Napster Wars: Will It Hurt MP3?

Electronic News, August 21, 2000 by Steven Fyffe

Could the RIAA choke off MP3 player sales and kill the market for NAND flash?

Napster Inc. has been granted a stay of execution. The court of appeals has yet to decide whether the Redwood City, Calif.-based company is in the business of file-sharing or file-stealing.

But if the axe falls, Napster's head might not be the only one on the chopping block. If Napster dies, the market for MP3 players and the NAND flash memory that goes inside them could die with it, according to some onlookers.

"Don't laugh, but we've really heard the argument that the threat of an injunction against Napster could cause the consumer NAND flash market to fall apart as nascent MP3 player sales dry up," wrote one Goldman Sachs analyst in a recent research note.

Others say the Recording Industry Association of America (RIAA) could even end up sabotaging its own core business. A number of statistical studies indicate that MP3 users are more likely, not less likely, to contribute to record label coffers.

"Those who use MP3 players are buying more CDs than those who are not," said Sujata Ramnarayan, an analyst at market research firm GartnerGroup Inc.'s Dataquest unit. On average, MP3 users bought three more CDs than non-users in a six-month period, she said.

Hank Barry, Napster's chief executive officer, sang the same tune to the Senate Judiciary Committee last month. "Napster is helping, not hurting, the recording and music publishing industry and artists," Barry said. "A chorus of studies shows that Napster users buy more records as a result of using Napster and that sampling music before buying is the most important reason people use Napster."

But the RIAA is intent on protecting its turf. Digital rights management is the buzzword they are using to describe their campaign to get people to pay for downloaded digital music. "I think right now the probability is higher that Napster will not be shut down, but will be asked to incorporate digital rights management," Ramnarayan said. "Artists or record labels would be setting the rules. They would decide whether a song could be downloaded for free, or if you could listen to it twice for free or if you have to pay $1 every time."

Implementing fail-safe copyright measures in this digital age is no easy task. As far as Napster-style file-sharing software is concerned, the cat is already out of the bag. "Even if the RIAA can really curtail Napster, they can't do anything about the software," said Richard Wawrzyniak, director of nonvolatile memory services at Semico Research Corp., Phoenix. "It's on the Internet and anybody can get it. There's already five other sites you can go to that do the same thing as Napster. If it's going to take a court case for each one, it's going to take years."

The battle should be shifted from the courtroom to the cleanroom, according to some semiconductor companies, which have proposed a chip-level alternative to current software-based measures. Oak Technology Inc. has submitted proposals to the Secure Digital Music Initiative and the RIAA for a copyright-sensitive CD controller.

"Our proposal is right at the chip level--at the controller itself," said David Ujita, vice president of corporate marketing at Oak. "If the controller sees a copyright-protected file trying to pass through and a consumer trying to burn a CD, the chip will disallow that."

While a chip-based copy-protect system would probably be better, it would also be more expensive, Ramnarayan said. "It's going to be more expensive to put in a chip, but the chip solution is no doubt more resistant to being hacked than a software-based solution," she said. "It would be at least two years before chip-based write-protect systems would be widely available."

Chip-based systems would price MP3 players out of the consumer market, Semico's Wawrzyniak said. "The technology that you would have to build into this system would push them far out of the realm of the mass market, and you've killed what you were trying to protect," he said.

Pirates would eventually find some way to thwart the system anyway, he said. "It's something that's been tried before multiple times in different forms and there is always a way around it." MP3 makers would be unwilling to handicap themselves in the marketplace, Wawrzyniak predicted.

"It's the same thing with VCRs. Would you buy a VCR that wouldn't let you copy a movie or tape a show on cable, especially when there are other machines around to let you do that?" Wawrzyniak said. The RIAA's only recourse would be more legal action, this time against the MP3 makers, he said.

"Their only next step would be to go after the MP3 manufacturers themselves, and I think they would have a real hard time getting a case against them. You can't make the manufacturer liable to a certain extent for what the end-user does with the product."

Thomson Multimedia, maker of the top-selling Lyra MP3 player, said it did not expect Napster's demise to damage its sales. "I think that Napster is just one of many ways people acquire digital music and that we would not expect any decline in our product sales as a result," said Luanne Scudder, product marketing manager for the advanced audio division at Thomson Multimedia. "Of course, if RIAA is able to shut down all the sites, perhaps we would feel an impact."