From: joelinda1@home.com
Date: Sat May 20 2000 - 15:23:50 PDT
http://www.zdnet.com/ecommerce/stories/main/0,10475,2562799-1,00.html
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
format.
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
operations.
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
it.
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
Internet.
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
destination.
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
exchanges?
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
suspected.
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
Napster.
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
http://www.sbcap.com/.
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