[ZDNet] Napster: Net market destabilizer?

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From: joelinda1@home.com
Date: Sat May 20 2000 - 15:23:50 PDT


     E-Commerce opinion
     Napster: Net market destabilizer?
     By Bill Burnham, ZDII
     May 5, 2000 11:40 AM ET

     Napster, in case you've been living under a rock, is a software
     program that allows individuals to freely trade files using the
     Internet. Napster has attracted a lot of attention because most
     of the files that people happen to be trading are illegal copies
     of songs that have been recorded in the wildly popular MP3

     As such, much of the debate and discussion around Napster has
     focused on Napster's implications for the recording industry.
     Fanning the flames of this discussion have been numerous
     high-profile lawsuits filed by the recording industry against the
     small company behind Napster.

     While Napster and its various copycats will no doubt have a
     tremendous influence on the music industry, the real importance
     of Napster has nothing to do with music, but has to do with the
     very structure of the Web itself.

     Napster's Brief But Important History

     Before elaborating on the broad implications, let's first review
     some background on Napster and what it's doing to the music
     industry. For several years now, the recording industry has been
     fighting a losing battle to prevent the illegal copying and
     distribution of copyrighted music over the Internet. Such
     copyright infringement really didn't start to take off until the
     advent of the MPEG-3, or MP3 standard, which made it possible for
     just about anyone to easily create and play relatively high
     quality copies of recorded music.

     It wasn't long after MP3 gained popularity that thousands of web
     sites started posting collections of illegal, or copyrighted, MP3
     recordings. In response to this trend, the recording industry
     began an aggressive campaign to try to shut down the sites that
     were offering the biggest collections of illegal MP3s. Lawsuits
     were the biggest threat, and in some isolated cases, offenders
     were actually dragged to court.

     For a brief point in time early last year, the recording industry
     seemed to be bringing the MP3 problem somewhat under control.
     Sure there was still a lot of illegal copying going on, but most
     of it was limited in scale. Almost all of the major MP3 sites had
     either been shut down or forced to dramatically scale back their

     Then came Napster. Unlike the centralized sites that posted
     collections of MP3s, Napster was a software program that enabled
     individuals to share their personal collection of MP3s with
     anyone else on the Internet. Thus, Napster instantly created a
     giant network of MP3 files, the sum total of which was far
     higher than any single Internet site.

     For teenagers everywhere, Napster made it almost laughably easy
     to find and instantly download almost any piece of recorded
     music. For the recording industry, Napster seemed to signal the
     advent of the apocalypse. Unlike big centralized sites that were
     relatively easy to target, Napster created a network of tens of
     thousands of smaller sites. Even if the industry wanted to shut
     these sites down, there would be almost no practical way to do

     Desperate to do something, the recording industry decided to sue
     the software firm that created Napster, despite the fact that
     this firm has no control of how their software is used. (It's
     like suing a word processing firm because someone wrote a death
     threat on it.)

     While the music industry may succeed in shutting down Napster
     (copyright laws are, thankfully, pretty strict), they can't put
     the genie back in the bottle. Already there are several software
     programs similar to Napster being circulated. If Napster is put
     of business, something else will simply take its place.

     While they would never admit it, Napster is doing the record
     industry a huge favor. Napster is demonstrating that the only way
     to control copyright violations is to protect their content
     before they release it to the public. The technology to do so,
     called Digital Rights Management, is new but rapidly maturing.
     Companies like Microsoft (Nasdaq: MSFT), Xerox (NYSE: X), Preview
     Systems (Nasdaq: PRVW), Intertrust (Nasdaq: ITRU) , Wave Systems
     (Nasdaq: WAVX), Reciprocal, and others (Softbank has investments
     in Preview, Intertrust, and Reciprocal) have all been focused on
     building this technology. The recording industry, however, has
     failed to adopt it, largely due to political in-fighting and poor
     communication. Perhaps Napster will force the music industry to
     be more proactive with technology.

     Napster's Real Importance

     Perhaps the greatest shame of the whole Napster debate is that
     the focus on MP3s and the recording industry obscures the real
     issue. Napster's fundamental architecture has the potential to
     destabilize many of the accepted premises that underpin the

     At its core, by independently connecting computers across the
     Internet, Napster enables the creation of a distributed,
     disembodied marketplace. This marketplace has no center and no
     owner, just a shared group of participants. This idea of a
     decentralized marketplace runs counter to much of the thinking
     behind many Internet marketplaces both in the consumer and
     business-to-business sectors. After all, companies are spending
     hundreds of millions of dollars creating centralized marketplaces
     founded on the premise that customers need a single, central

     However with software, such as Napster's, the need for a
     centralized marketplace is greatly diminished, and in some cases
     possibly eliminated. Just look at the MP3 sites. Prior to the
     advent of Napster, numerous sites flourished as centralized
     marketplaces where consumers could download/trade MP3s. One of
     them, MP3.com (Nasdaq: MPPP) even went public. However, with the
     advent of Napster, marketplaces for MP3 files were instantly
     commoditized. Original MP3 marketplace sites have either gone out
     of business or have hastily repositioned themselves.

     Napster Everywhere

     Taking the idea of Napster a step further, what's to prevent
     someone from creating the Napster of consumer auctions. If the
     Napster approach hit auctions, how could the existing auction
     players such as EBay (Nasdaq: EBAY), Amazon.com (Nasdaq: AMZN) or
     Yahoo (Nasdaq: YHOO) hope to compete? For that matter, what's to
     prevent someone from creating Napster-like programs that take on
     the numerous players currently creating business-to-business

     The short answer is nothing. There's nothing to stop programmers
     from adapting Napster to a wide variety of applications, each of
     which will challenge the site-centric thinking that predominates
     on the Internet today.

     In some cases Napster's architecture fundamentally undermines one
     of the crown jewels of Internet stock valuation theory. This
     theory holds that Internet marketplaces generate network effects
     as they grow in size. These effects in turn accelerate the growth
     of the marketplace and make it almost impossible for competitors
     to catch up. As it stands, the network effects generated by sites
     such as eBay are thought to be so powerful that it is almost
     impossible for these sites to be unseated. However, Napster's
     fundamental architecture and its impact on the MP3 market
     suggests that network effects are much more fragile than

     If this is indeed the case, some of the premium valuations that
     are enjoyed by both consumer and business-to-business
     marketplaces could come under pressure. Investors may begin to
     fret that they too will feel the powerful, distributed sting of

     Whatever happens, one thing is clear. The impact of Napster will
     be felt far beyond the confines of the record industry's
     executive suites. Indeed, Napster and its offspring are only in
     the early stages of a revolution that will likely impact
     boardrooms and stock markets across America.

     Bill Burnham is a General Partner at SOFTBANK Capital Partners
     and was a former Wall Street e-commerce analyst. SOFTBANK is an
     investor in ZDNet. For more information on SOFTBANK Capital
     Partners and a list of current job openings, go to

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