Rolling Stone: Napster could have saved the music business. Now iTunes owns it.

Rolling Stone magazine's article "The Record Industry's Decline" says the record industry blew it by not making a deal with Napster. I agree. See "Napster: The Inside Story" for the Napster perspective on this story. The record labels blew it again by suing hundreds of individuals who downloaded music.Then blew it a third time by waiting 2 years after Napster to make a deal with iTunes for digital distribution. Read this excerpt from the Rolling Stone story;

"They left billions and billions of dollars on the table by suing Napster -- that was the moment that the labels killed themselves," says Jeff Kwatinetz, CEO of management company the Firm. "The record business had an unbelievable opportunity there. They were all using the same service. It was as if everybody was listening to the same radio station. Then Napster shut down, and all those 30 or 40 million people went to other [file-sharing services]."

"The record companies needed to jump off a cliff, and they couldn't bring themselves to jump," says Hilary Rosen, who was then CEO of the Recording Industry Association of America. "A lot of people say, 'The labels were dinosaurs and idiots, and what was the matter with them?' But they had retailers telling them, 'You better not sell anything online cheaper than in a store,' and they had artists saying, 'Don't screw up my Wal-Mart sales.' " Adds Jim Guerinot, who manages Nine Inch Nails and Gwen Stefani, "Innovation meant cannibalizing their core business."

Even worse, the record companies waited almost two years after Napster's July 2nd, 2001, shutdown before licensing a user-friendly legal alternative to unauthorized file-sharing services: Apple's iTunes Music Store, which launched in the spring of 2003.

Rosen and others see that 2001-03 period as disastrous for the business. "That's when we lost the users," Rosen says. "Peer-to-peer took hold. That's when we went from music having real value in people's minds to music having no economic value, just emotional value."

Hilary Rosen's comments are especially painful, and ironic. Rosen was the head of the RIAA and the one leading the charge to kill Napster. We wanted Napster to be the digital distribution channel for the record labels, like iTunes is today. We told them if they forced Napster to shut down there would be hundreds of Gnutella style file sharing services popping up all over the place. Gnutella didn't have a central server, and no company to shut down. They would be unstoppable. The RIAA didn't believe us. You know the rest of the story. Again, from the Rolling Stone story;

More than 5,000 record-company employees have been laid off since 2000. The number of major labels dropped from five to four when Sony Music Entertainment and BMG Entertainment merged in 2004 -- and two of the remaining companies, EMI and Warner, have flirted with their own merger for years.

About 2,700 record stores have closed across the country since 2003, according to the research group Almighty Institute of Music Retail. Last year the eighty-nine-store Tower Records chain, which represented 2.5 percent of overall retail sales, went out of business, and Musicland, which operated more than 800 stores under the Sam Goody brand, among others, filed for bankruptcy.

The record labels faced the classic Innovators Dilemma. They saw the new disruptive technology (p2P file sharing) but held on tight to their existing business model. They were making billions and living the life of rock stars and music moguls. Not anymore. Now they are firing thousands of employees, watching sales decline every year for the past 7 years, and clueless about what to do next.

Rolling Stone introduced some ideas on how to move forward. They include; ad supported music, P2P subscriptions, and social network affiliate sales.

People haven't lost their love for music. We want more music, tailored exactly to our tastes, delivered when and where we want it. And, we will pay for it. The record labels just aren't providing a good way for us to consume and pay for music. They are killing themselves.

Are the Movie studios making the same mistakes?  The movie studios have the benefit of hindsight and seven years of experience. The MPAA is experimenting with a few ideas but they are still hanging on tight to the old school models. BitTorrent and YouTube are the new enemies of the establishment. Google's deep pockets and legions of lawyers are defending YouTube.

The sheer size and length of movies protect them somewhat from mass distribution on file sharing services. But bandwidth is improving all the time and compression schemes are getting better. Unless they make changes the movie studios will eventually suffer the same fate as the record labels. It is just a matter of time.

Hat Tip to Robert Gorell at GrokDotCom for pointing me to the Rolling Stone article.

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Comments

[visitor]

There are many lessons we can learn from that

[Marc Cohen]

I am not one to stand up for the record industry but in their defense I would say a couple of things.

First, Napster happened way too fast. Yes, it would have been better to react differently but no multi-billion dollar industry can react that fast. Plus, there was just no precedent for what was happening.

Second, remember that Napster had no realistic revenue model.

In regards to recorded music, I don't think the "freemium" model of giving it away and making money on the upsell works. Recorded music is content like a TV show. TV has proven you can give content away if you support it with advertising. Advertising supported music will be the bread and butter of the recorded music indsutry.

Check out the Ad-Supported Music Central blog:
http://ad-supported-music.blogspot.com/

[Joseph Bentzel]

While Napster had many of the characteristics of a bubbleboy business, and was not sustainable in and of itself, Dodge is making the point here that the onus was on the record industry to 'embrace and extend', as Bill Gates has often described the challenge of incumbent market leaders that has come to be called the innovator's dilemna. I think the credit here goes to Apple for seeing this disconnect between a so-called 'disruptive innovator' (Napster) and market leaders that failed to embrace and extend. They crafted a solution iPod/iTunes and became the real winners. I go into this Napster episode in my book "Asymmetric Marketing: Tossing the 'Chasm' in the Age of the Software Superpowers", which focuses on how market leaders like MS, Oracle, Google and others engage in systematic 'embrace and extend' marketing that grows markets and provides real opportunity for ecosystem partners.

[Lloyd Budd]

I agree with Marc Cohen, at the end of the day, the leadership team of Napster are responsible for its successes and failures.

Nastogia is a funny thing.