Monday, February 24, 2014

Killing Napster Created Today's Apple Inc.

The Internet is not a place but a tool. If it is a place, it is the mall with a porno theater out back. If traffic stats are to be believed, Netflix streaming takes up 25% of traffic at night and porn makes up 33% of traffic. Netflix does not stream porn, so roughly 50% of all traffic is video entertainment. Add in digital music, and the Internet is just a media distribution platform. Apple's ITunes has passed Walmart as the top music "store" in America. Napster was part of the Wild Wild West downloading era of the Internet. There were programs before it but none as awesome and simple for music downloading as Napster. Napster was killed by the music industry's stupidity. Apple and Napster are linked. In Napster's death, Apple was saved.

Napster was a file sharing program that allowed search and previewing of anything you typed in. It would find it somewhere if someone was sharing a file with that keyword. Obscure stuff, new releases, covers, live concerts, Napster had it all. This helped boost the mp3 player market, but when people bought mp3 players, there was that "will they outlaw mp3s or no?" concern. In their arrogance and forgetting the boost the industry saw after the invention of the recording tape player, the music industry unleashed the hounds on Napster. It felt like it was over before it really took off. This was all in early 2001. Because the music industry has no soul, they went after individuals for illegal file-sharing, taking grandmothers to the cleaners for hundreds of thousands if not millions in headline grabbing damage awards. Napster was dead and people were afraid. There were also viruses if you used those dirty illegal file sharing programs.

At the same time that Napster was dying, Apple rolled out ITunes. In late 2001, Apple rolled out the Ipod. It was classic Apple: expensive, for a price insensitive market, stylish and destined to be awesome but fail. Sure it stored 1,000 or 10,000 songs, but where would you get them, man, mp3s were illegal man, and the file sharing systems were dirty. The genius move was in mid-2003 signing deals with record labels to set up the ITunes store. Proof the efficient market theory is crap is looking at Apple's stock price in 2001 through 2003. Here was a company on the ground floor of having a monopoly on a new technology and the share price bounced around $10/share for three years. It is over $500 now. Want a time machine? I do.

Steve Jobs and crew knew that the mp3 technology would not be denied so they tapped into a feeling that many people who were not part of Napster's early adopter users but the greater market would want: a cheap way to download music legally and not get in trouble. Like buying weed from a licensed seller in Colorado vs. getting it cheaper from a dealer, many will take the sanctioned route if it keeps them out of trouble for a little bit more. Jobs was even smarter in making every download $0.99. Locking in the price screwed the record industry because they could not slot different singles, but it was great for the middleman and consumer. Come on man, it's not even a buck a song, just use ITunes. Jobs also tapped into America's longing for consumer products that marked status and "cool". Celebrities were photographed with those white ear buds before you bought one. That's not a coincidence. Somehow Apple dominated the mp3 player market with over 90% share yet the Department of Justice never cracked down on them.

This might be too much of a reach, but read this 1996 interview with Steve Jobs. See if his webobjects talk sounds familiar (bolding is mine).

Jobs: There are three parts to the Web. One is the client, the second is the pipes, and the third is the servers. 
On the client side, there's the browser software. In the sense of making money, it doesn't look like anybody is going to win on the browser software side, because it's going to be free. And then there's the typical hardware. It's possible that some people could come out with some very interesting Web terminals and sell some hardware.  
On the pipe side, the RBOCs are going to win. In the coming months, you're going to see a lot of them offering a service for under $25 a month. You get ISDN strung into your den, you get a little box to hook it into your PC, and you get an Internet account, which is going to be very popular. The RBOCs are going to be the companies that get you on the Web. They have a vested interest in doing that. They'd like to screw the cable companies; they'd like to preserve the customers. This is all happening right now. You don't see it. It's under the ground like the roots of a tree, but it's going to spring up and you're going to see this big tree within a few years.   
As for the server market, companies like Sun are doing a nice business selling servers. But with Web server software, no one company has more than a single-digit market share yet. Netscape sells hardly any, because you can get free public-domain software and it's very good. Some people say that it's even better than what you can buy.  
Our company decided that people are going to layer stuff above this very simple Web server to help others build Web applications, which is where the bottleneck is right now. There's some real opportunity there for making major contributions and a lot of money. That's what WebObjects is all about. 
What other opportunities are out there? 
Jobs: Who do you think will be the main beneficiary of the Web? Who wins the most?   
People who have something -  
Jobs: To sell!  
To share.  
Jobs: To sell!  
You mean publishing?
Jobs: It's more than publishing. It's commerce. People are going to stop going to a lot of stores. And they're going to buy stuff over the Web!

What Steve Jobs described was his company working on a means to offer a platform for people to sell goods and buy goods using applications. His company would help them write these applications. Jobs was already looking to figure out how to create something that would be a middleman nexus between consumers and producers. He saw the Web becoming the new Mall. He knew transactions would come, and like MasterCard, he wanted a processing fee. Like a real estate developer, he wanted consumers' buying attention and mindspace. In the interview, Jobs spouts criticism of education system inertia and the coming consumer scrapping of desktops.

The Ipod created the cool branding. Apple had to know with technology gains, it would be no time before others created Ipod competitors and could undercut them on price. They would either have to innovate or see margins shrink. The Ipod family was still the gorilla in the market, but it was an awfully steep price to buy the gorilla. As cell phones offered mp3 playing technology, the cell phones would erode the Ipod mp3 player market. Apple struck back with the Iphone. It became the cool thing to have because Apple had cornered the market on cool technology with Ipod mania. Jobs had a zombie market of brand loyal consumers to then create his webobject or app marketplace. The Iphone tapping into the web and having apps is your shopping guide, store and if digital, tool for using the product.

Let me offer a counterfactual for a second. In the year 2000, the recording industry tells Metallica to shut their has been mouths up. The music industry convenes a meeting. With this new mp3 technology, they will not be able to charge $21.99 for Mariah Carey album releases. What to do? A young research analyst stands up and explains an idea.

Gentlemen, and I use it loosely you sick bastards, we have an opportunity here. This cute little system that these two brothers dreamed up is a potential market research tool that we could not top. Don't kill Napster. Buy these guys out. In fact, these guys may be the ones to write code that would add new features, so let's keep them on for R&D. Think of it. We have every user library, tastes, searches, and if we install a player into the program, we can tell what they play and how often they play it. We have a research tool that is also a distribution network. As new users adopt this, they will be less techie and more normie. In two years, a middle aged woman is going to join Napster. After her 10th download of James Taylor for 99 cents, we'll send her a free 30 secs of the new version of him, John Mayer, for $2.99. She likes Carly Simon, we got new versions of her, too. Mariah's getting fat. We can substitute that BeyoncĂ© girl for her through this system to girls everywhere. We can set the singles at whatever we want. Some rocker dies, jack up his singles. It'll be billions I tell you billions!
Applause. The music industry buys out Napster, keeps the system free, and markets it a synthesis of the old timey jukebox with a information highway search engine. The music industry's sales still drop but not as much since digital downloads are their domain. Pricing them cheap enough while simultaneously going after illegal downloads protects their turf. Apple never gets the ITunes monopoly. The Ipod is an expensive gadget for some wealthier users, tech gadget geeks and music lovers. Apple's stock stays around $10 for a decade. Blackberry stays alive for a while longer. Steve Jobs dies of cancer, and no one gives a shit but his friends and family.

I can see it happening, but it would have taken vision and imagination on the music industry's part. If Napster stays alive, there may have been challengers. The industry may have worked through an initial agreement, then developed their own competing programs to beat up on one another. Would Apple Inc. have died? No. There is always a market for high end products, and Jobs would have reached his webobjects/apps idea some way. Would Apple Inc. be the monstrosity it is today with half a trillion market cap? No, and everyone you know today who is an Apple aficionado would be a little less annoying today. It all started with grabbing one monopoly and a new technology at the same time... and the destruction of an actual program that embodied the romanticized, free spirit version of the web that we all wish was still around.


Mike said...

Interesting piece. The music industry monoliths always seem to lag behind the trends. No way they had the foresight to consider what you proposed so instead they sought to muzzle Napster any way they could.

Also, it's interesting to see what the music industry has become. Either the acts are exploited 'pop idols' or starving artists that exist only in indie circles.

OT: Cross the gay mafia and you will be banished, as Alec Baldwin learned. His decades as a liberal crusader apparently meant nothing.

Son of Brock Landers said...

Thanks. Napster was an opportunity not a threat. They did not see it that way. Now they languish as you say it with small time indie acts or pop puppets.

I actually feel bad reading Baldwin's "goodbye". One day the media will die and then their protected groups will need to reform.

klejdys said...

I was an a early adopter of MP3 technology, leaving my PC on (w/ AOL!) overnight, downloading tracks on Napster while I slept.

I actually had two MP3 players; the RIO 500, which had 64MB of memory (expandable to 256MB), which was smaller than an iPod; was perfect for taking to the gym. But it required adding and removing songs every week or so.

I also purchased, the first week it came out, the Creative Nomad Jukebox. It was the size of a portable CD player, held an amazing 6GB of music (which was, at the time, about 75% of my library) and had line out jacks to plug into receivers.

Taking it on an Army "deployment" to Honduras was among its uses. But Creative & Rio were bit players when Apple destroyed them with the iPod. Steve Jobs understood glitz, ease of use and celebrity. They didn't stand a chance.

Jobs' genius was understanding your point and understanding convergence; people wanted their camera, their phone, their txt machines and their music player all in one. The iPhone does it all, it's simple, it's networked, and your 2 year old or 93 year old grandmother can use it.


etype said...

Good article for someone with only a superficial understanding of what went into antecedents of the system of which itunes is only a front end. As it turns out Apple designed the kerbango network system with 3com that provided the code that was napster. Apple de facto owned napster and at anytime could have had it banned due to patent violation... which is why no one would buy it who had any sense.
You quote a 1997 article on Jobs - you should listen to the Denver U talk where Jobs described exactly internet commerce, itunes, the ipod, the iphone, the ipad etc. down to the last detail, and how Apple was going to work with it - in 1983.