Let's begin with a moment of silence for the old Napster. I'll admit I used it. Did you?
Oh, I absolutely used it.
What was the attraction that drew 60 million users in about a year's time?
I had a very passionate theory about that, and many questioned my logic, but I felt that it wasn't ever about free. It was always about the glee of being able to instantaneously access virtually any song you could think of, download it, move it to your MP3 player. The free part was almost incidental to the extraordinary foundational change in terms of the way people could interact with music.
Absolutely. Tell me where Napster was when you came on board, and how it's changed since Roxio acquired it.
Well, we bought Napster just a little more than two years ago out of a bankruptcy proceeding. We were very fortunate
to pick up all the assets of the company, not only the name and brand and urls but also some peer-to-peer technologies
that we think will be very valuable going forward.
We basically leveraged all of the good will associated with the Napster brand and then, of course, purchased the Pressplay company, which was a legal online music service previously owned by Universal and Sony, and we put those two groups of assets together and then set off on a mission to re-create Napster in a legal reincarnation.
So what's the value of the Napster brand today? It must be a double edged sword, with having to explain to people that you're now a legitimate company. And then you have the younger kids who probably aren't sure what all the fuss was about back in 1999-2000.
Well, we found that the value of the Napster brand is incalculable. Some statistics: 97 percent of Internet users recognize the Napster brand; 74 percent have very positive feelings about the Napster brand. When you start a digital music company, particularly with the breadth of competition we have from some very well-heeled players, it's an extraordinary asset for our small company to have by far the biggest brand, the most well-known brand and the most well-loved brand in he business. So it has been a very valuable calling card for us to start our business.
Tell me about Napster To Go. It's basically an extension of your service to bring Napster to portable players, where the future is. Is that right?
Right. Napster To Go was launched on Feb. 3. Basically, what we've been trying to do with the legal version of Napster is to come as close as possible to the experience people had with the original Napster. With Napster To Go you're completely unencumbered. You pay a monthly fee, you access virtually any song you can think of, you download it to your PC. And now you can move hundreds, thousands of songs to your MP3 player without ever having to pay 99 cents a track.
Each song is wrapped in DRM so that as long as you subscribe you can access it, but if your subscription lapses the songs no longer play.
Right. What we are providing consumers with is an experience where they can have this unlimited access and playback and portability for a monthly fee, and as long as they keep paying fee, they have the privilege of membership, if you will — sort of an all-access pass to the world's music library.
How many subscribers do you have?
As of Dec. 30, we had 270,000 subscribers. We've been growing very rapidly. Our last two successive quarters we increased our subscriber base by over 50 percent.
How are you doing compared to Musicmatch or Rhapsody or your other competitors?
Musicmatch hasn't published figures for quite some time; we believe we're in excess of their subscriber base. The other major premium subscription service is Rhapsody, and we are convinced that we should easily surpass them in the next three to six months. Then we'll be the No. 1 subscription service in music.
I want to ask you about the Super Bowl commercials. Honestly, were they a good idea? Hare you seen any immediate, tangible benefits?
The $30 million advertising campaign we kicked off at the Super Bowl has already been an over-the-left-field-fence home run for our company. We have dramatically increased our subscribers both to our basic service and to Napster To Go, already considering exceeding our targets. So I would have to say that we are thrilled with our marketing campaign.
I saw one of your ads that said something like, which would you rather spend: $10,000 for 10,000 downloaded songs or 10 bucks a month to listen to a million songs? What's the idea behind that?
Well, the idea is this. We don't really compete with iTunes. We feel we could compete with iTunes all day long and frankly kick their butt. iTunes probably has 10 or 15 percent of the comprehensiveness of what the Napster experience offers. In fact, we offer an a la carte download service similar to iTunes for 99 cents a track or $9.95 an album.
The issue for us is not iTunes but the iPod. The iPod has been so successful that what you have is a lot of consumers going into the marketplace, very excited about the opportunity for digital music, and they purchase the most well-known device. They don't know in advance that when they buy that device they can't use Napster or any of our other competitors. So they get trapped in the experience of iTunes.
Now, that experience is very one-dimensional and it's very costly. We thought it was important in our initial advertising rollout to really contrast the iPod/iTunes experience with the Napster experience and we think our advertising campaign's results show that it's been quite successful in getting people's notice.
Napster plays on mp3 players by Creative, Dell, Gateway, iRiver and Samsung, but it won't play on an iPod, which controls about two-thirds of the MP3 player market. Isn't that a big built-in disadvantage?
In the short term it has been a disadvantage. I think the real statistic that we look at is Apple controls about 32 percent of the worldwide MP3 market. So when Apple throws their statistics out, they never include flash players, which is an enormously important part of this market. Also, we fully expect iPod's share of the hard-drive device market to have a substantial decline during this Christmas selling season because virtually every MP3 player sold in America will support Napster To Go this fall — except the iPod.
So you're going to have consumers having to make a decision between last year's technology, your father's Oldsmobile, or any other MP3 player that will support this extraordinary portable subscription opportunity.
Why is renting digital music a better deal than owning it?
The easiest way to answer that is simply to go to Napster.com, download our client and take a free two-week trial of Napster. But let me try to describe why we think this is extraordinary. Imagine a day in the life of a Napster subscriber. You wake up in the morning, put on a playlist that you created while you're getting ready for your workday, you jump in your car with your MP3 player where you downloaded 10,000 tracks of your choice, and you're grooving in your car. You get to work and you turn on one of Napster's 50-plus interactive radio stations; you're listening to over 200 pre-programmed tracks of any genre you want. You get the picture.
It is just a completely immersive music experience, encouraging discovery, sharing, community. We give our members the ability to email songs to one another to check out playlists. So this experience is so dramatically different than going to a store, listening to a 30-second clip, and making a decision about parting with a dollar for a song.
The only downside, of course, is that once you stop subscribing, you're left with nothing but memories.
That's correct, but the way we look at it is kind of interesting. I believe that we are going to see a shift in the way consumers think about music. And that shift we're seeing very visibly at Napster. The point is simply that people are going to value instantaneous access to anything they can think of anywhere anytime. That's what they'll place value in rather than ownership — I own this CD, I own this track I downloaded. Because in the digital world, everything is available.
So it's really a paradigm shift for people to recognize that the music collections they've carried around with them on their back, all of this stuff doesn't matter anymore. Because for a monthly fee they can have access not only to everything they've collected in the past, but everything they don't even know about yet that they can still discover. It's a very different model and extremely attractive, once you get used to it.
The other thing I'd emphasize is, if people still desire ownership and they want to burn a CD or put together a compilation disc, they can still do that at Napster.
What about the new breed of file-sharing services like Kazaa? The trading going on there is illegal, but how is what Napster now offers superior to doing it the old-fashioned way?
That's an easy question. First, before you even get into the morality of it, the current peer-to-peer experience is fraught with peril. You've got spyware, viruses, you've got serious damage that can be done to your hard drive, you've got booby-trap files, all of the spoofing ware that the major labels are using. And it has turned into a Petri dish of corruption for your hard drive.
We actually had a focus group with a bunch of young kids who were all using the illegal services. We put them on Napster and they all went absolutely crazy. We said, would you pay for it? They said, yeah we would. I said, tell me why. This kid says, 'I've had to replace my hard drive three times in the last 18 months from using the illegal peer-to-peer services.'
Some of us have fond memories of the original Napster, but illegal peer to peer today is a pretty ugly playground. When you contrast that with the pristine digital environment that we've created at Napster, we think the benefits of paying are immediately seen. And then you have the knowledge and good feeling of knowing that you're not cheating the artists that you enjoy.
How did you come to the $15/mo. price point for your chief subscription offering? Is that as low as it can go from a practical point of view?
When you think about it, 15 bucks a month is one CD. So for the price of one CD you can have access to the world's music catalog, put it on your MP3 player. We came to that price point by doing some extensive consumer research and focus groups, and that turned out to be the sweet spot.
Of that $15 a month, how much goes to the artists?
We take some costs off the top and then we split the balance with the record labels. And then the record labels pay the music publishing out of their share and they pay the artists out of their share, which all depends on each artist's contract with the labels.
Generally, though, it would fall in the 5 percent range?
Five to 10 percent, depending on how powerful the artist is.
How many tracks does the average Napster To Go subscriber download?
We haven't shared that data yet. Since it's been out only a few weeks, I'm not sure we fully understand the trends. But what we're finding to be extremely popular is what we call playlists to go. So instead of just a 10- or 15-track playlist, we'll have 20, 30, 40, 50 tracks. We have one called Jazz 101, where you can just drag and drop the history of the coolest jazz in the world with one click to your MP3 player. You can just drag and drop the playlists you've already created on Napster. We encourage people to play around with world music and reggae and old-school R&B.
Besides playlists, what kind of recommendation technology do you have?
Certainly we have a recommendation engine that is somewhat typical of services like ours. If you search for Neil Young, we'll say, Users who searched for Neil Young also liked the Eagles and Jackson Browne. But in addition, we allow you to search for music in the playlists of other users. So if you find a unique blues track that turns you on, you can say, I wonder what else that guy has in his library? With your permission, we can allow people to dive in, just looking at your user name, and see what you're listening to. This is a feature our users are really enjoying.
Our new Napster client has the ability to take a genre page and make that your customized home page and landing page. Going forward, we have very ambitious personalization goals. Our vision is that one day when you log on to Napster, it will be highly personalized to each individual.
How many years away are we from a true celestial jukebox?
The major impediment to a true celestial jukebox in the legal world is the complexity of the rights clearances. This remains an important challenge for everyone involved in the business. The biggest problem, frankly, are the music publishers. It's just the sheer clumsiness of the way the music publishing organizations are set up.
In the United States, about 50 percent of music publishers' rights are cleared by one agency, the Harry Fox Agency. The other 50 percent are represented by 50,000 individual music publishers. So this is where it becomes a complex task for anyone to get out there and clear this stuff. We're trying all kinds of things to make the process simpler.
While we have the largest music catalog in the world, well over a million tracks, we aren't remotely satisfied. We want to keep adding hundreds of thousands of tracks as aggressively as we can. We have more than doubled our catalog in the past year or so since we launched. And this isn't with strange tuba orchestras, this is all with really high-quality major label and independent stuff.
What about a blanket license rather than doing it one by one?
You know, a compulsory licensing of the music publishing would be a tremendous windfall for digital music. It would be a win-win-win for everyone. It would get more content out there for consumers to enjoy. It would help propel our business, letting us get closer to that celestial jukebox. All of these teeny little music publishers from all over the world would have an opportunity for substantial income. Compulsory licensing is being discussed in Washington, and we'd love for it to happen.
It used to be during a weekend with the original Napster you could find songs from really obscure labels and eclectic artists. Now that Napster's gone legit, it's harder to find more obscure material legitimately online. What's the holdup with signing up the smaller indie labels?
Usually it's just the logistics of doing it. We have a pretty comprehensive music clearing operation. It's pretty rare that you run into someone who's not interested in licensing their music for digital distribution.
But I'll emphasize that 85 to 90 percent of the top 100 searches on Napster are successful. Consumers, nine times out of 10, will find what they're looking for.
Let's discuss the recent friendly jousting between you and Steve Jobs last month. When you heard that Jobs sent an e-mail to top record industry executives, alerting them to a security gap in Napster's service, what was your first reaction?
My first reaction was that he must be pretty frightened of the Napster To Go technology to be so petty. Frankly, that's what I think the impetus was for him to fire that off. It was really pretty silly.
He was claiming we had some sort of security gap, and of course we didn't. That technology — like recording something off of a radio broadcast — had been out there for 10 years. Certainly his service is susceptible to it as well.
We saw it as a sign of weakness, that he's very concerned about a technology that makes his hardware and his software irrelevant in our view.
The same afternoon you shot off your own email to the same execs, defending Napster's security and pointing out how trivial it was to unlock "a large collection of iTunes music in seconds." The point you were making?
We wanted to make sure that there wasn't any misunderstanding that there was a problem with the Napster technology. We hadn't been hacked, we still haven't, and frankly I doubt we ever will be.
Many analysts believe that the online music marketplace won't truly flourish until a lot of the digital handcuffs that are placed on consumers today are removed. What's your view of what needs to change in the world of DRM?
If you had asked me a year ago, I would have said that the DRM landscape is a mess and needs to be cleaned up. But I'm feeling much more positive about where we are right now.
I think this is a Windows Media Audio world. I don't think there's any question about that. WMA already dominates MP3 players globally. Even in the United States with flash memory players, the WMA format dominates the set-top box, and digital media adapter technologies — enormous corporations like Comcast, Sky, SBC, Murdoch's operations, are all designing their entry into the living room with digital media based on the Microsoft platform. So I think there's zero question that Windows Media Audio will be the prevailing technology for all platforms, hardware and software. That's why we've built our foundational technology around WMA.
I think the WMA DRM now is actually very good. In terms of digital handcuffs, right now with the Napster subscription you can download your content to three PCs and three MP3 players, which we think is very liberal. You can have one in your office, one in your home office, one down the hall in your kids' room. That's a lot of value for $10 or $14.95 a month. If you want to burn a track to CD, that's 99 cents. So I think we're getting to a very good place.
What happens if Apple counters Napster To Go with iTunes To Go? Do you see a music subscription service coming from Apple?
If they bring out a subscription service, then they will have a competitive product that's good for their users. Ultimately, their users will have to make a tough decision. Do they want to stick with a platform that is not going to be the ubiquitous platform for digital media around the world, that is not going to take them into the living room, for example.
The Apple technologies will always be what they have always been: really great in a completely closed, proprietary world. But at some point, people will lose their sense of humor about that when they realize that they're constantly running into situations and obstacles where they have a technology that has not been built on an open platform. The most obvious example is, if you bought an iPod and want to listen to Napster, you're screwed. That kind of is the Apple way.
Leaving aside the question of whether Windows Media is really an open platform, where does Napster stand with the record labels and the RIAA these days?
We have an excellent relationship with the five major labels and the RIAA. We started this game with a deep respect for artists' rights, and I think that the rights holders recognize that. The labels have been very proactive in helping us get ready for the portable subscription opportunity. While we always have little frictions along the way, they've come an enormous distance from where they were two years ago, when all they were doing was obstructing the progress. They've moved into a very proactive path.
Say I'm a musician and I want to get my music on Napster. What do I have to do?
At this point, we are only accepting music by signed artists. So we'd suggest that their record label contact me, and I'll make sure our music programming folks jump right on it. We are very, very interested in getting into every nook and cranny.
What is the state of online music services today, where does it need to go, and how does Napster fit in?
Our vision is that Napster is a branded music experience that people will continue to come to because they're relying on us as the genuine article that's going to present the most comprehensive music library in the most fun and interesting way. We want the consumer to go to Napster, when I'm interacting with music on my PC, when I'm filling up my MP3 player, when I'm making decisions about how I'm going to listen to music in my living room and in my car.
Today we're in a world of online music companies like Napster, satellite radio companies like XM and Sirius. You've got the satellite delivery of television through companies like DirecTV, or Comcast supplying music services through their television offerings. At some point, the consumer will grow weary of paying each of these separate entities for an uncoordinated music experience.
Where do you see Napster in 10 years, and what is it doing?
Ten years from now we are sitting on top of the legal celestial jukebox. We are one of the biggest names in digital music, if not the biggest. We are ubiquitous, and we are cross-platform. We are everywhere you want to listen to music — in your PC, in your living room, in your car.
J.D. Lasica is author of the upcoming book Darknet: Hollywood's War Against the Digital Generation.