will stop going to theaters and they'll just be downloading movies for free either to watch on a home network or the PC. We've seen this fear just from the attack of the clones.

MARGARET WARNER:

We have to leave it there but thank you so much.

P.J. McNEALY:

Thanks for having me.