\Napster Case

\Napster Case

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. Introduction:
Amidst the hot debate about whether or not music should be free, there are ethical and moral considerations as well. MP3 music downloading has become the latest fad for computer owners. One computer site where users can download MP3 songs is Napster. The emergence of digital entertainment, whether an MP3, Liquid Audio book, or streaming video, has caused an inevitable shift in the entertainment market from a commodity base to a service base. One reason is that the digital medium eliminates acquisition cost for the consumer. A perfect copy of the original good is automatically created upon request. Using open platforms and formats, new companies in the entertainment sector have literally bypassed traditional production and distribution channels to reach the consumer. Napster is the perfect example of this new paradigm, turning every member’s computer into an audio server and distributing an individualized playlist. However, this trend seriously limits a content owner’s ability to restrict the supply of his/her intellectual property on a large scale and thus control it. In response, the music industry has resorted to litigation and restrictive usage rules on licensed or retailed digital products.
2. Analysis the Economics of the music recording business
The music industry continues to be characterized by commodity pricing. This is largely due to the fact that major label revenues are predominately derived from CD sales. As such, the focus of the industry’s online strategy has been to prevent CD sale cannibalization through control of online product supply and distribution. In the absence of this control, copyright owners would be unable to maintain pricing control. As a result, the industry has taken the lead in defining new rules for online digital distribution that would replicate conditions existing for off-line digital distribution.
 Copyright infringements (excluding the effect of Internet) - bootlegging, piracy and counterfeits - are costing the music industry approximately $5 billion per year
 sales in the music industry's five biggest markets (USA, Japan, Germany, UK and France) are growing slowly, if not stagnating
3. Analyze the company’s history, development, and growth.

James Breyer (venture capitalist): “Napster is truly revolutionary- and it will be a precursor of some of the most important web applications over the next several years.)”
3.1. History

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The music industry grew at a robust rate in the 90s with global sales of $38.5 billion in 1999, this growth come to end in 2000, when global sales fell 5% and again in 2001 slumped to $33.7 billion after Napster birth in 1998. The International Federation of the Phonographic industry (IFPI) claimed the decline in sale as result of fact that the commercial value of music is devalued by mass of copping and piracy, piracy cost the industry over $10 billion per annum. In Germany 18% of 10000 surveyed consumers said burning CDs results in their buying less music. In United States About 70% of people download music and burn it to CDs, as 35% saying we download music from the internet and now buy less music as a result.
3.2. Development and growth
The music industry dominated by a big five recording companies ( Sony, Universal, EMI, Warner Music & Bertelsmann) that collectively accounted for over 90% of global music sales are now have been affected by the piracy and buy less of CDs. In May 2000 the big five companies settled suit with the Federal Trade Commission agreeing to end the a requirement that retail stores adhere to minimum prices in advertisement and expected price discount of CDs in retail stores, this procedures are followed by the European Union. Hence in 2000, 95% of CDs sales in USA were made through music stores and nature of distribution was changed with discount. In addition the big five companies’ distribution were causing tension to retailer who start fear that that sorters sales may suffer.

4. The company’s internal strengths and weaknesses
4.1. Strengths:
People could download music for free, why pay money for CDs that contain track only three of which they wanted. The convenience of the technology to get music you don’t have to go to the store you just open the PC and logon to the service and quickly download what you want many also find it interested to browse through the other play list finding music that they wouldn’t otherwise listen to. And you could find music on Napster that you couldn’t find in the retail store. Users download files and play them on their portable MP3 players plus new technology that allow them to burn or create customized CDs. According to the (RIAA) survey of 1015 music consumers on the attraction of Napster found that 87% access to large selection and variety of artist followed by 84% the capability to download files quickly, 83% the ability to download individual songs, 81% for the convenient search features, 79% ability to get music for free and lastly 64% ability to access songs not commercially available.
4.2. Weaknesses:
There was no marketing or advertising strategy to sell their service, which was given away for free. The service spread through word of mouth. They haven’t financial capital, they had to develop business model that would enable it to profit from the service it provided, third needed to prepare itself for the inevitable challenge from RIAA.

5. Analyze the external environment
5.1. Threats:
5.1.1. Napster competitor:
Napster founder was proposing to create peer-to-peer network of personal computers coordinated by a server which manage the Index of MP3 files. First threat that appears is that anther company attempt to utilize peer-to-peer technology SETI@home was a program that harnessed unused computing power to analysis from radio telescopes. The basic idea when the computer is unused and the screensaver was on the SETI@home program would communicate with the central server to download MP3 songs to the PCs for free, about 2 millions volunteers download the screensaver program as result that computing power has ten time faster than that of a conventional supercomputer.
5.1.2. Universities problem:
By lately 1999 Napster was occupying 30% to 80% of the internet bandwidth capacity of USA Universities, which lead to slowing down access and impeding the value of academic tools and therefore many Universities banned Napster was not protection of copy rights, but a desire to protect scarce computing resources from being soaked up.
5.1.3. The collision:
Copy rights Napster was on collision course with the music industry. The core of the problem according to the (RIAA), was that Napster’s services was violating copy rights, facilitating massive piracy of intellectual property and consequently steal. The set of rights can be violated in three ways:
• Direct copyright infringement: direct infringer violates any of the copyrights exclusive rights.
• Vicarious copyright infringement: infringer has the right and ability to control the direct infringer’s action and recap financial benefits from those actions
• Contributory copyright infringement: infringer knowingly induced or caused the directly infringing conduct.
Napster contended that its users did not infringe copyright because they only made personal copies and used the service in a way to amounted to sampling. Eileen Richardson (CEO) says “we are about enabling amateur and unknown artist to share their music on these new medium. Our job is not to stop pirating; that is your job” replying to RIAA representative in cyber chat at CNN chat rooms. From this point the collision course problem began with the music industry and the most high profile suits was that of the music group Metallica, Napster respond if Metallica identify users that were violating copyrights law they would remove them from the server.
5.2. Opportunity
5.2.1. Roadblock:
By Late spring Napster had it back against the wall. Not only was the company object of several law suits, but also fast running out of cash. On mid 2000 Mr. Hummer announced that it would invest $15 million in Napster keeping the business running.

5.2.2. Legal problems resistance:
Napster brings Daived Boies, who is a former lawyer with a strong background in intellectual property law to who had led to victory in the Microsoft anti trust case defend Napster against the RIAA. This step give Napster tow month’s extension in the court and the case was going against them. With the injection granted and the service shut down, Napster considered selling a minority stake in the company to the music labels and the splitting subscription, sponsorship, and advertising revenue.
5.2.3. BMG the rescue:
BMG one of the big five record label announced that it was forming an alliance with Napster to develop a subscription based music distribution service based in Napster peer to peer technology, BMG provided Napster with $60 million loan.
6. Conclusion
Creating an appealing pay service will be a steep barrier, particularly with the fact that the users have got accustomed to the free service and the existence of competitors who can provide the same service free. In addition, the opinion that they have been charged excessively by the music industry is common among the consumers and needs effort from all sides to correct this problem. Napster has sown the seeds of a digital revolution where the consumers have become tired of the traditional distribution model and have started expecting more.
As technology advances across the board and online digital delivery slowly replaces CD sales, these issues will become more and more pressing for the major labels. Napster needs to make recording companies realize a vision of a digital future. Recognizing and planning for future market needs now will allow these major labels - or anyone else who responds well to this market needs - to survive as the future of the music industry. Napster became wildly popular because it provided something that customers really want and that was not available anywhere else: convenient, on-demand access to everything. No Internet service, no record label, no retail store, no flea market, no radio station has ever before provided people with this opportunity, and the fact that people flocked to use it in record numbers shows clearly that this on-demand access is something of great value.
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