A Crushing Defeat For Napster - Company Business and Marketing

Industry Standard, The, August 7, 2000 by Laura Rich

The RIAA's Rosen says the labels haven't worked together because of antitrust concerns: "While consumers don't care, the Justice Department frowns on too much collective action in those regards."

To avoid a similar predicament, other media businesses are paying close attention to the recording industry's struggle. Book publishers, for instance, have been trying to get ahead of the curve on encryption systems.

"Copyright infringement has always been an issue in the book business," says Steve Cohen, a senior VP at St. Martin's Press and its e-book guru. "The Napster thing heightened our awareness of the risks of not having protection. We were not going to make the same mistakes. If the music business had been able to encrypt a CD the way the publishing industry encrypts books, they wouldn't have this problem."

The movie industry similarly has sought to distance itself from the problems of the music business, pointing to its own efforts to link up with digital rights management companies. But in fact, it is following the labels' scattershot approach as each studio sets up a proprietary system for delivering films to consumers. The Motion Picture Association of America, meanwhile, is fighting its own legal battle against what it views as piracy.

The truth is that traditional media companies haven't felt Napster's bite: They're still raking in the dough. Music is a $40 billion industry, movies raked in $8 billion from the box office alone (with $8 billion more from video rentals and $2 billion on the fledgling DVD market) and books made $20 billion.

It's not surprising that established, highly profitable industries would be reluctant to alter their established businesses until they end up in dire straits.

But the RIAA's strategy is puzzling in that it's not at all clear that Napster poses a threat to sales of recorded music. The data so far is inconsistent. In May, a study from music-industry research firm SoundScan reported that sales of CDs were down in stores near colleges and blamed Napster for the dip. But Napster pointed the finger at chains like Wal-Mart for eating into those sales. Last month, Internet-industry research firm Jupiter Communications found that Napster users are 45 percent more likely to purchase music not because they are music aficionados, but because digital music-swapping itself is a catalyst for sales.

But the copyright-infringement issue remains and Napster can't ignore that. In a statement released after his court victory, RIAA senior VP and general counsel Gary Sherman said: "We hope [Napster] will work with the record companies to devise innovative ways to use their technology for legitimate purposes with permission."

Napster seems willing to try. At the Plug In conference in New York the day after the hearing last week, Napster CEO Hank Barry said the company thought artists should be compensated. Last week, Napster entered into a relationship with Liquid Audio, which like Napster has received an investment from Hummer Winblad, to research and develop technology that would allow Napster to track user activity. That would make the service somewhat more palatable to the recording industry, which could then chase down individual copyright infringers and demand payment.