Red Herring Research Study Doubts Napster Success - Brief Article

Information Superhighways Newsletter, July, 2001

Napster cannot exist without the consent of the recording industry, according to a comprehensive comparison of on-line music business models and companies prepared by Red Herring Research. Napster's recent attempts to appease the copyright infringement concerns of the industry have failed.

The study finds it highly unlikely that the company's peer-to-peer model will find success given the history of its relationship with the recording industry, its declining membership, and impending competition from services like MusicNet and Duet.

The Red Herring Research report, Online Music Tunes Up, is a wide-ranging analysis of the on-line music companies and their formats for delivering music on the Internet. It concludes that the only successful companies will be those that can license a database of digital music (recording industry), that can successfully syndicate on-line music technology or that can develop a subscribership whose monthly remittances to the on-line music firm are great enough to cover both the demand for profits from the recording industry and music artists and the costs of operations.

"All of the on-line music companies must test out some sort of subscription-based model," said Matt Wells, the author of the report. "They must get users to pay for content and, as we know, there are very few Internet entities that have been able to make that successful. On-line radio is definitely going to have to look at that as a source of revenues going forward."

Among five companies scrutinized, Online Music Tunes Up finds that RealNetworks maintains the strongest overall business model, revenue base, and growth prospects, making it well-positioned to survive the shakeout of digital music. That company was a pioneer in streaming audio and dominates the distribution and sales of the tools needed to stream audio and to play streaming audio files. In addition, RealNetworks has managed to adapt to the evolution of music on the Internet with the addition of other content-oriented services.

Red Herring Research concludes that MusicNet, though it has yet to deploy its syndication services, is off to a good start given its backers and game plan. Since music listening is such an issue, MusicNet's offering of a pre-licensed package to customers is an attractive one. With the record labels' support and a key distribution network in place, MusicNet is primed to become a viable delivery method of music over the Internet.

MP3.com, the study finds, serves as an ideal marketplace for amateur bands that are trying to establish a Web presence by taking advantage of MP3.com's additional services for promoting themselves.

The recent purchase of MP3.com by Vivendi Universal changes the on-line music playing field dramatically. Historically at odds with the labels, MP3.com now serves as a key asset for one of the largest record labels, which must figure out how to effectively fold MP3.com into its existing business and leverages its key features.

Launch Media has built an established brand and a popular on-line radio station. However, the company may have focused too closely on advertising revenues while not exploring alternative revenue streams. As the bottom dropped out of the advertising market, Launch media has felt the crunch.