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Napster Case Study ► “Today’s announcement underscores one key fact: the real questions about Napster's future are economic, not technical or legal”. (Napster.

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Presentation on theme: "Napster Case Study ► “Today’s announcement underscores one key fact: the real questions about Napster's future are economic, not technical or legal”. (Napster."— Presentation transcript:

1 Napster Case Study ► “Today’s announcement underscores one key fact: the real questions about Napster's future are economic, not technical or legal”. (Napster CEO Hank Barry, Feb ) ► Court rulings have limited many of the features that made Napster a social phenomenon, and the prospects of venture funding have diminished rapidly, forcing Naspter to act decisively and quickly to leverage its key resources to create a revenue-generating business.

2 ► “Napster: It’s the future, in my opinion. That’s the way music is going to be communicated around the world. The most important thing now is to embrace it…” (Dave Matthews band) ► Napster is nothing but a “Giant Online Pirate Bazaar.” (Recording Industry Association of America (RIAA))

3 Recorded Music Industry ► Prime candidate for restructuring ► Disruptive Technology ► Changes in…  production process  production technology  distribution technology  revenue sources  roles

4 Traditional RMI Value Chain ► Composer/Performer ► Recording ► Manufacture ► Distribution ► Wholesaler ► Retailer ► consumer

5 ► How can Napster transform itself from a file swapping resource with over 60 million registered users to a revenue-generating business operating under the guidelines of the copyright laws that have limited its utility recently?

6 Current Napster ► Being forced to install filters on its servers to prevent copyright violations has overshadowed the more fundamental issue Napster has faced since becoming the preeminent file sharing resource on the Internet. ► How can Napster transform itself into revenue- generating business, let alone a profitable business? ► One can think of a profit stream as starting with the development of innovative capabilities, then incorporating those innovations into product attributes. These product attributes generate value in the market through tactical actions. The final and critical step, at least from the standpoint of an enterprise, occurs when that value generated can be transformed into profits through a competitive offering.

7 ► Obviously, with 60+ million registered users and over 5 million songs downloaded daily, Napster is generating value in the market. The question that remains, is how can Napster appropriate some of the value that at this point is entirely being given away to its subscribers?

8 What is Napster's product / service exactly? ► The product itself is relatively simple, as evidenced by the dozens of competitors who have entered the market recently. ► The court ruling based on the copyright infringement argument has decreased the utility of Napster to millions of consumers who are in the habit of finding and listening to high-quality music for free at their own convenience. ► Yet, it has to be the same principle of copyright protection that will enable Napster to transform itself from a freeloader’s paradise to a revenue generating business in the face of competition.

9 Market Forces ► The whole music market has split into an increasingly obscure mass of sub and sub-sub genres at the beginning of the 21st century. ► The 'half-life' of individual music trends is thus significantly reduced and record labels are faced with a flop rate of %, i.e. less than 20% of new releases are at least covering their marketing and production costs and returning a profit on top. ► As a result, the fixed costs and investments incurred are shared among a noticeably smaller number of earners, hence restricting the financial flexibility of the record label.

10 Market Landscape – Problems of the Music Industry ► Forget digital downloads for a moment. What are some non-technical trends in the music industry that set the stage for Napster's rise and the industry's response? ► Until the mid-nineties, the global music industry enjoyed an uninterrupted boom. Due to the successful launch of the CD as the new sound medium, the industry was experiencing unheard-of success. Yet, by the mid-nineties, the turnover figures in the most important markets demonstrate clearly that the recording industry had reached a state of market saturation. ► There has been noticeable uncertainty in the industry in the past few years with a lot of factors contributing to the problems.

11 Problems of the Music Industry ► Another trend is the appreciably shorter life span of artists and groups. A number of record labels are still feasting off the acts launched almost forty years ago. In some cases, they provide labels with constant sales figures even today, without needing a significant marketing budget. For example, the band Led Zeppelin (30+ years old) contributes significantly to the revenues and profits of Atlantic even today. In contrast, Warner Brothers' expectations of the prematurely lauded REM, for example, are currently not entirely fulfilled, in spite of excellent sales for the group in the early nineties.

12 Distribution Media ► Since the introduction of the CD approximately 15 years ago, the music industry has de facto failed to anchor a new audio medium comprehensively in the market. ► A significant factor in the recording industry boom at the beginning of the nineties was precisely the new investment in CDs, which were rapidly penetrating the market. It has been impossible to repeat a similar development since then.

13 Problems of the Music Industry ► Given these circumstances, sales in the music industry's five biggest markets (USA, Japan, Germany, UK and France) are growing slowly, if not stagnating. It will be difficult to implement new growth initiatives from the previous business alone. ► Copyright infringements (excluding the effect of Internet) - bootlegging, piracy and counterfeits - are costing the music industry approximately $5 billion per year. Many industry experts see the influence of the Internet, as confirmation of their fears that the losses incurred by copyright offenses will rise exponentially in the next few years.

14 Technological Landscape – Seeds for a Digital Revolution ► The seeds for Napster’s success were sown a few years before the actual event. Expanding frontiers in technology as well as changing competitive landscapes were the primary driver of this innovation. Starting with the widespread adoption of the Internet, a whole new spectrum of products and services has emerged to complement and enrich the Internet experience.

15 ► MP3 Format: Technology that allows digital music from CD to be converted and compressed into a digital format that can be stored on traditional disk drives. Another critical feature of this technology has been the lack of a security layer that prevents the effective copying of MP3 files. An MP3 file, once generated, can be copied, sent and played by anyone with a device connected to the Internet having software that can translate this format into music. ► Dedicated MP3 Players: Another critical factor has been the development of portable MP3 players. These players have dedicated drives, which can both store and erase music, allowing unprecedented convenience. The increased convenience afforded by the portable MP3 player led to its emergence as a viable and serious alternative to traditional forms of portable music (portable CD-player/cassette players). ► Internet Relay Chat (IRC): This technology was incorporated into what came to be known as Instant Messaging. Particularly popular with teenagers, it allowed a group of people to interact with each other in real time over the Internet. AOL Instant Messenger and ICQ popularized this technology.

16 ► These technological changes have facilitated and fostered two other underlying market forces – the growing globalization and a general dissatisfaction with content providers, especially Record companies. ► People, goods, services and ideas diffuse across the globe much faster, causing demand for valuable services and products to become ubiquitous. ► As a result, the time required to reach critical mass of acceptance has become much more compressed than ever before in the history of innovation. ► The increasing penetration of the Internet and the availability of content traditionally found only in tangible goods, has brought to light the minuscule variable costs in reproducing content (both books and music). ► Given that the market price for this content is much higher than its variable costs, the general public has come to the conclusion that they have been overcharged over an extended period. ► These factors have led to the development of new competitive landscapes, which have blurred traditional boundaries in the music industry value chain and led to the risk of disintermediation of the recording industry.

17 ► Innovations are a function of technology push and demand-pull. These technology advances have been critical to the development of Napster. Additionally, the significant changes in competitive landscape have created a market demand for innovations such as Napster. ► Moreover, at this stage in Napster’s lifecycle at the point of the case, this demand element is more important because of its continuing nature. While these market forces were important to the development and initial success of Napster, the demand that continually broadens the entertainment boundaries (competitive landscape) will form an even greater reason for the survival of this type of technology.

18 Broadening Entertainment Boundaries ► How has the Internet changed the entertainment sector? How has it affected competitive boundaries of the music industry? ► While the Internet is a fairly new medium for entertainment, it has already expanded the traditional boundaries of entertainment. Unlike primarily passively consumed media such as TV, radio, film, and print, the Internet has enabled highly interactive activities, such as stock trading, auctions, search functionality, and file- sharing to enter the sphere of entertainment. This new sphere of entertainment, symbolized by services such as Napster, has the following characteristics:

19 ► Utility: Consumers view sites that are based on utility and function as entertainment online. They require intuitive navigation and fast, dependable service from their online entertainment destinations. Not only is Napster the first of its kind, it is easy to use, reliable and offers a breadth of selection not available among any of its competitors. ► Engagement: The Internet is more advanced than is the traditional media on the scale of participation. Services such as Napster provide the ability to create communities where users can contribute, control and connect to others with similar passions and interests as themselves and enable them to engage in entertainment at a whole new level. ► Novelty: The Internet has also allowed the consumer to overcome the rigidity of scheduled programming. This unleashes an inherent human desire to find new sites, products, and activities, and invites consumers to keep coming back to enjoy the rush of finding something new. Napster’s discussion boards and quick access to new, unknown music caters exactly to this sentiment.

20 ► These trends in the entertainment experience are highly visible in Napster and were critical to its huge success. Napster has over 60 million subscribers spread across the world. This is an unprecedented feat in the history of technology innovation. ► While the primary reason behind the phenomenal success is the free access, there are powerful design features embedded in Napster that make it particularly successful in the face of strong opposition from record companies and stiff competition from a number of clones. While the user interface is not particularly sophisticated, it is deceptively powerful from the user standpoint. Napster provides users with control. It is easy to navigate and allows the user to be functional within minutes of downloading the application. ► The high installed base provides the user with increasingly positive network externalities. As the user base has grown, it has become increasingly easy to locate and download even the most obscure music. ► Finally, there is no limitation on time and place when someone can use Napster to find a particular music file. This is a convenience value never before seen in any entertainment channel.

21 Technology Appropriability ► Now we come to the question that we addressed at the beginning. Can Napster (or any business like Napster) ever be a profitable business? How imitable is Napster's invention?

22 ► As the proliferation of competitors would indicate, the technology behind Napster is neither exceedingly complex nor highly protected. ► Napster is the first success story of distributed computing. Distributed computing has long been a vision for some of the leading technologists who desired to see the unused capacity of the millions of computers on the Internet be an efficient source of processing power. Napster, with its central servers, is not the purest form of distributed computing, but is an important step in that direction. ► A number of hackers and computer enthusiasts have embraced this technology and developed competing models that range in distribution model, from the loosely distributed “rolling horizon” models of Gnutella and Freenet to the Napster clones like iMesh and Bearshare. Thus, there are very low barriers to entry for providing this service. ► The fact that this market is easy to enter and easy to imitate implies that it is an efficient Market, indicating that attractive situations do not last long and will require quick and decisive actions to appropriate above-average rents.

23 Complementary assets ► How much of the complementary assets does Napster control? Can they acquire control over any critical assets and still be profitable? How?

24 ► Before considering the viability of Napster as a revenue- generating business, further analysis of the important technology drivers that double as complementary assets is presented. The development of MP3 format as well as portable MP3 players (Rio, Sony MemoryStick) has played a major role in success of Napster. Additionally, penetration of other consumer technologies, including writable optical storage drives (CD-R, DVD-RAM), and the adoption (albeit slow) of broadband Internet access has also contributed to the widespread adoption of Napster. The majority of music files distributed on the Internet originates from consumers' use of software such as RealJukebox to "rip" CDs - converting songs on CDs to RealAudio or MP3 format. ► Consumers burn their own CDs using a CD recorder (CD-R) or CD rewritable (CD R/W) drive and associated software, which is available in existing digital audio jukebox software or as standalone audio production. CD burning software can output audio formats from Red Book (standard audio CD format, which allows playback on all CD systems) to MP3 formats, which allow up to 12 hours of music on one 650MB CD and must be decoded on playback.

25 ► Therefore one can conclude that technically proficient consumers are driving the current excitement surrounding distribution of digital audio. They are making music files available to be traded on engines such as Napster and their demand for sophisticated complementary technologies is driving up the utility of services such as Napster. Finally, beyond the technology based complementary assets there is the issue actual copyright protected content that gets traded on Napster.

26 ► Napster owns none of the complementary assets mentioned above. Since most of these complementary assets are industry standards that are not held tightly by any organization, few of them pose any real threat to the viability of Napster. ► The two notable exceptions are the MP3 standard and the legal ownership of copyrighted material. While MP3 is the industry standard at this point, there is no guarantee that it has achieved dominant design status. Since recording companies own most of the copyrighted material being traded on Napster, the free availability of music is closely tied to the lack of copyright protection in the MP3 format. If the MP3 format had strong security features, or alternatively if the industry standard for digital audio had strong copyright protection features, trading files would present no value to Napster users. There is significant inertia towards maintaining MP3 as the standard for digital audio. This inertia is rising out of switching costs to users who currently own complementary assets dedicated for the use of MP3-formatted digital audio, and the sheer volume of audio files currently in MP3 format. ► Yet, if content providers and software companies were to collaborate to no longer support the MP3 format, there is a possibility that a more secure digital audio standard might emerge in the near future.

27 ► Subscribers continue to use Napster despite the blocking of over 1.6 million copyrighted titles, indicating that there is still a demand for non-copyrighted material. But crucially, there is little opportunity for Napster to charge for these services. ► Therefore, in order for Napster to profit from its innovation, they need to tightly align themselves with the complementary asset essential to their value proposition - the copyrighted material owned by the record companies. ► In this case, copyrighted music is tightly held by the recording industry and the cost to acquire those assets are extremely high. Given that copyrighted music is tightly held and the limited nature of Napster’s financial resources, Napster can only hope to acquire these assets through alliances. ► Moreover, an alliance will not be useful unless a minimum number of record companies commit to this alliance. Having one partner (as they do now) or even adding another will not ensure a revenue generating business, as subscribers will be unable to take advantage of the network externalities, one of the strongest features within Napster.

28 ► Therefore Napster needs to form alliances with a majority, if not all, of the record companies, in order to have their music distributed on its service. It will take considerable effort for Napster to persuade record companies who are fearful of unchecked piracy as well as business models that can put their existence in jeopardy.

29 Competition ► How is Napster positioned relative to its own competitors?

30 ► The difference between Napster and some other online file sharing technologies is that Napster has a central index of users and their files. While some competitors without a central index can track users with IP addresses (iMesh, Bearshare), others are just protocols (Gnutella, Freenet). ► A few competitors encrypt all information and files to protect the identity of the sender and receiver and hence cannot be targeted for copyright violation. The particularly compelling competitors are those based outside the United States and those that do not have centralized servers but instead serve as protocols. ► One significant file-sharing clone is iMesh, headquartered in Israel, and outside US judicial reach. It allows trading of a variety of digital audio and video files. It asks visitors to respect copyrights and informs them that complying with the law is their responsibility. Gnutella and other such protocols are not as well developed and robust as Napster. ► Moreover, their highly distributive nature has resulted in limited network externalities due to bandwidth constraints and limitations of recognition technology (algorithms to find the fastest connection between search and target computers). Finally, like Napster, these platforms are dependent on the existence of MP3 as the digital standard. Greater security on digital files would reduce the utility of these file-sharing platforms.

31 Napster SWOT Analysis ► Strengths: ► Installed Base – Over 60 million subscribers ► Strong Contagion effects – Driven primarily through word of mouth and interpersonal networks and the feeling of community among the members. ► Highly Positive Network Externalities – Installed base leads to positive externalities that have resulted in continued membership even after the blocks of copyrighted material was imposed. ► High Market Profile- No marketing expenses required because the revolutionary nature of the innovation and the public dispute with RIAA. Public opinion generally in favor of Napster. ► Powerful Design Features – Simplicity of design allows for easy adoption. The presence of central servers allow Napster some control over files and virus protection. Learning effects from 2 years position them well to transition to a for-pay model.

32 ► Lack of critical complementary assets – Complementary assets required to appropriate rents from innovation tightly held by record labels. ► File selection greatly reduced – Court-mandated blocking of copyrighted material, which resulted in reduced selection, thereby lowering utility for subscribers and making it difficult to transition to a for-pay model. ► Antagonistic relationship with record labels – The court battle makes it difficult to have constructive relationships with record companies. In light of the court decision, record labels are less inclined to reach an agreement with Napster. ► Peer-to-peer computing – Implementing the filtering mechanism against illegal file downloads is more difficult than the courts assume. ► Transition from “free” to “pay” model – Neither the traditional business world nor the new Internet economy can offer up many examples of companies that have successfully made the transition from “free” to “pay” model.

33 ► Opportunities: ► Online entertainment trends – A new generation of technically savvy consumers is looking increasingly online for their entertainment choices. Content providers are generating both online-exclusive and online-convertible content. Users looking for ease of use, flexibility and comprehensive selection in online entertainment. Continued development and penetration of flexible and high quality PC peripherals will sustain and increase demand for digital music in the future. ► MP3 standard – Lack of security in the digital music standard allows for some utility to remain in Napster as courts impose blocks on copyrighted material. ► Potential for alliances with record labels – Leverage alliance with one major record (Bertelsmann) to form relationships with others. ► No focused strategy for record labels – In light of the many unregulated competitors trading copyrighted MP3 files, Napster might be the best alternative for record companies to not miss the boat and to gain a new revenue stream.

34 ► Threats: ► Large number of competitors – Numerous competitors, many unregulated, will result in dissipation of subscriber base. ► MP3 file format – While this is a strength in the free model, it will be a liability in for-pay model. ► Entry of the record labels – If they decide to enter the market either at an individual level or by forming an alliance, the market profile of Napster will decline slowly. ► Entry of major online brand names – If AOL, Yahoo or some other premier online brand decide to enter this market, there is a possibility that Napster’s customer base will dissipate faster as many of these online heavyweights have the brand/market presence and financial clout to influence recording companies. ► Possibilities of huge liability – If RIAA secures an outright win in the courts, Napster might have to pay huge fines for copyright violations that can cripple Napster or might force it into bankruptcy.

35 What does the market need? ► What do people want? What will the market demand as digital distribution arrives for the masses? One should be able to deduce a lot of information from Napster’s success about these essential questions. Whether the service gets shut down or not, it has over 60 million users, who signed on in little more than a year, a truly staggering growth rate. Some of the essential features people look for:

36 ► Music on Demand: Napster became wildly popular because it provided something that customers really want and that was not available anywhere else: convenient, on-demand access to everything. No Internet service, no record label, no retail store, no flea market, no radio station has ever before provided people with this opportunity, and the fact that people flocked to use it in record numbers shows clearly that this on-demand access is something of great value. ► Entertain-Me - Personalized Programming: Even with on-demand delivery, people like to listen to radio for two reasons. First, it provides them with effortless, relevant entertainment and second, it provides exposure to new music. New technologies have tremendous potential to improve the level of personalization and interactivity on the web. As distribution and promotion become even more similar, listeners will come to expect personalized packaging and recommendations with every music experience. ► Easy Access: People spent tremendous amounts of money to replace LPs and tape collections with CDs not only because of improved sound quality and durability, but mainly because of the increased convenience (ability to quickly, easily and precisely skip to any song on an album). Technology is making possible another quantum leap in people’s ease of access to their music collections, by allowing storage of all their music in one place and to access entire collections with phenomenal speed and facility.

37 ► Ownership: This is a hotly debated topic. While the consumer sentiment on ownership is changing to accept more forms of digital media, the personalized nature of music would indicate that digital music consumers have strong preferences for ownership over rental formats such as “listen on demand”. ► Quality: With interconnectivity increasing, the concerns about quality and protection from computer viruses will take on an increasingly high profile. Consumers will pay for services that ensure quality and protection from disruptive agents. ► Access to Everything in One Place: Unlocking large libraries of music for a consumer on the basis of a single transaction benefits all parties involved: ► Consumers: Aside from the obvious appeal of the volume discount, subscriptions offer consumers the ubiquity and transparency that are the hallmark of online music. The secure distribution of music via networked file sharing practically mandates subscriptions—otherwise, consumers would have to individually unlock every file they download.

38 ► Record labels: Subscriptions give labels something they have always lacked: an ongoing relationship with consumers. This relationship will yield an important stream of consumer data, and aid in marketing efforts and the broadening of their overall revenue strategies. ► Destination sites: For the first time, media and commerce players will have the ability to create a product format out of major label content uniquely formatted to the visitors on their sites. Because MTV knows more about its visitors than BMG does, it will be a better judge of its users' tastes, and will thus sell more music than it did under the regimented album format paradigm. A rise in total sales means increased revenue for all concerned. ► Overall benefits: The maturity of the third-party service landscape, and the advent of subscriptions means that the format issues that have plagued the industry thus far become almost moot. Additionally, services will absolve labels and destination sites of the burden of technical expertise required in their absence. ► Any company in the music industry will do well to recognize these needs and focus on providing innovative solutions to these needs.

39 Strategic Alternatives ► Let's discuss what Napster should do at the time of the case. What are their strategic options? ► Convergent handheld and home entertainment devices will drive consumer acceptance of digital media. With the belief that over time, the PC will evolve as a point-of-purchase media and storage hub connecting consumers to an online distributor and enabling them to off-load digital assets to dedicated devices for quality playback, one can analyze the strategic alternatives available to Napster. ► Revenue streams for Napster can be from advertising or from subscriptions or some combination of both. The two models are based on very different ideas.

40 ► Advertising-based revenue model: A business model driven primarily on advertising revenues would imply that Napster would be offering high quality content or peripheral services that would bring the consumer to the website/service. Given the lack of any copyrighted material at Napster and the potential negative associations present in site advertising, it will be extremely optimistic to expect advertising to form the primary source of revenues at Napster. Therefore, while the possibilities of advertising revenues will be considered, it is only seen as a supplementary source of revenue that augments the primary subscription based model. ► Subscription-based revenue model: Despite the reluctance to pay for online content, more than two in 5 acknowledge that content cannot remain free forever[1], driven by awareness of financial problems that Internet companies are having as well as by recognizing that content creators must receive compensation for their work. The key to any subscription-based model is to understand the features that the consumer values (demand), and to offer those features with level of exclusivity (scarcity). [1] [1] Jupiter Finding the Elusive Winning Formula Vision Report Volume 7 / December 11, 2000) [1]

41 [2][2] Jupiter Consumer Survey (6/00), N = 2,258 (US ONLY) [2] ► A June 2000 survey by Jupiter MediaMetrix found that 22% of digital music consumers stated they would be willing to pay a monthly subscription fee and 20% stated they would be willing to pay per use[2]. This would indicate that demand for online digital music exists in a variety of forms. [2] ► To succeed in the dynamic music market, Napster must offer a tiered set of subscriptions with different levels of payment and commitment. ► Service options could range from pay per download models to mid-range limited access models and full service, unlimited download models. Mid-range models might include access to particular libraries of popular songs such as “Billboard top 100” or artist-based or even a genre- based access.

42 ► Pay per download: Small cost to downloading a particular song. Offers all kinds of control and flexibility to user. Would require registration with site. Micropayments[3] might be useful here. [3] ► Unlimited access to specific Napster defined libraries: This could mean access to the popular content or even artist based access. ► Unlimited access to all content based on limited time commitment: Something that can take the form of $14.99 for 3 months or $9.99 for 6 months. ► Unlimited commitment: $4.99 per year for a minimum of 1 year. ► The sustainability of a subscription-based service is possible only if Napster can align itself with all the major record labels to have their content available on their site. The other key variable is the need to develop a more secure format that may ameliorate indiscriminate casual piracy. This can be achieved only with a concerted effort among the record labels, distribution outlets such as Napster and software developers such as Microsoft and is easier said than done. ► [3] Payment method capable of handling arbitrarily small amounts of money – e.g., for sale of non-tangible goods over the Internet. [3]

43 ► These subscription based revenue models can exist under a variety of ownership structures for Napster: ► Independent: Napster stays independent and aligns with record labels. Not particularly viable, considering the recent defeat in the court and antagonistic relationship with the record labels. Not much value in partial libraries. A key success factor for Napster has been the high level of network externalities. ► Sell majority ownership to Bertelsmann: Napster can get investment from Bertelsmann to implement a subscription fee-based model and in turn giving away ownership. ► Sell majority ownership in Napster to record labels: Make record labels the primary beneficiary to potential success of subscription-based model, by recognizing the value of the installed base in Napster. ► Align with AOL: AOL - AOL already provides a subscription-based service. They have direct marketing know-how. They would also realize the value of Napster's installed base and recognize a potential audience for their existing service. It would be relatively easy to add on Napster subscription on top of AOL current revenue models. Time Warner and Bertelsmann, when combined with the might of AOL and Napster, will induce other labels to join an alliance. ► Exit completely: “Hope cannot be the basis of a strategy”. At the end of the day, if everything fails and nothing seems to be working out, the best option would be to exit completely. A business cannot be sustained mainly on the glimmer of hope that events might correct themselves. With the possibility of big fines for copyright violation if RIAA scores a complete win in the courts, it is probably prudent for Napster to examine the option of declaring bankruptcy and closing down the operation. This option is considered not simply for the sake of completeness with regard to all options available to Napster, but also to signify importance of the option, given the weak positioning of Napster. These subscription based revenue models can exist under a variety of ownership structures for Napster:

44 ► Independent: Napster stays independent and aligns with record labels. Not particularly viable, considering the recent defeat in the court and antagonistic relationship with the record labels. Not much value in partial libraries. A key success factor for Napster has been the high level of network externalities. ► Sell majority ownership to Bertelsmann: Napster can get investment from Bertelsmann to implement a subscription fee-based model and in turn giving away ownership. ► Sell majority ownership in Napster to record labels: Make record labels the primary beneficiary to potential success of subscription-based model, by recognizing the value of the installed base in Napster. ► Align with AOL: AOL - AOL already provides a subscription-based service. They have direct marketing know-how. They would also realize the value of Napster's installed base and recognize a potential audience for their existing service. It would be relatively easy to add on Napster subscription on top of AOL current revenue models. Time Warner and Bertelsmann, when combined with the might of AOL and Napster, will induce other labels to join an alliance. ► Exit completely: “Hope cannot be the basis of a strategy”. At the end of the day, if everything fails and nothing seems to be working out, the best option would be to exit completely. A business cannot be sustained mainly on the glimmer of hope that events might correct themselves. With the possibility of big fines for copyright violation if RIAA scores a complete win in the courts, it is probably prudent for Napster to examine the option of declaring bankruptcy and closing down the operation. This option is considered not simply for the sake of completeness with regard to all options available to Napster, but also to signify importance of the option, given the weak positioning of Napster.

45 ► So, going back to the question we posed at the beginning, what should Napster do?

46 ► Creating an appealing pay service will be a steep hurdle, particularly with the fact that the users have got accustomed to the free service and the presence of competitors who can provide the same service free. In addition, the sentiment that they have been charged excessively by the music industry is prevalent among the consumers and needs effort from all sides to correct this problem. Napster has sown the seeds of a digital revolution where the consumers have become tired of the traditional distribution model and have started expecting more. ► But it’s hard to deny the compelling advantages provided by these new technologies. As technology advances across the board and online digital delivery slowly replaces CD sales, these issues will become more and more pressing for the major labels. Napster needs to make recording companies realize a vision of a digital future. Recognizing and planning for future market needs now will allow these major labels - or anyone else who responds well to these market needs - to survive as the future of the music industry.


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