In 1999 at a Sony Music corporate meeting, the room was filled with Sony executives and attorneys from across the globe. At one point, one of the Sony attorneys gave a presentation on two music services. One was the Sony music service and the other was a tiny, fledgling service.
The Sony service required users to go through multiple layers of Web sites in order to get to the songs they wanted. And even then, there were severe restrictions on the use of those songs.
Then the Sony attorney demonstrated the other service. She typed in the name of a Beatles song, “Hey Jude.” Not only did the the Beatles version appear, but so did other versions created by multiple artists.
And — it was free.
And by the way, the name of that service was Napster.
Podcast: Listen to the entire interview (25:45 minutes).
New Digital Age
Steve Gordon was one of the Sony executives present at that meeting.
Gordon is the author of The Future of the Music Business: How to Succeed With the New Digital Technologies, a book that lays out the rules for independent artists and entrepreneurs to distribute music digitally.
Almost 10 years later, the music industry is still reeling from the “Napsterization” of its business model.
In an interview with the ECT News Network, Gordon provides his insight into the impact of Napster and other digital technologies on the music industry.
According to Gordon, the music industry has already gone over the cliff, revenue has steadily declined over the last decade and the only remaining question is: How hard will the industry finally land when it does hit bottom?
Gordon also offers key insights into how independent artists especially have an opportunity with digital distribution. Using digital technology, he says, they can produce and distribute fairly cheaply and keep most of the profits for themselves.
Here are some excerpts of the interview:
E-Commerce Times: In a nutshell, could you briefly talk about Napster and the music industry and what really happened?
I remember when Napster came out very well because we had a business affairs conference in New York at the time, and for the first time, all the lawyers from Sony — where I was still an executive — from all over the world attended this conference, and for the first time, they addressed digital music. The discussion on digital was led by a litigator, for reasons that will become clear in a second.
What happened was she showed us what Sony was doing with digital, and then she showed us Napster. What Sony was doing with digital in 1999 was offering two Mariah Carey singles for sale, and you had to go to the Sony Music Web site, then to Columbia Records’ Web site, and then inside Columbia Records, which was owned by Sony, you’d find Mariah Carey’s Web site — and then inside that Web site, you’d find these two singles for sale, and they were both around (US)$3. For $3, you could listen to each song on your desktop, but you couldn’t download it to your computer, you couldn’t share it with your friends, and you certainly couldn’t press a CD, or burn a CD.
Then she showed us Napster, and the glowing skull came up — it’s still around now, but in legal form. And she asked for a song from the audience, and somebody requested “Hey Jude.” She put it in the browser, and not only did the Beatles version come up, but every other artist who ever recorded the song — there were around dozens of versions, and they were all downloadable, they were all freely shareable with your friends, and they could all be burned to a CD, and they were all free.
ECT: Amazing difference between what Sony was doing and what Napster had done.
Then, we all got the impression that we were in trouble. And then it got worse — she requested another song and somebody came up with an obscure song from the ’50s, and again, dozens of different versions came up and they were all downloadable, burnable, shareable and free. So, we knew that we had a problem. So what did the record companies do, including Sony? Well, there were some that argued that we should make a deal with Shawn Fanning or create a Web site of our own to compete.
And we chose not to do this — we chose to sue Napster instead of creating an alternative and instead of licensing Shawn Fanning, which he requested that we do. He wanted to negotiate and pay us. But the business model in 1999 was so successful that we couldn’t get off of that approach — which was to sell records like no tomorrow and hope that a few would sell incredible numbers, which happened.
ECT: What you’re saying is that the cash cow was so great that you couldn’t see the future coming at that point?
Well, we didn’t want to see the future. Let’s give you a concrete example: For less than $1 million we could create a Mariah Carey CD, compared to Hollywood, where their blockbuster movies cost $25 to $50 million, even then. And if we sold 5 million units, which we often did of artists like Mariah or Pearl Jam, or Bruce Springsteen, Bob Dylan, Billy Joel, we could make $10 wholesale for every record. If you sold 5 million, that’s a hell of a lot of money.
ECT: That’s $50 million.
And only with an investment of about a million. So the record companies, all five of them — the majors at the time — they resisted the change that they saw in Napster, because they were making so much money the old-fashioned way. So they sued Napster, and they sued it out of existence. It took two years, but they were successful.
However, while they were suing Napster, other peer-to-peer systems were growing, like Kazaa, created by other teenage technologists. And in fact they were faster, easier to use than Napster, and offered more music because they allowed people to share directly with each other instead of through a central database. So while the record companies were resisting the growth of digital and trying to shut down peer-to-peer, the world was going in a different direction. In fact, the world of the fans and the major consumers of recorded music was going in a different direction.