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Napster's new gamble could be pivotal in Web commerce

Updated:
Industry wonders if music fans will buy into fee for service

By Alan Goldstein / The Dallas Morning News


Would Napster's 38 million users be as passionate about the service if they had to pay for the music?

It's a question of interest not only to music fans. In recent years, Internet users have grown accustomed to receiving a variety of information, entertainment and services free. Many Internet businesses concluded that it would be nearly impossible to get people to pay for content that they expect to get for nothing.

That makes Napster's alliance this week with recording industry giant Bertelsmann AG a potential watershed event for many Internet businesses.

Napster said it would charge a fee, perhaps $4.95 a month, for subscription-based access to its service. If the company, based in Redwood City, Calif., can shift to a business model in which its customers pay for the service, Internet executives said Wednesday, other businesses may be more willing to consider a similar transition.

"I think they've got a pretty good shot at it," said Lee Wright, president and chief executive of Anywhereyougo.com, a Dallas-based company that helps software developers create wireless Internet services. "Something like this was inevitable.

"A lot of people talk about copyright as being a thing of the past in the digital age," Mr. Wright said. "That's a somewhat romantic but mistaken notion. People who have invested the time and energy should have an opportunity to get returns."

Napster's wide reach can be used to competitive advantage, said Elias Farhat, a vice president at the Irving office of Bain & Co., a management consulting firm. Even if the rate at which they convert users to paying customers is relatively low, he said, Napster is big enough, and monthly subscription fees are a stable enough form of revenue, that it can succeed.

"I'm not sure what success would be in this case," he said. "If it is survival, they may pull it off. If it's significant financial success, then it's less sure."

Napster was introduced only last year, but it has rapidly morphed into an Internet phenomenon. Boasting a digital library consisting of the favorite songs of millions of its users, Napster has established a new level of breadth and convenience for music lovers. They can download and play virtually any song they can think of within minutes, without paying a cent.

The recording industry took a stand against Napster last December. BMG, a Bertelsmann subsidiary, along with four other major record companies, accused the service of abetting copyright infringement. The companies are still fighting Napster in court.

But Bertelsmann said Tuesday that it would drop its suit once the alliance was in place. Bertelsmann also said it is trying to persuade the other record companies to go along.

BMG got a critical jump on its competitors, said Steven Leeke of 2M Technology Ventures LP, an investment vehicle for Dallas businessman Morton H. Meyerson. "Frankly, they're defining what this business will be. Clearly, the Napster model is very compelling. You can instantly buy what you want. What more powerful form of distribution can there be?"

Many businesses that offer content will be able to consider sharpening and refining their business models to find ways to charge for their offerings, said Steve Truitt, executive vice president in the Dallas office of an Internet consultancy, e2i.

To be sure, Napster will face resistance from many customers, many of whom can easily go to competing file-sharing services, such as Freenet and Gnutella.

"I'll just get it somewhere else for free, and there are LOTS more to choose from," wrote one participant in an informal interactive survey Wednesday on The Dallas Morning News' Internet site, dallasnews.com. Most people who voted Wednesday said they wouldn't pay.

But another participant wrote: "I am so addicted to having Napster, not sure what I would do without it. I would pay the $4.95/[month] fee they are tossing back and forth."

Paying a nominal monthly subscription fee to Napster is more appealing than paying full price for compact discs, said Annie Barrera, 16, of Dallas, a junior at Lake Highlands High School. "If people will still save money, they'll still use it," she said in an interview.

Napster and BMG did not say how their system would work, when the service would start, how revenue would be split or how much consumers would pay.

"I don't know how you do it until you make micropayments easier," said Mark Lynd, chief executive of Vectrix in Dallas, a transaction infrastructure company. Mr. Lynd said he doubted whether many consumers would commit to any subscription-based service.

The $4.95-a-month figure cited by Napster on Tuesday may also turn out to be too low to be economically feasible.

Even $20 a month might be too low to compensate the musicians and recording labels sufficiently, said Guy Hoffman, a partner in the Dallas office of TL Ventures, a venture-capital firm. And a fee that high would almost certainly lose customers.

"I get a sense Napster is still largely about kids in college dorm rooms," he said. "Think about $240 a year to kids. That's a lot of beer money."
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