Industry Insights: Why Napster Was the Best Thing to Happen to the Music Industry (and Why They Killed It)

Napster was the best thing that ever happened to the music industry, according to Wharton Marketing Professor Peter Fader. The industry responded by killing this golden goose that connected it to enthusiastic music listeners and, in the process, ruined any chance of extracting any meaningful profits from the innovative technology that it encompassed. During a session with EMTM alumni, Fader related his firsthand experience of the digital revolution in music. He offered a cautionary tale about the complex evolution of new technologies in the crosswinds of industry traditions. Technology, reason and research were often left by the wayside.

An Insular Industry

As a marketing professor, Fader successfully demonstrated that he could apply marketing models used to predict grocery sales and new product introductions to explain purchasing patterns for CD sales and Billboard "Hit 100" songs. He realized that the music industry was weak on data and models, and his marketing models could help, so he and a colleague started a consulting company.

But in 2000, when they walked into the offices of music industry executives armed with their models, they received an icy response. The music executives politely told them, "You're probably smart guys, but you don't understand the business. This is a creative business and every album is completely different from the one that preceded it." They asked him what kind of music he liked. Fader thought to himself, "I just finished a major consulting project at Campbell Soup Company and nowhere along the way did anyone ask me if I was a 'chicken noodle' guy."

Misunderstanding Napster

In such an insular industry, it was perhaps no surprise that Napster was seen as a threat. Napster organized dedicated music listeners and allowed them to share their favorite songs. If listeners liked a song, they often would go out and buy the CD. Fader remembered sampling a song by Blink 182 that he liked and then bought. For the first time, these circles of music enthusiasts expanded from living rooms and garages to the entire world. "What made Napster so cool was that it was the first online social network, before Friendster and Facebook," Fader said.

When Fader submitted an expert-witness report during the infamous Napster trial in May 2000, he presented research showing that Napster was the best thing to happen to the industry. "We did surveys by credible third-party firms and, without doubt, the available evidence provided overwhelming support that Napster was not just beneficial to the music industry, it was the greatest thing to happen to it. Industry sales peaked in summer of 2000 when Napster was peaking." Of course, it meant little in the David-and-Goliath trial, which pitted a tiny dorm-room startup against the most powerful companies in the industry. The research went unheeded. Legal maneuvering triumphed, and Napster was shut down.

The industry did not understand Napster, Fader said. Executives felt it was a bunch of high school and college kids stealing music when, in fact, the majority of Napster users were adults. Kids have always been stealing music, from making tape recordings to slipping albums into their jackets. When they grow up, they realize it's not worth it. The digital technology allows listeners to sample songs. "This meant all the music lovers in the world were all in one place talking about music," Fader said. "There was more engagement than there ever was or ever will be. And the industry's response was to sue it out of existence."

Record company executives panicked in February 2003 when they found that the debut album by 50 Cent, Get Rich or Die Tryin', was being shared online before its launch. The company accelerated the launch, so there was little time for a conventional marketing campaign. Yet the album went straight to the top, selling more than 800,000 copies in four days, making it the highest-selling first album from a major label. "Ask 50 Cent what he thinks about file sharing," Fader said.

Some musicians appear to recognize the power of the new channels in driving sales. One of the U2 band members "lost" a backpack in Europe containing a CD of their new album before its release. It was an instant hit with file swappers. "It was a fantastic thing," Fader said. "They had buzz months and months before launch. And it wasn't the first time that U2 had an incident like this months before one of their albums was formally launched."

Taking the Poison Apple

The industry not only killed Napster and sued its own customers ("Rule one," said Fader, "is don't sue your customers"), but failed to create a viable alternative. Apple moved into the vacuum with iPod and iTunes. While Fader concedes that this was a stroke of genius (although "it is a subpar device given today's technology and a bad business model for the industry"), it was only possible because of a failure of the music industry to take control of its own destiny. "I went on record at the time saying that the iTunes business model was a cancer to the music industry; it will kill the industry," Fader said, "and time is proving me correct. The iTunes Music Store is (indirectly) doing more harm to the industry than any unauthorized file-sharing network has ever done."

While the industry initially saw Steve Jobs as its savior, there is now more concern about Apple's rising power. An article in Variety in June 2006, for example, showed a photo of Steve Jobs with the headline "Friend or Foe?" Because Apple makes money from selling its devices, and practically gives away the music, pricing has nothing to do with the music itself. When recording companies suggested to Apple that they should charge more or less for songs based on popularity, Apple insisted on staying with its 99 cent fixed price across the board. "These companies have lost control of their own industry," Fader said.

A subscription model, such as is used with cable television (Comcast) or DVD rentals (Netflix), is a more powerful model. Fader himself has a subscription to XM radio and Rhapsody, which his teenage daughter uses to stream music constantly. He envisions a "celestial jukebox" that would allow users to connect to almost any song from almost anywhere. While an iPod might give you 10,000 songs, the jukebox could access two million, like carrying 200 iPods. "If you are walking across campus and want to hear The Flaming Lips, you can hear them -- if you remembered to put it on your device that morning or not."

The future of the industry is still with the album. While iTunes and file sharing may have eroded album sales a bit, the declines are primarily due to "gross mismanagement of the marketing and distribution aspects of the industry," not the new technologies. Many users still use these digital channels for sampling and discovery before buying an album. The industry could have moved ahead more aggressively in adding value to the album. Dual-disc technology makes it possible to put a DVD on one side and a CD on the other, with the kind of extras that make movie DVDs popular. "But the industry is too busy hiring lawyers to sue its customers, instead of focusing on making this a successful step forward," Fader said.

The entertainment industry still has mixed feelings about letting customers have some control over content. Warner Music made a landmark licensing deal with YouTube to allow users unrestricted access to its songs (setting aside uneasiness about videos of cats lip synching Madonna songs), but at the same time Viacom sued Google for $1 billion over YouTube. "YouTube is the best thing that ever happened to Viacom," Fader said. "How many people watch Jon Stewart's The Daily Show on No one does -- they watch it on YouTube. And if Viacom takes it down, they'll just watch something else instead. YouTube is holding all the cards here, just at Napster was way back when. Whether Viacom has the right to sue is irrelevant — the key question is whether it's good for business. This kind of lawsuit is a big step backwards for Viacom and the entertainment industry as a whole. I'm amazed that Viacom shareholders haven't filed a class action lawsuit."

Beware if you think your business is unlike any other. It might be able to learn from the models that have worked in other areas. Your industry may also be able to learn from the mistakes of the music industry and others. "They say, it is a creative business, a people business," Fader said. "Who needs the silly adjectives? It's just a business; run it like a business."

“We did surveys by credible third-party firms and, without doubt, the available evidence provided overwhelming support that Napster was not just beneficial to the music industry, it was the greatest thing to happen to it. Industry sales peaked in summer of 2000 when Napster was peaking.”

Professor Peter Fader
The Wharton School

The industry not only killed Napster and sued its own customers, but failed to create a viable alternative.

“They say, it is a creative business, a people business. Who needs the silly adjectives? It's just a business; run it like a business.”

Professor Peter Fader
The Wharton School

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