Selling Information Goods: Rights Management and the Internet A Look at the Online Music Industry

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Selling Information GoodsRights Management and
the InternetA Look at the Online Music Industry

• Eric Parish and James Moynihan

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The Internet

• Originally started as a government project
• Now has over one billion users
• This is a huge market

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Napster

• First released in June 1999
• First lawsuit in December
• Reached its peak in February 2001
• 26.4 million users
• Closed down in July 2001
• Eventually bought by Roxio and recreated to
  provide legal downloads

4
Online Music Stores

• Vastly cheaper distribution may feel like a
  threat, but it offers great opportunity - Park
• Original online stores a failure
• Too expensive 3.50 per Mp3
• iTunes in 2003
• Has sold 1 Billion songs
• Now dime a dozen
• Rhapsody
• Napster 2.0

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DRM

• Digital Rights Management
• Technology used to enforce intellectual property
  rights and music licenses
• Technologies
• Fairplay iTunes
• Only allows shares up to 5 computers
• Only works on iPod
• Windows Media DRM Rhapsody, Napster
• Has options to only license for a set amount of
  time
• Can prevent many features

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Problems with DRM

• Copy protection that imposes costs on users is
  vulnerable to competitive forces -
  Park
• If consumers even know there's a DRM, what it
  is, and how it works, we've already failed
  - Disney Executive
• Incompatible technologies
• Windows DRM, Real, FairPlay do not talk to each
  other
• MP3 players
• Often prevents backups

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Rhapsody

• Offered by RealNetwoks
• Subscription Service
• Launched Dec 2001 (1 ½ yrs before iTunes)
• Search by artist, track, album, popularity, genre
  etc.
• Content can be burned to CD and some players

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Rhapsody Features

• Pricing
• Unlimited (tethered) 9.99/month
• Unlimited (non-tethered) 14.99/month
• Download Song 0.79
• Burn/Copy Song 0.79
• Streaming Unlimited
• Radio Unlimited
• Format Windows Media
• Digital Rights Management Windows DRM

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Rhapsody Features continued

• Preview of songs 30 seconds
• 14 day free trial period
• Catalog
• 95,000 albums
• 65,000 artists
• 1,500,000 songs
• Platforms
• Windows 98
• Linux
• Mac

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Rhapsody - Finances
RealNetworks Inc Current Stock Price 7.91 52
week high 9.08 52 week low 4.65
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iTunes Music Store

• Introduced April 28, 2003
• Most popular music download service
• Feb 2006 over 1 billion songs worldwide (2days
  ago)
• Roughly 80 of digital music sales
• Result of deal with the 4 major record labels
• WMI, Sony BMG, Universal, and Warner Bros
• Offered by Apple Computer, Inc
• October 2005 started offering TV shows and music
  videos

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iTunes Features

• Pricing pay per song/album
• 0.99 per song
• 9.99 per album
• Platforms Mac OS X, Windows 2000 XP
• Primarily download service
• Streaming only for previews
• Built in radio stations
• Allows burning/copying and transfer to iPod
• Preview is 30 seconds

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iTunes Features continued

• Format AAC _at_128 kb/s
• Digital Rights Management FairPlay
• Up to 5 computers, unlimited CDs, unlimited iPod
  transfers
• No trial period
• Catalog of 2,000,000 files
• Songs, Audio Books, TV Shows, Music Videos,
  Broadcasts
• Gift certificates
• User Playlist Sharing, Billboard Charts, Radio
  Charts, and Movie Trailers
• Global Availability

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iTunes Controversy

• Accused of vertical monopoly
• iTunes files are only functional on iPod
• FairPlay DRM not available to any other company
• iPod cannot play Windows DRM files
• Locked-In to service
• Rhapsody created FairPlay workaround, Apple
  countered with new firmware, Rhapsody vowed to
  create another workaround

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iTunes - Finances
Apple Computer, Inc Current Stock Price 71.75 52
week high 86.40 52 week low 33.11
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Napster

• Subscription Service
• Menu Pricing
• Napster Light Buy permanent songs for 0.99
• Napster Membership - 9.99/month (unlimited
  tethered)
• Napster to-go - 14.99/month (unlimited
  un-tethered)
• Platforms Windows 2000 XP
• Burning/Copying 0.80-0.99 per song
• Streaming Unlimited
• Radio - Unlimited

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Napster - Features

• Format Windows Media Files
• Digital Rights Management Windows DRM
• Preview 30 seconds
• 7 day trial period
• Catalog of over 1,000,000 songs
• Created own players through Samsung
• Other compatible players available
• Download/Stream all songs, not playable if
  subscription lapses

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Napster History

• Original company, Napster, went bankrupt due to
  legislation
• Roxio, Inc purchased assets 2002
• Created Napster 2.0 for legal music downloads
  (Oct 29, 2003)
• Aug 9, 2004 Roxio sold to Sonic Solutions for 80
  mil
• Deal completed Dec 17th, 2004
• Re-branded to Napster, Inc

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Napster Success?

• Second largest music subscription service behind
  Rhapsody
• 500,000 paying subscribers Napster
• 545,000 for Rhapsody
• Higher education service growing
• Jan 2006 laid off 10 management jobs from staff
  of 153
• Took criticism from analysts
• Cited doubling of revenue for Q4 2005 as proof of
  stability
• Expects to lose money for foreseeable future

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Napster - Finances

• Napster, Inc (NAPS)
• Current Stock Price 3.62
• 52 week high 8.29
• 52 week low 2.95

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eMusic

• Format Mp3
• Digital Rights Management None!
• Catalog of over 1,000,000 songs
• Works with any Mp3 player, including iPod
• Monthly subscription
• 10 a month for 40 downloads

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eMusic - History

• Started in 1995 as the fourth online CD store
• In 1998 became the first company to sell music
  files online
• Bought in 2001 by Universal Music for 24.6
  million
• Bought in 2003 by JDS Capital Management, Inc

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Cdigix

• Gives students legal access to over 2 million
  songs
• Subscription service - Ctrax
• 3 per month billed to student account
• Additional 5 per month for Mp3 player support
• Or 89 cents per song
• On campus server

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Cdigix - History

• Started in 2000
• Partners with universities to provide music and
  movies to college campuses
• First customer was Duke University in 2002
• UMR in 2006

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Cdigix - Downsides

• Once you leave UMR, your subscription is no
  longer 3
• Must have a subscription in order to listen to
  music except individual purchases
• Subscriptions may continue at currently
  available retail rates.

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Conclusion

• The Internet is a huge market that allows you to
  easily sell information goods
• Don't make DRM too restrictive
• Try to support all portable players