January 31, 2001, 11:24 AM

The Napster lesson: Expect the unexpected

In the early days of radio, recording companies feared that playing of music over the airwaves would kill record sales. But radio had the opposite effect, propelling the recording industry into a major component of the economy. Now the same thing could happen with Napster-the greatly feared yet wildly popular Internet-based music-swapping service.

“Napster can be seen as more of a promotional device to get people closer to the music,” says Idil Cakim, senior media analysts at New York-based research company Cyber Dialogue, which surveyed Napster users about their usage and buying habits. “File exchanges are fueling, not hurting, record sales.”

After an intense effort by the recording industry to force Napster to close, citing copyright infringement, Germany’s Bertelsmann AG created an e-commerce group and formed a strategic alliance with Napster to develop a new business model for the person-to-person file sharing service. The new model will be a membership-based service that might require users to pay a monthly or yearly fee for access to music files. Napster, the computer brainchild of 20-year-old Shawn Fanning, will use the fee to pay recording artists, songwriters, recording companies and music publishers. Under terms of the agreement, Bertelsmann’s music division, BMG, will drop its lawsuit against Napster and make its music catalog available to Napster.

There has been conflicting evidence about the impact of Napster-some claim that over time file sharing will reduce music sales. Cyber Dialogue believes music companies can use Napster to increase customer acquisition and deepen retention. According to Cyber Dialogue research, 55% of 10.4 million Napster users bought a CD as a result of using file-sharing technology. “Bertelsmann is making a courageous business initiative by teaming up with Napster,” Cakim says. “They will be tapping into a very valuable user base.” An average Napster user spent $188 online for music in the last year, 45% more than the $130 spent by non-Napster users, according to Cyber Dialogue research.

Cakim says consumers will not forgo buying CDs and tapes because they like the packaging, pictures, liner notes and lyrics that come with CDs. Cakim says other reasons swapping services are not likely to hurt the recording industry soon are that consumers do not yet view computers as entertainment devices, and the MP3 players on the market are not portable enough to attract widespread use.

So instead of shutting down, Napster has plans to evolve. And it looks like it will be taking the music industry with it down the evolutionary path.

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