Son of Napster?

Son of Napster One Possible Future for a Music Business That Must Inevitably Change

When I mentioned in last week's column that I would this week be writing about a legal way to do a successful music downloading business -- a business that would threaten the Recording Industry Association of America and its hegemony -- dozens of readers wrote to me trying to predict what I would write. Some readers came at the problem from a purely technical perspective, ignoring the fact that the real issues here aren't technical but legal. Some readers took a legal approach, but they tended to ignore the business model. Some were looking solely for the business model. Interestingly, nobody even came close to my idea, which makes me either a total loon or a diabolical genius. Truth be told, I'm probably more of a diabolical loon.

.... The business I am about to describe has not been legally tested. I have run it past a few lawyer friends of mine, but a true legal test can only be done in the courts. Having said that, the universal response I have received from lawyers can best be described as giddiness. They get it. And the implications of this idea -- the sheer volume of trouble it could create -- gets their billing glands working.

Without having been truly tested, so far I have yet to find a lawyer who sees a serious flaw in my logic. What I am about to propose is apparently not illegal under current law, which of course means that the RIAA will throw their lobbying muscle into making it illegal, getting Congress to pass a new law specifically against my technique. The trick then is to establish the business before that can happen. Gentlemen, start your engines!

Napster failed because it was determined by the courts to violate intellectual property rights and because it did not have a successful business model, or any business model for that matter. Any successor to Napster must be both legal (if barely) and profitable.

First the law. Snapster is built on the legal concept of Fair Use, which allows people who purchase records, tapes, and CDs to make copies for backup and for moving the content to other media. So a CD can be copied to an MP3 player, for example. But to remain legal, the MP3 player should be that of the CD owner and not that of another person. CDs can be lent, sold, or borrowed, but in order to make backup or media-shifting copies, the copier must own the original CD. If the original CD is no longer owned by the maker of the backup or media shifting copies because the CD has been sold or given away, any copies should be destroyed under U.S. copyright law.

Snapster is all about ownership. Snapster will be a company that buys at retail one copy of every CD on the market. Figure 100,000 CDs at $14 each requires $1.4 million. Snapster will also be a download service with central servers capable of millions of transactions per day. Figure $100,000 for the download system and bandwidth for one year. Throw in $100,000 for marketing and $400,000 for legal fees and the startup capital required for the business is $2 million.

Snapster has to be a public company. It would have its IPO as soon as possible after all those CDs have been delivered. It must be a public company right from the start of operations. Say Snapster goes public on NASDAQ at $20 per share. The IPO sells one million shares (10 percent of the company) netting $20 million minus underwriting fees. So almost from the beginning, Snapster has millions in the bank and a market capitalization of $200 million. What is critical here for the business success is not the price per share but the broadest possible ownership of shares. But the way those additional shares would be sold would be through stock splits, not supplemental offerings. This means that early investors would benefit greatly from being early investors and the Snapster founders would benefit most of all.

By limiting issued shares to 10 percent of total Snapster ownership, stock splits could be used to maintain the price of each Snapster share at $20. Since Napster at its peak had 60 million global users, I see that as a size to which Snapster could grow, meaning each original share would eventually be split into 60 shares. If the share price remained at $20 -- which it logically would because, as you will see below -- most investors would only need to own one share. That means investors at the IPO would see their $20 investment quickly grow to $1200 and the market capitalization of Snapster would become $6 billion.

Each Snapster share carries ownership rights to those 100,000 CDs. You see, Snapster is a kind of mutual fund, so every investor is a beneficial owner of all 100,000 CDs. Each share also carries the right to download backup or media-shifting copies for $0.05 per song or $0.50 per CD, that download coming from a separate company we'll call Snapster Download that is 100 percent owned by Snapster. With one million co-owners each downloading one CD per month, gross revenue would be $6 million per year. If they download an average of 10 CDs per month revenue grows to $60 million per year. At these download volumes and with the very low cost of running the service, the $200 million market cap is justified even at the lower sales level. At the $60 million sales level, the share price ought to rise. Now grow the business to its logical size of 60 million users. At 10 CDs per user per year, Snapster download revenue would be $3.6 billion or about a quarter the size of the current recording industry, which it would effectively replace. With 90 percent profit margins, Snapster would be making $3.2 billion per year in profit. Based on a modest price-to-earnings ratio of 10-to-1 (I am choosing this low number because of the obvious legal issues involved in this business) Snapster's market capitalization is now up to $33 billion, which is more than any current record company. Investors who paid $20 at the IPO will now find each of those shares worth $33,000, which is comparable to Microsoft or Dell or Cisco in success except that Snapster would do this all in one year.

Interestingly, $33 billion represents approximately the total market capitalization of all the major record companies, which we'd have to expect would be driven down by the success of Snapster. So Snapster would be a transfer of wealth from current owners of record company shares to owners of new Snapster shares.

What I have described is legal, it just leverages technology in a way that has never been done before. There are precedents for group ownership of recordings and certainly the law of mutual funds is very clear. Of course, the RIAA will have a response. They will file suit, probably claiming restraint of trade, but this simply will not stand and it is impossible to believe they could get any form of retraining order. Still, Snapster must have funds to support a vigorous defense -- a defense that has been planned well in advance. The RIAA will also try to have laws passed making Snapster illegal, so an anti-RIAA lobbying effort would also be a good idea.

Many things aren't fair in life, Virginia, but Snapster is fairer than most. Look at it from the perspective of the music consumer. Since Snapster would have only a quarter the revenue of the system it replaces, that means consumers would be getting more music for less money. And as Snapster owners, which they would have to be by definition, consumers would benefit from the many Snapster stock splits it would take to reach 60 million beneficial owners, and then the increase in stock price beyond that. This is more benefit than these same people ever got from the record companies. And since Snapster would quickly become the most broadly traded stock of all, this transfer of wealth would have a broad benefit.

To paraphrase Marie Antoinette, if they have no sales, let them buy stock. There is nothing that would keep owners of record company shares from selling those shares and replacing them with Snapster shares. The earlier they do so the more they would benefit both because they'd be selling before the record company shares went completely in the tank, and they'd be buying before Snapster shares had fully appreciated. It is one thing to maintain the status quo and another to recognize the inevitability of change and benefit from it.

Investors in companies that manufactured horse drawn carriages could have tried to make automobiles illegal or they could have sold their carriage shares and bought car shares. Which makes more sense? There is more money to be made by embracing this future than by fighting it.

The questions that are left unanswered in this are what will Snapster do against competitors, and what will the company do after there are no more CDs to buy? With the barrier to entry at $2 million, Snapster will have competition, but there are advantages to being the first mover and plenty of room for price cutting, which is even better for consumers. In fact there is probably room for many Snapsters, though I'd expect the first Snapster to be the biggest Snapster.

What is more problematic is what Snapster, as essentially a repository of oldies, would do to further grow its business and maintain earnings growth. This is the same question as asking what Microsoft will do after the age of the PC is over. The company could diversify and go into other businesses. It could extend the concept of a mutual fund even further and strictly manage its excess profits as investments. Or it could find some way to plow the money back into the music business, which I think would be best, but I can't see exactly how it would be done. Still, it is a good idea.

the heart and soul of ALL these "breakthroughs" has been with the re-asserted and redefinition of "copyright" violations per the digital copyright act. (this was one of newt's babies).

They had to enact this legislations to recreate a new "copyright" definition, since the courts have ALWAYS held that any analogue recordings can be shared, or even given away to friends and family en masse... via analogue recordings of a record, via cassette recordings, via recorded radio programming... et. al. as long as no sale has taken place.

the dca sought to turn back the clock, via this new medium... digital file sharing, and with the current court schemata... it appears to have worked for now. burning a "compilation" tape for friends on an analogue medium is STILL legal but, burning a digitally encoded version of the same song, on a cd is criminal.

LOTs of bands and musicians however are deserting the riaa. But it, along with it's failed business model (the likes of which created david geffen) will take a decade to die fully. Pass us the wooden stakes please.

They have successfully asserted that napster and its clones were killing their industry.

But the truth has been that sales were going up each year, with the additional exposure that file sharing brought their artists. Now that napster and file sharing has been staked in the heart, sales are falling off. When they figure this out, it will be too late.

Meanwhile, the NEW artists that can read the "mene mene tekel upharsin" on the wall, have already begun the quiet scramble to the new business model...

The (what I consider, subjectively of course to be the) illegal monopoly on file sharing, possessed by the government and the riaa (and its musical union partners), will however die.

There is an entire movement on the internet by independent artists, and some NOT so independent artists to make their music available for FREE, NO charge... or so inexpensive (3-5 a cd) it costs less to buy it than to burn it yourself.

Their business model is, free digital music (which advertises the full blown, value added CD). The entire CD, including special web access to the band, valuable concert discounts, eye popping liner art, official lyrics, artist backgrounds and notes, is sold for only a few bucks... but the real item THEY are after is venues and fans to pay for tickets. A good independent band, can make upwards of 20 gs in a one weekend venue... and keep all of the profit for themselves... screw the musical unions, industry moguls and such. 12 venues a year, is 240 g's minimum, divided by four or five.. enough to make a "starving" artist's dream come true... the sales of paraphernilia and cd's are all "icing".

tis true you cannot find your favorite top forty "payola scandal" artists in this mode... yet.

But who listens to top forty anymore anyhow? OLD (at heart) PEOPLE.
The ranks of RIAA sychophants are diminishing.
The "labels" of "that thing you do" fame, are all gone,and their offspring are dying as well.

When an independent band sells one CD, ready to go liner notes, art and all, for 5 they get it all. When the music store sells it via the archaic distribution model.. they are lucky to get a nickle a cd.

Even a stoned out musician can do the math.

What's to come?
Eventually, ALL bands will be "bootleg" bands, and NONE of them will be signing contracts with the riaa, or major music labels. Today, a used 586 with a mixer board and a stack of CDr ROMS is all a band needs to become their own "artist agency" "distributor" and "business agent".

And they get paid to do just that... when they opt out.
Here's to "opting out" and the destruction of the same gang that brought us the illegal "payola" scandal of the top forty that sent industry officials to prison in the fifties and sixties.

/ the dinosaurs are dying arr two !/

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