The days of Napster, as we know it, are numbered. Only in perfect harmony can the industry make digital music sing. Publicly traded companies -- from the manufacturers of MP3 players to the labels themselves -- are banking on sustainability over inevitability. Whatever the outcome, turning this cacophony into a symphony will not be easy to orchestrate.
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Unplugged. That's how more than 50 million Napster fans will feel once the final decision is made to shut the MP3 music trading site down. The dorm download parties and sleepovers at your broadband buddy's house are coming to a close. The 9th U.S. Circuit Court of Appeals has already ruled against the revolutionary renegade and now it's just a matter of tweaking the fine-print legalese. As a music fan, no matter where you stand on the digital copyright debate, it's important to note that Napster could very well continue as a paid service. The company has proposed charging users anywhere from $3 to $10 a month for access to help monetize digital airplay. But you need two hands for a handshake and four of the five major record labels aren't buying in. The fifth, Bertelsmann AG, actually did buy in, becoming an investor in Napster late last year. Bertelsmann was also the lone supporter of Napster's proposed payout -- $200 million a year to be distributed between the labels. That offer was quickly shot down by the other labels. Playing hardball That's fine, as long as the music makers don't hold out for too much money. Ask for too much and Napster will sink under the weight of its own contractual obligations. While that might give the labels the last laugh, it would also effectively dam up what could have been a lucrative revenue stream. And what about that stream? Naturally, how much Napster can pay depends on how much it can charge its subscribers. Moving away from a free formula is never easy; Yahoo! (Nasdaq: YHOO) lost 80% or so of its auctions when it moved to a paid listings model. But at least with Yahoo!, the experience has improved for the seller because more bids are being placed. The new Napster will be label-approved. That will probably mean that many of the real gems on Napster -- those rare demo recordings and live bootlegs -- will no longer be available. While the quality and reliability of the files will improve dramatically, there may not be as much demand for a collection of homogenized label tracks as the industry believes. In addition, the vast majority of Napster users tend to be young music fans. They may not old enough to enter into a paid contract without parental consent -- or have the plastic means to do so in the first place. Though Napster has a devoted following today, it just won't be the same revolutionary peer-to-peer hub tomorrow. That's why the labels would be doing a great disservice to themselves and their artists if they pass up the opportunity to get Napster to commit to paying now, while there is still a false sense of security that the site will be able to retain many of its current users. Game over? While the labels would ultimately profit, rounding up the entire roster is still no substitute for a subscriber music service. So let's go further down the food chain here. Napster users argue that they have other options if the site is shut down or forced to charge, but once the courthouse ink is dry it will be much easier to prosecute defiant alternate sites and -- more frightening to the Napsterite -- their users. Unless the measure ends up being unenforceable, one sector that seems headed for a hit is the MP3 hardware makers. SONICBlue (Nasdaq: SBLU) and Creative Labs (Nasdaq: CREAF), makers of the popular Rio and Nomad players, have been thriving on the consumer's desire to play MP3 tracks away from the computer. Despite huge portable capacity, it's hard to imagine the players selling as briskly if users go back to listening to purchased CDs. Even Iomega (NYSE: IOM) will suffer, as it was successfully reinventing itself as a beefy player in MP3 storage. There's also a bigger issue at play here -- broadband. At the residential level, the demand for fatter pipes might begin to fade if the demand for fast MP3 downloads evaporates. That won't be good for the DSL and cable modem markets, which are already suffering from waning demand on the corporate side. Winners hard to find Ultimately, the next step forward might prove to be a step back. If the labels go their own way, they'll be retracing selfish steps that have led to dead ends in the past. If they sign on with Napster, there will be a limited audience and the site will become a shell of its former self. Either way, the consumer will walk away with the bitter aftertaste of corporate greed. The major labels will walk away lamenting the country's ethically bankrupt ways when it comes to paying the performer. Yet, tucked away in a garage out in the Baltimore suburbs is a 14-year-old kid strumming away on the weekends. The power of music lives on -- that will never change. Rick Aristotle Munarriz loves music. He loves to play and compose music, too. As a matter of fact, his band was once signed to Sony's Columbia Records label. The band -- Paris By Air -- has music on Napster as well MP3.com. Rick owns shares of MP3.com. His stock holdings can be viewed online, as can the Fool's disclosure policy. Related Links
While it might seem as if the recording industry is playing hardball, the labels might very well play along -- as they did when they all settled with MP3.com (Nasdaq: MPPP) last year -- if the price is right.
If any party balks, the game is over. The key to lining up all the labels -- as MP3.com did with its My.MP3 music locker service -- is the difficulty individual record companies will have going it alone. Yes, Napster will have BMG. AOL Time Warner (NYSE: AOL) will have Warner Music. That is a meaty combination, since AOL acquired Nullsoft (maker of the popular Winamp MP3 software player) and audio content specialist Spinner in 1999. Others, like Sony (NYSE: SNE), have also tried to roll out their own versions. The end result is that the products have been as popular as a movie house that shows only one studio's flicks.
It's hard to find a winner in a Napster-less scenario. If the move finds music fans clamoring for nothing but free tunes, MP3.com's stronghold of 135,000 mostly unsigned artists might fit the bill for the adventurous. If the labels join with Napster to help wean the consumer off of free downloads, the consensus is that companies like EMusic (Nasdaq: EMUS) and ARTISTDirect (Nasdaq: ARTD), which are already charging for MP3 files, will thrive -- but that is misleading. Their success is based on the assumption that piecemeal downloads will still have a market in the wake of the all-you-can-eat Napster buffet.
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