Napster, Yahoo Pitch Subscriptions As Best Consumer Download Model, Fanning Talks Snocap

Hey everyone! Welcome to one of the coldest days in New York City in some time. Yesterday, I wrote that the Groundhog saw his shadow a few short weeks ago, which means six more weeks of winter. Today definitely proves it. It is COLD! So bundle up.

Yesterday, I attended the 2005 edition of Digital Media Wire’s Digital Music Forum in New York. For a one day conference, it is becoming de rigeur for anyone interested in the digital music industry. I did not attend last year, but did so the year before. At that time, it was clear the war going on over the legality of Peer 2 Peer software companies, for example Kazaa and Morpheus, who’s software allow the end user (that would be you) to share music files over the Internet, was centerstage.

To me, nothing got done that year. It was all about fear, anger, intimidation and drama. This year, I’m happy to report it feels like we are in business mode now. Especially with Yahoo morphing from a search engine into one of the world’s largest media companies. Record labels now have to play by the rules of the .dotcom generation. And it’s starting to change attitudes and forge new business models that will one day be successful.

Post-Napster demise (and resurrection), companies such as Kazaa and Morpheus created Peer 2 Peer software for the end user to install on their PC’s (Mac users can use Aquisition or Poisoned) allowing the possibility of sharing computer files across the Internet. Once installed on your machine, the software’s built-in instructions guided you to adjust preferences to point to the folder on your computer’s hard drive where you might store all of your digital files, resulting in the ability to share those files through an open TCP/IP port on your computer.

The software then acts somewhat like a window, letting people who are using P2P software on their computer peer (through an open hole, or “port”) directly into your computer and activate a request to download the song directly from your computer via the Internet. All computers use ports to communicate. Your computer has hundreds of ports. Some, like port 110 for HTML data and port 80 for POP3 Email allow packets of data to flow to and from your computer over the Internet network. (Click here to see the definition of port at For example, Kazaa mainly uses port 1214 (but <can switch ports without you knowing it).

Now, digital media files could mean any file in that folder. A Word doc, an Adobe Photoshop .psd file. Whatever is in that folder is there for all the world to see, provided you have activated the P2P software program on your computer.

Many people began to use these services, post-Napster, to trade MP3 music and Windows Media or QuickTime movie files. Napster's big mis-step, which led to their demise, was providing a centralized network, or repository if you will, that matched user requests on the network with existing files on other people's computers. However, instead of allowing you to download the file directly from the host computer, Napster cached a local copy of that file on their own servers. This enabled Napster to create a huge database of music, unrivaled in the history of the music industry as we know it, which allowed anyone with a computer and Napster software the ability to activate a request to download a digital copy of the song directly from their servers for free.

This made Napster a distribution point. The company was no longer Shawn Fanning sitting in his bedroom creating a fun application to trade music files with his friends. It was now a corporation with venture capital investors taking advantage of a legal loophole to distribute music to everyone without having to purchase it from anyone. The courts finally determined this type of file sharing illegal (from a centralized database) and Napster shut down. The company was then sold by its parent BMG to Roxio, who have since sold their core business to focus on digtial music subscription and then changed their corporate name to Napster. If you can follow that, I'll give you a prize!

Kazaa and Morpheus, on the other hand, launched their software products based on the fact that they only provided the window and not a centralized database storage system from which people could download. The files are not cached on their company's servers. Users peering into each others computers activate requests to download songs directly over the network and not from cached copies in a central database.

The stakes of the game are such that, if you are sharing a new music file with someone next door, on the next street, around the block, in another city or even in another country, is that legal? Well, some would say yes, but many rightsholders argue no. When you purchase a CD or digital music file, you are only allowed by license to make a limited amount of copies for yourself and you are not allowed to distribute them for profit.

Is this enforceable, of course it isn't (even though some would point to recent court action against a few hundred who have been caught, that's just a drop in the proverbial bucket), however companies continue to develop "digital rights management solutions" to prevent unauthorized duplications (but hackers usually break the security within weeks of the release of a new solution).

But when a person allows hundreds, if not thousands of downloads of the same song from his or her computer for free, then the argument is that the person is committing and act of music piracy which negatively affects sales. The label doesn't get paid, the artist doesn't get paid, people lose their jobs and it hurts the larger economy in general.

Some would argue it even impacts the modus operandi of society as a whole, because we are now getting what we want for free when it is something we used to pay for. And, what's the impact on greater society based on the how people percieve music today? Is music a commodity with cash value to be bought sold and traded or has it started to blend into the background of life and become something we expect to get for free? I am not taking a stand either way here, because I believe there is value in both arguments. My purpose is to try to explain to you, the reader, so you clearly understand the implications of illegal downloading to the music community and on our society as a whole.

In 2003, Peer 2 Peer software companies were touted as the dagger that would slay the corporate music monoliths, bringing music giants like Time Warner and Universal to their proverbial knees while opening the flood gates of free music to the mainstream masses. Has that happened? I don't think it has, but what it has done is revolutionized an entire industry that fought, kicked and scratched to keep things the way they were, spending the equivalent of the economies of entire third world countries to prevent change.

What's the end result? Even though millions of tracks have been downloaded, none of the major labels have gone out of business. In fact, there are new statistics that point to a rise in music sales last year. And, iTunes has transacted over 100 Million paid downloads, which is a pretty impressive feat. The labels obviously realize a profit from those sales. So let's not cry for them yet.

I believe that many of us think the business if just changing in it's inherent 20-year lifecycle. We all remember the CD and how that killed the cassette. And we remember the cassete killed the 8-track, and you can go on and on.

There are many people in the world who are content with subscribing to music services or downloading a la carte from reputable download companies such as iTunes, Music Match and the like, for two basic reasons:

  1. They are passive users who, even if given the opportunity to download for free, like the experience and prefer using an iTunes or the now legal Napster. They like the fact that an editor, content manager or music programming specialist is creating genre playlists or reviewing music that they otherwise wouldn’t normally listen to. They are discovering new indy rock bands, singer songwriters and dance music artists that they wouldn’t normally listen to. And since they don’t have to buy it, they can listen to as much of it as they want, when they want. And that’s what the consumer wants at the end of the day, choice.
  2. They do not have the time or knowledge of music to sit behind a computer all day and download thousands of songs for free. They don’t know how to install Kazaa or Morpheus. If that person does install a P2P software client, they learn the hard way from Cousin Vinny, who’s over the house for Thanksgiving or Christmas, that they have been hit with all kinds of additonal spyware programs tracking their movements or by using a P2P app, they’ve inadvertently downloaded a virus. American’s are vey conscious of personal freedoms and many do not like to be tracked doing anything (even though we’re tracked everyday anyway…but that’s another blog for another time).
  3. Fortunately for me and many others who attended yesterday, the abscence of anyone from a well known P2P company was tangible. I did not run into anyone from Kazaa, Morpheus, eDonkey and the like, and the conversation refreshingly was focused on what is happening now and what is going to happen in the future, which is really what I and I think everyone else was there to hear, learn, and move on, instead of bemoaning the fate of the music industry. That story is old news and no one wants to hear it. Either you get with the program or you become obsolete. End of story.

    I was very impressed with all the panelists and speaker’s yesterday, especially Shawn Fanning from Snocap, who discussed his vision of the tracking of music files on P2P networks, why it’s important and how Snocap is trying to solve the problem. Brad Duea, CEO of Napster was extremely charismatic and knowledgeable while putting forth his views on the digital music subscription model Napster is betting the farm on, and David Goldberg, Vice President & General Manager, Music at Yahoo gave an excellent PowerPoint presentation on Yahoo’s music vision for the future. There was a moment where the PC running his PowerPoint presentation crashed and he couldn’t get it to reboot, so he jokingly commented “Is anyone from Microsoft here?” and then said, “I wish I had an Apple” to the rooms delight.

    Personally, I am a firm believer in the subscription model. Brad Duea and David Goldberg are both touting that model as the best model for the future of the online music industry. The reasoning is that the profit margins are so slim for a la carte downloading, with all the compeition going on, it’s going to be increasingly difficult to turn a la care music downloading into a profitable business enterprise. It might even become a loss leader if people aren’t careful. Because once you’ve hit your peak of mass acceptance, your growth is going to slow and you are going to have to find new things to offer your customers other than just music. The same thing that happened to Tower Records at the brick and mortar level will happen to companies that want to be the Tower Records online. You won’t be able to survive on just music alone. However, with a subscription model, you just increase the rate a few bucks and now you have both music and movies, and maybe even digital books and software rentals. Need Photoshop? Your subscription service might not just provide you music, it might also provide you with other media and software as well.

    With the subscription model, you become a member of a community. You are then actively participating in your decision to get what you want and control the experience. As a subscriber, you have crosse the bridge, so to speak, that says you want to tailor the experience to suit your lifestyle.

    A passive user will only purchase when he/she feels like it. An active user wants to be marketed to and told what’s hot, what’s relevant and what’s enjoyable.

    It’s funny, I was talking to my friend, Jeff Carvalho who works over at Akamai in Cambridge, MA, a few weeks ago. He believes subscription models will never work. He reason’s that people want to own their music. But when over 200 attendees in the auditorium were asked by David Goldberg, during his presentation whether they used the compact disc as a viable music format, not one person in the audience raised their hand. The entire audience confirmed they NO LONGER USE THE COMPACT DISC AS A VIABLE LISTENING FORMAT. (Of course, no one in the room would honestly answer how many files they’ve illegally downloaded either. So my statement means someting, but then again doesn’t really amount to much. You decide.)

    Now, do they own their music on their digital music players? Who knows? But with services like Sirius and XM growing by the day, I truly feel that the end user will not mind paying “X” per month and then buy something when he or she feels like owning it.

    Goldberg other great analogy is there are many people who have purchased hundreds, even thousands of CD’s, but how many do they actually listen to? How easy is it for them to make that programming choice? How do they decide pull out the old Dizzy Gillespie album as opposed to the Black Eyed Peas they saw on this year’s Grammy telecast?

    To be a subscriber is to feel like part of a community that understands you, and many consumers want to be understood. I know I do. If I could subscribe to a music community that spoke to my dance/electronic music tastes, I would do that in a minute if I could listen to hundreds of tracks for $15 bucks. And maybe that is what Netmix will become one day. As we all know, dance music is somehow disposable. It’s like the Gillette Match 3 razor of music. You use it for a week, then you put it back in the plastic holder when it starts giving you razor burn. Whereas Rock or Hip Hop is the Remington electric shaver that’s always plugged into the wall, purring like a kitten everytime you put it up to your face. You love how it makes you feel, everyday.

    According to Brad Duea, the major issue’s facing digital music are player compatibility and “the living room.” Will Apple allow other music subscription services to rain on their parade? Not likely as Apple is stuck with it’s successful download store. I know, how can you be stuck with success? Well, let’s say that Apple has proven that oxymoron to be true before. Who created the first user-friendly GUI interface but only controls 2 to 5 % of the worldwide desktop computer market? Hmmmm…let me guess?

    Will Apple stumble over itself again? Not sure. They’ve sold millions of iPods, hooked up with Hewlett Packard, created iTunes for Windows, developed a sub-$500 computer and a $99 iPod, but at some point users will want more choice. And when that happens, market pressures will speak louder than Apple can contain the competition. Apple leads the market at 60% of all portable hard drive players, but can they maintain that commanding lead in the face of stiff competition? It remains to be seen and I’m not predicting the future, but if music subscription services take off when the PC world gets their act together over standards, DRM and other issues, only then will Apple’s dominance be at stake.

    Note to Brad: I want to use your service, but I can’t because I love my iPod over any other portable player. Most of them look cheap I don’t pick them up and they all just don’t have the UI and feel of the iPod. They don’t convey a sense of lifestyle, which is what music is about. A Rio is just not…it’s just…not…me! But we both know my iPod is not compatible with any other service (at this point a new Apple patch has blocked compatibility with Real’s Rhapsody). Nothing you or I can do about it. Once that is answered, I’m in. But I’m waiting for that day. You let me know when it happens.

    Both Brad Duea and David Goldberg covered the issue of the living room. How are people going to get their music off of their portable devices and computers and start listening to that music on their home stereos? No one wants to connect another cable from the computer to the stereo, so wireless networking will improve the ability to move music or play music over different devices in they home. The next question is, if you’ve stored it at home, how do you get it into the car?

    I recorded audio from the event and will write tomorrow on the “living room” issue, as well as post more pics from the event.

    Have a great day!


    Tony Z.

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