Acceptable Losses

Richard J. Greenstone

Note to reader: This article, like any article on Napster which attempts to predict the future should be taken with a grain of salt. It was written in April and May of 2001 for publication in August 2001. A lot can change in just four months…

        Six persons–five record label executives and the president of the Recording Industry Association of America, the RIAA–prance around a coffin. The remains of Napster rest quietly, its short life and unrealized potential not fully appreciated by the revelers make the circle dance not one of victory, but a macabre dance of death. In short, the failure of the record labels and the RIAA (collectively the “record industry”) to recognize opportunity and embrace the immature Napster model point up one of the biggest business mistakes in history.

Little Round Top, Gettysburg by Richard Greenstone, 2005

Little Round Top, Gettysburg
by Richard Greenstone, 2005

    This author is not an apologist for Napster. Any business that distributes infringing goods is bound to find more success (isn’t that how the Mafia works?) than one that has to go out and legitimately acquire or manufacture property. It is recognized that the Napster model was built on another persons property–copyrights. But it should be pointed out that there is precedent for this: The formation of performing rights societies such as ASCAP, BMI and SESAC to collect license fees. But this time around the record industry never even gave Napster a chance to adopt that model. Napster instituted a paradigm shift for the record industry and the failure of that industry to embrace change will set it further back and alienate its core customers. The record industry saw a challenge to its existing business model. The change from its core customer base–young adults–yet the best the record industry can do is hide its head in the sand through litigation rather than through the adoption of a positive stance.

        Neither is this article about copyright and the ongoing Ninth Circuit Court of Appeals litigation. It is about recognizing an opportunity and grabbing it, exploiting it, even when its not yet the perfect model as outlined by various record company visionaries, A&R people, web site designers, security experts, accountants, attorneys and other so-called decision makers.

        Let’s examine the effect of Napster first from the point of view of the customer: Napster allows a user to bypass established record distributors. It allows a user to get just what they want–one particular song, not the whole album. Purchasers have long bristled at paying $15 to $20 for a compact disc only to find one or two songs worthwhile. Napster empowers a user to find music that may be out of “print” and to spend money on “old music” rather than trendsetting new music. New artists can use Napster to distribute music at little or no cost thereby cutting out the record labels that often take more than they give to an artist in a standard recording contract.

        The changes to the recording industry, from their perspective, are far more disturbing: Napster allows users to obtain music without the record label/brand identification. Napster allows users to get what they want, just one or two songs versus an entire album of often second rate filler material so that the record industry can sell an overpriced compact disc. Napster allows users the convenience of “shopping” from their computer thereby bypassing established distribution outlets. Napster users often bypass the record label hype machines while looking for songs. Napster users don’t have to be subjected to record stores which often don’t have an item in stock. Artists can distribute their works without label intervention and without the label “dipping its beak,” i.e.,taking the lion’s share of income or applying unreasonable and outdated deductions.

        The record industry suffers from hubris; it feels that it can sell products better, cheaper, even faster than Napster via the Internet. That is not the case. To this day, each of the record companies have failed to deliver a compelling and easy way to purchase music. And they have completely failed and shown their inability to deal with technology in an elegant way by their insistence on noncopyable music. The Secure Digital Music Initiative (SDMI) still founders after several years. The record industry should learn from the experience of computer software publishers, i.e.,encoding, copy protection, hardware and software keys, just don’t work. Some hacker will always crack the system. And hackers are always out there, but what it really says is that the record industry just does not trust their customers. It’s a terrible message to send and one that always earns negative publicity.

        The software industry has dealt with this problem in a logical way: Very high end programs that sell for several hundred to thousands of dollars are protected by a registration number system, usually an initial string of letters and digits followed by a hyphen and then several more digits. The first string will appear in the “About This Program” box in which it also delivers a copyright notice and basic licensing information. The last string is necessary to make the software program work but does not appear in the about this program box. So if the user copies the program and registration number from the about this program box, the program will not work. All other programs, virtually all sub$-100 programs can be obtained on a try before you buy basis: Download the program, use a fully functioning version, then it either times out or some functions will not work after a period of time.

        Why can’t the record industry adopt the model of allowing a certain number of plays on any machine including machines to which the music was passed to (which allows for the viral spread of music), then ask the user to pay for that particular piece of music after a certain number of plays on a unique machine if he or she wishes to keep it? This would have the benefit of spreading goodwill (free music) with the added incentive that if the music has any merit or appeal, the user must eventually pay for it or suffer the automatic deletion of the song file from the machine.

        Napster works. It works the way people purchase music: A person enters a record store and searches for a disc first by genre (the rock ‘n’ roll “department” if you will), then by group. A user searches online for music by artist or song title, and then is given a variety of files to choose from, usually presented by bit rate, source, download speed, etc. What a user does not do is search for or purchase music by record company. A person does not say, “Gee, I think I’ll buy a piece of music from Elektra.” That’s an unnatural way to search for and purchase a song and completely ignores the brick and mortar model of music distributors selling music from all record label sources. Thus, the balkanization by record companies of online distribution will doom those record companies to insignificant online sales.

        The current version of Napster may not have been the ideal model for the record industry, but what software program is ever fully effective in its version 1.0 incarnation? The current version of Napster may not be worth spit to the record industry, but the adoption of the Napster model would have coopted millions of users happy with the Napster system. The record industry should have taken a lesson from the computer industry: Version 1.0 of a program does not fill all needs and is usually poorly implemented; version 3.0 is the killer app.

        Napster users could be converted to a paying subscriber base. It is recognized that not all of them would pay, but, there was a system in place whereby a large number could be converted to paying customers, and happily so, because they do recognize the meaning of copyright. But now the record industry has forced these people–with their take no prisoners stance–to migrate to systems where there are no central servers; where there are no accountable companies. The record industry–indeed all copyright industries–could have been educating people about copyrights. “You don’t walk into a shoe store and just take pair of shoes. It’s stealing. And you don’t copy software or music, that’s also stealing but we have a name for it–copyright infringement.” The entertainment industry and the computer industry should have been paying for massive educational campaigns since the early 1980s when computers made software easily copyable and video cassette recorders allowed copying via time shifting. Now twenty years have passed, and a generation which could have been educated was ignored.

        So what does the record industry expect when people take music? If there had been education programs in place, they would have been able to show that music on the radio is not really “free,” and therefore music from the Internet should not be free. The seeds of the Napster revolution were sown over twenty years ago.

        Napster had a reported 50 million users. That’s not a community, but a virtual nation. And the record industry decided to declare war on that nation not willing to recognize one fundamental fact: The citizens of that nation comprise record industry customers. Wars have ugly truths. In order to win the war and not commit the biggest business mistake of all time, the record industry should adopt the notion that a certain amount of music they distribute will be delivered without payment. Call it goodwill or acceptable losses. Every business must factor into its pricing structure some acceptable losses. In the restaurant business it’s called “waste”; in the retail business it’s called “shrinkage.” The record industry already factors into their pricing structure the inevitable shrinkage that occurs as a CD makes its way from recording studio, to manufacturer, to distributor, to retail store.

        The record industry locks itself into a selfdefeating stance when it expects compensation for every last unit. Every consumer has experienced the uncomfortable feeling of going someplace that puts security before customer service. It’s that awful feeling when a guard patrols the exit and leers as you leave, or the ubiquitous security camera panning in sequence with your footsteps. Businesses designed to stop theft instead of meeting customer needs are often the most unsuccessful.

        The record industry needs an audience. Without it they have no income. They should be doing everything possible to deliver music to the user in a manner that the user wants and needs. They’ll get far richer with that strategy. But at this time, the record industry has managed to alienate a nation of users.

        In the end, the record companies should concede defeat in this war, and acknowledge that there will be “acceptable losses.” They cannot license each and every sound recording. There has always been, and there will always be some copying. The computer industry recognizes this, but the record industry does not; the prosecution of the war killed the golden goose called Napster.

This article first appeared in The Licensing Journal, August 2001.