Case Study: 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 Apple’s iTunes.

Business Model of Napster

The original Napster

Napster was initially created between 1998 and 1999 by a 19 year old called Shawn Fanning while he attended Boston’s 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 Fanning’s 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 Napster’s 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 PressPlay 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 Napster’s 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.