Napster Case Study - eBusiness
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Transcript of Napster Case Study - eBusiness
Napster Case Study: The New Napster changes the music marketing mix
The Napster brand has had a varied history. Its initial incarnation was as the
first widely used service for ‘free’ peer-to-peer (P2P) music sharing. The
record companies mounted a legal challenge to Napster due to lost revenues
on music sales which eventually forced it to close. But the Napster brand was
purchased and its second incarnation offers a legal music download service
in direct competition with Apple’s iTunes.
The original Napster
Napster was initially created between 1998 and 1999 by a 19 year old called
Shawn Fanning while he attended Boston's Northeastern University. He
wrote the programme initially as a way of solving a problem for a friend who
wanted to find music downloads more easily online online. The name Napster
came from Fanning’s nickname.
The system was known as Peer to Peer since it enabled music tracks stored
on other Internet users hard disks in MP3 format to be searched and shared
with other Internet users. Strictly speaking, the service was not a pure P2P
since central services indexed the tracks available and their locations in a
similar way to which instant messaging (IM) works.
The capability to try a range of tracks proved irresistible and Napster use
peaked with 26.4 million users worldwide in February 2001.
It was not long before several major recording companies backed by the
RIAA (Recording launched a lawsuit. Of course, such action also gave Napster
tremendous PR and millions of users used the service. Some individual bands
also responded with lawsuits. Rock band Metallica found that a demo of their
song ‘I disappear’ began circulating on the Napster network and was
eventually played on the radio. Other well-known artists who vented their ire
on Napster included Madonna and Eminem. However, not all artists felt the
service was negative for them. UK band Radiohead pre-released some tracks
of their album Kid A on to Napster and subsequently became Number 1 in
the US despite failing to achieve this previously.
Eventually as a result of legal action an injunction was issued on March 5th
2001 ordering Napster to cease trading of copyrighted material. Napster
complied with this injunction, but tried to read a deal with the record
companies to pay past copyright fees and to turn the service into a legal
subscription service. In the following year, a deal was agreed with German
media company Bertelsmann AG to purchase Napster’s assets for $8 million
as part of agreement when Napster filed for Chapter 11 bankruptcy in the
United States. This sale was blocked and the web site closed. Eventually, the
Napster brand was purchased by Roxio, Inc who used the brand to rebrand
their PressPlay service.
Since this time, other P2P services such as Gnutella, Grokster and Kazaa
prospered which have been more difficult for the copyright owners to purse
in court, however, many individuals have now been sued in the US and
Europe and the associations of these services with spyware and adware has
damaged these services, which has reduced the popularity of these services.
New Napster in 2008
Fast Forward to 2008 and Napster now has around 830,000 subscribers in
the United States, Canada and United Kingdom who pay up to £14.95 each
month to gain access to about 1.5 million songs. The company is seeking to
launch in other countries such as Japan through partnerships.
Revenue for financial year 2008 is expected to exceed $125 million,
representing growth of 17%.
The online music download environment has also changed with legal music
downloading propelled through increasing adoption of broadband, the
success of Apple iTunes and its portable music player, the iPod which by
2005 had achieved around half a billion sales.
Napster gains its main revenues from online subscriptions and permanent
music downloads. The Napster service offers subscribers on-demand access
to over 1 million tracks that can be streamed or downloaded as well as the
ability to purchase individual tracks or albums on an a la carte basis.
Subscription and permanent download fees are paid by end user customers
in advance either via credit card, online payment systems or redemption of
pre-paid cards, gift certificates or promotional codes. Napster also
periodically licenses merchandising rights and resells hardware that its end
users use to store and replay their music.
BBC (2005) estimated that the global music market is now worth $33 billion
(£18.3 billion) a year while the online music market accounted for around 5%
of all sales in the first half of 2005. Napster (2005), quoting Forrester
Research estimates that United States purchases of downloadable digital
music will exceed $1.9 billion by 2007 and that revenues from online music
subscription services such as Napster will exceed $800 million by 2007.
BBC (2005) reports Brad Duea, president of Napster as saying: ‘The number
one brand attribute at the time Napster was shut down was innovation. The
second highest characteristic was actually free. The difference now is that
the number one attribute is still innovation. Free is now way down on the list.
People are able to search for more music than was ever possible at retail,
even in the largest megastore."
The Napster online music service
Napster subscribers can listen to as many tracks as they wish which are
contained within the catalogue of over 1 million tracks (the service is
sometimes described as ‘all you can eat’ rather than ‘a la carte’). Napster
users can listen to tracks on any compatible device that includes Windows
Digital Rights Management software, this includes MP3 players, computers,
PDAs and mobile phones. Duea describes Napster as an "experience" rather
than a retailer. He says this because of features available such as:
• Napster recommendations • Napster radio based around songs by
particular artists • Napster radio playlists based on the songs you have
downloaded • Swapping playlists and recommendations with other users
iTunes and Napster are probably the two highest profile services, but they
have a quite different model of operating. There are no subscribers to
iTunes, where users purchase songs either on a per track basis or in the form
of albums. By mid 2005, over half a billion tracks had been purchased on
Napster. Some feel that iTunes locks people into purchasing Apple hardware,
as one would expect Duea of Napster says that Steve Jobs of Apple “has
tricked people into buying a hardware trap”. But Napster's subscription
model has also been criticised since it is service where subscribers do not
‘own’ the music unless they purchase it at additional cost, for example to
burn it to CD. The music is theirs to play either on a PC or on a portable
player, but for only as long as they continue to subscribe to Napster. So it
could be argued that Napster achieves lock-in in another form and requires a
different approach to music ownership than some of its competitors.
Napster Strategy
Napster (2005) describe their strategy as follows. The overall objective is to
become the “leading global provider of consumer digital music services”.
They see these strategic initiatives as being important to achieving this:
Continue to Build the Napster Consumer Brand – as well as increasing
awareness of the Napster brand identity, this also includes promoting the
subscription service which encourages discovery of new music. Napster
(2005) say ‘We market our Napster service directly to consumers through
an integrated offline and online marketing program consistent with the
existing strong awareness and perception of the Napster brand. The
marketing message is focused on our subscription service, which
differentiates our offering from those of many of our competitors. Offline
marketing channels include television (including direct response TV),
radio and print advertising. Our online marketing program includes
advertising placements on a number of web sites (including affiliate
partners) and search engines’
Continue to Innovate by Investing in New Services and Technologies – this
initiative encourages support of a wide range of platforms from portable
MP3 players, PCs, cars, mobile phones, etc. The large technical team in
Napster shows the importance of this strategy. In the longer-term, access
to other forms of content such as video may be offered. Napster see their
ability to compete depend substantially upon our intellectual property.
They have a number of patents issued, but are also in dispute with other
organizations over their patents.
Continue to Pursue and Execute Strategic Partnerships – Napster has
already entered strategic partnerships with technology companies
(Microsoft and Intel), hardware companies (iRiver, Dell, Creative, Toshiba
and IBM), retailers (Best Buy, Blockbuster, Radio Shack, Dixons Group,
The Link, PC World, Currys, Target), and others (Molson, Miller, Energizer,
Nestle).
Continue to Pursue Strategic Acquisitions and Complementary
Technologies – This is another route to innovation and developing new
services.
Napster mobile
During 2007, Napster launched a wireless music service branded “Napster
Mobile”. In conjunction with Ericsson, this offers ringtones, OTA (over-the-air)
downloads and wallpapers via a variety of mobile carriers in the United
States and Europe, including Cingular/ATT, O2 Ireland, TMN in Portugal,
SunComm and Dobson. Using Napster Mobile, customers are able to
purchase music downloads from our full music catalog using their mobile
phone handset and have the songs delivered OTA to their handsets with a
copy sent to their PC as well.
Napster's Customers
The Register (2005) reported that in the UK, by mid 2005, Napster UK's
750,000 users have downloaded or streamed 55m tracks since the service
launched in May 2004. The company said 80 per cent of its subscribers are
over the age of 25, and half of them have kids. Some three-quarters of them
are male. Its subscribers buy more music online than folk who buy one-off
downloads do and research shows that One in five of them no longer buy
CDs, apparently.
Describing it’s marketing strategy Napster says in its SEC filing: “We
primarily focus our marketing efforts on online advertising, where we can
most cost effectively reach our target audience of 25-40 year-olds, as well as
strategic partnerships where we can market our service with complementary
products. In the United Kingdom and Germany, we also market our paid
Napster service directly to consumers through a predominately online
marketing program, consistent with the existing strong awareness and
perception of the Napster brand. The marketing message is focused on our
subscription service, which differentiates our offering from many of our
competitors. Our online marketing program includes advertising placements
on a number of web sites (including affiliate partners) and search engines".
Napster distribution
Napster’s online music services are sold directly to end users through the
website (www.napster.com). Affiliate networks and universities that have
procured site licenses (In the US, a significant proportion of subscribers are
University users). Prepaid cards are also available through retail partners
such as Dixons in the UK, who also promote the service.
Napster also bundle its service with hardware manufacturers such as iRiver,
Dell, Creative Labs, Gateway and Samsung.
Distribution partnerships with mobile providers are a key aspect of it’s
strategy and Napster has pursued agreements in this this are. In 2008,
Napster launched Mobile music service with Telecom Italia which serves
more than 35 million subscribers; Entel PCS, the leading Chilean mobile
operator with more than 5.5 million subscribers and in Japan Napster Mobile
for NTT DoCoMo.
Napster Competition
Napster see their competitors for online music services in the US as Apple
Computer’s iTunes, Amazon, RealNetworks, Inc.’s Rhapsody, Yahoo!
Unlimited, Sony Connect, AOL Music, MusicNet and MusicNow. In the UK, in
2005, new services with a subscription model were launched by retailers
HMV and Virgin. They expect other competitors such MTV Networks to enter
the market soon.
Napster (2005) believe that the main competitive factors affecting their
market include programming and features, price and performance, quality of
customer support, compatibility with popular hardware devices and brand.
Intellectual Property
"We may be unsuccessful in prosecuting our patent applications or patents
may not be issued from our patent applications. Even if patents are issued
and maintained, these patents may not be of adequate scope to benefit us or
may be held invalid and unenforceable against third parties.
While we rely on patent, copyright, trade secret and trademark law to
protect our technology, we also believe that factors such as the technological
and creative skills of our personnel, new product developments, frequent
product enhancements and reliable product maintenance are essential to
establishing and maintaining a technology leadership position. We cannot
assure you that others will not develop technologies that are similar or
superior to our technology."
Employees
As of March 31, 2005, Napster had 135 employees, of which 10 directly
supported the online music service (maintaining content and providing
customer care), 25 were in sales and marketing, 63 were in engineering and
product development and 37 were in finance, administration and operations.
The costs of managing these staff is evident in the table.
Napster Risk factors
In their annual report submission to the United States Securities and
Exchange Commission, Napster is required to give its risk factors, which also
give an indication of success factors for the business. Napster (2005)
summarises the main risk factors as follows:
1. The success of our Napster service depends upon our ability to add new
subscribers and reduce churn.
2. Our online music distribution business has lower margins than our
former consumer software products business. Costs of our online music
distribution business as a percentage of the revenue generated by that
business are higher than those of our former consumer software
products business. The cost of third party content, in particular, is a
substantial portion of revenues we receive from subscribers and end
users and is unlikely to decrease significantly over time as a percentage
of revenue.
3. We rely on the value of the Napster brand, and our revenues could
suffer if we are not able to maintain its high level of recognition in the
digital music sector.
4. We face significant competition from traditional retail music distributors,
from emerging paid online music services delivered electronically such
as ours, and from “free” peer-to-peer services.
5. Online music distribution services in general are new and rapidly
evolving and may not prove to be a profitable or even viable business
model.
6. We rely on content provided by third parties, which may not be
available to us on commercially reasonable terms or at all.
7. We must provide digital rights management solutions that are
acceptable to both content providers and consumers.
8. Our business could be harmed by a lack of availability of popular
content.
9. Our success depends on our music service’s interoperability with our
customer’s music playback hardware.
10. We may not successfully develop new products and services.
11. We must maintain and add to our strategic marketing relationships in
order to be successful.
12. The growth of our business depends on the increased use of the
Internet for communications, electronic commerce and advertising.
13. If broadband technologies do not become widely available or widely
adopted, our online music distribution services may not achieve broad
market acceptance, and our business may be harmed.
14. Our network is subject to security and stability risks that could harm
our business and reputation and expose us to litigation or liability.
15. If we fail to manage expansion effectively, we may not be able to
successfully manage our business, which could cause us to fail to meet
our customer demand or to attract new customers, which would
adversely affect our revenue.
16. We may be subject to intellectual property infringement claims, such
as those claimed by SightSound Technologies, which are costly to
defend and could limit our ability to use certain technologies in the
future.
Q1 Identify the elements of napster case study that are indicative of e-
commerce era I and e-commerce era II.
Q2 Into which category the Napster fall.
Q3 what was the issue for litigation of Napster.
Q4 Comment on the Business model of Napster.