Record industry execs could learn a thing or two from Napster's electronic distribution model.

COMMENTARY--By my calculations, the record companies can make as much or more money by abandoning their old business model and going with Napster's. They should look at the numbers, do the math, and then form a massive joint venture with Napster. Then again, why do that when they can have both business models and make twice as much money?

When Napster first rolled out, it had perhaps 50,000 users, and as a music distribution conduit, there was nothing compelling about it. The concept made no sense to the record industry, which saw it as a glorified bootlegging operation. But along with the MP3 movement, Napster introduced the notion of practical electronic music distribution, which appealed to early adopters and technology nuts.

Once the RIAA lawsuits began, however, we saw an oft-repeated phenomenon: incredible free publicity for a little-known product, thanks to litigation. Napster became a household name within months. But instead of the record companies dealing with 50,000 dedicated users making copies of their music, they now have to face over 50 million.

The sheer number of users and how this changes the math of electronic distribution was overlooked by the RIAA. According to the RIAA, the CD business is a $13 billion market. Of this $13 billion, a serious chunk of money goes to distribution and manufacturing. It's hard to determine the net profits after all the expenses and overhead, but it's probably only a few billion.

Add it up
Meanwhile, many Napster users have said that they will pay up to $20 a month to keep this service alive. The company has suggested $5 a month for access. Exactly how many people would pay is unknown, but I suspect the numbers will be high. And if the service were legal and ethical, I'm certain many people who are on the fence would join. Adding special international servers and more specialized subsystems would also make a subscription model more appealing. With good marketing, more services, and legal, free trading of all content 24 hours a day, I think maintaining 50 million users is possible.

Napster could become the dominant, worldwide music distribution source. And being the big gorilla, there would be no competition, because there would not be enough critical mass on any other system.

Now imagine if the record companies joined the deal. ASCAP, BMI, and other international royalty distribution organizations could form a consortium to oversee the trading. They could monitor which songs are being downloaded for the purposes of royalty payments to the artists and record companies, which could come from the subscription revenue.

I think $10 a month is the right fee. I'd pay it in a minute. If 50 million users each paid $10 a month, or $120 a year, for unlimited access to everything, the service would gross $6 billion annually. Most of this money would be redistributed to the artists and labels, as determined by various contracts. Britney Spears would still make most of the money, but nobody can complain.

The $6 billion a year would be right off the top and amount to almost pure profits, because the cost of distribution is nil. Possibly, the record companies and artists actually could make more money from this source than from conventional CDs.

Going both ways
But the kicker is that the record companies could do both! Anyone who has experimented with Napster knows that tracking down all the good songs from your favorite artists is more trouble than it's worth. I know plenty of people who use Napster for the occasional hard-to-find song, but still concentrate their efforts on buying CDs. Why would this change? In real terms, Napster hurts CD sales only in situations where a one-hit wonder has a CD full of junk that nobody wants.

So Napster sits there as the perfect opportunity for record companies to profit. All the record labels allow FM and AM radio to broadcast their songs for an ASCAP fee; why not use Napster in a similar scenario? But this time the fee would be more substantial. Apparently only a few corporations, such as Bertelsmann, can even sense the possibilities. This situation is like a silver prospector stumbling onto a rich gold mine, then closing it because it doesn't contain any silver. What are they thinking?

In real terms, Napster hurts CD sales only in situations where a one-hit wonder has a CD full of junk that nobody wants.