Roxio and Napster -- Meant to be?

Since this is a hot topic in my current section of Customer Behavior, and, in my opinion, a rare example of a currently occurring fundamental shift in the way a product (music) is delivered that is occurring because of a huge change in customer behavior, I decided to do a little research on Roxio and its reformed iteration of Napster.

Roxio's core technology business, which is a natural fit, is used to burn CDs and DVDs and comes bundled with many CD-R, CD-RW, DVD-R and DVD-RW drives. Given the fact that its technology is used to burn CDs, the Roxio name is undoubtedly familiear to many former Napster users:

"Roxio, which makes the bulk of its revenue from the sale of its flagship CD and DVD burning software, is entering the marketplace at a time when rivals are in the midst of rejiggering their pricing policies to lure subscribers."

(http://ecommerce.internet.com/news/news/article/0,,10375_1607541,00.html)

I found it interesting to learn that 60 million people had used Napster at the height of its popularity. The segment was a group of young early adopters whom the Roxio is hoping to win back to the pay model. Roxio's research last summer indicated that 47% of online music fans would pay for what they had formerly downloaded for free. This number may be a little low, because the research was conducted before the criminal cases against downloaders were filed. Yahoo! Finance describes this set of customers as rebels:
"Napster has tried to preserve the counterculture image associated with the original Napster, a music service created by Shawn Fanning that was shut down during the summer of 2001 because of its file-sharing capabilities. Web surfers who hit Napster.com can watch the animated Napster cat break out of jail and into the music industry. Print ads show a dark graveyard, with an empty hole surrounded by dirt in front the Napster cat's gravestone.
But despite the rebel hype, this version of Napster falls firmly within the establishment, and the key question is whether Napster's formerly loyal fans will pay for what used to be free - especially when other no-cost file-sharing services such as Kazaa and Morpheus continue to operate - and other big-name companies enter the space. " (http://biz.yahoo.com/djus/031009/1659001100_2.html)

The new Napster will provide both streaming audio and downloadable music in a paid model which will return revenue to the music companies. In addition to deals with the music companies to license legal downloads, as part of its marketing plan, Roxio is leveraging strong strategic alliances within the computer industry to tap into the desire Napster users have for portable digital music. On September 30, atnewyork.com reported on a strategic deal that will help position Roxio ahead of its competitors in this space:

"In a coup for Roxio (Quote, Chart), the soon-to-be-relaunched Napster 2.0 has found a home on the upgraded WindowsXP Media Center Edition 2004, putting the paid download music service before a potentially large audience. Napster 2.0, which Roxio expects to launch before the holiday shopping season, has been embedded on the second iteration of Microsoft's hybrid platform to let music fans browse, sample and buy digital music by clicking on remote controls."
(http://www.atnewyork.com/news/article.php/3085701)

Additionally, Roxio will bundle the software with its own technology, and that of PC makers. According to an October 9, 2003 article in Yahoo! Finance:
"On Tuesday, Napster and Microsoft announced a specially designed Napster 2.0 interface, which will be included on Microsoft's new media center product. Also, Gateway Inc. (NYSE:GTW - News) agreed to install Napster 2.0 software, along with 150 songs, on the hard drives of certain computers." (http://biz.yahoo.com/djus/031009/1659001100_2.html)

Napster's success in creating a profitable model depends on creating a revenue model that can cover its overhead, by far the biggest component of which is the royalties on the music. Earlier this year, eCommerce News reported on the difficulty Roxio faced in its ultimately successful negotiations with the music companies. The February 23, 2003 article, Roxio Plans Legit Napster Comeback, discussed the cost component of the business model and the challenge of meeting the music industries royalty demands and maintaining profitability:
"(Jupiter Research Analyst Lee) Black told internetnews.com the biggest impediment to launching a successful premium service is the cost to acquire the licenses from the music labels. 'The business model gets destroyed by trying to buy the content. Only five players -- the labels -- control the pricing and they are able to set the prices very high,' he explained.

On average, the labels ask for about 50 cents on a download that's sold for 99 cents and, when overheads and bandwidth costs are calculated, the music services end up making next to nothing. 'The price they have to pay to get the licenses from the major labels is steep. It would be interesting to know if the music services have to give up equity or put up a retainer fee to acquire these rights,' Black said."

(http://ecommerce.internet.com/news/news/article/0,,10375_1607541,00.html)

Because it already offers a complementary technology to downloading music, the company has some degree of brand recognition among members of the target audience, and, because it has already bundled its burning software with hardware, existing relationships with manufacturers that have enabled it to leverage co-marketing arrangements others could not. On July 28, 2003, internetnews.com reported that Roxio plans to leverage the synergy of its core business with the new model:
"Digital media software firm Roxio (Quote, Chart) plans to bundle the reborn Napster 2.0 service with its popular CD/DVD burning tools and roll out what it calls the first online music play offering unlimited a la carte downloads alongside a subscription option.
Roxio chief executive Chris Gorog used the spotlight of the Jupiter Plug.IN Conference & Expo here to release details of Napster 2.0, which is expected to go live in time for the Christmas holiday with about 500,000 tracks for sale via individual downloads, by monthly subscription, via Internet radio, or in any combination."

(http://www.atnewyork.com/news/article.php/2240801)

On October 10th of this year, e-Commerce News described one analyst's take on why the new Napster has the potential to become more than just a way to share music. The idea of creating a virtual listening community online that is actually a group of niche communities may play heavily into Napster's strategy for engaging its customers, and may also pose an interesting challenge to the site:

"GartnerG2 analyst Mike McGuire, who has been testing the trial version of the new Napster, told the E-Commerce Times that Napster's subscription service has some intriguing features, including the opt-in ability for a user to post the songs he or she is listening to and find out which songs are on other users' playlists.

According to McGuire, Grateful Dead lyricist John Perry Barlow once said people have an innate desire to share things that are cool. Illustrating this point, McGuire cited the prevalence of music-based communities, such as the Deadheads, long before the Internet's rise.

The challenge for online retailers is to extend music listeners' sense of community into the e-commerce arena, he said.

McGuire added that he can foresee a time when communities based on certain genres of music, such as speed metal or reggae, could congregate at Napster, and he noted that Napster faces an interesting challenge in terms of how best to engage these enthusiasts. For example, if the company overmanages its forums, he said, they will become less attractive to users seeking community and may limit Napster's ability to maintain customer loyalty."
(http://www.ecommercetimes.com/perl/story/31831.html)

To date, Napster has not joined its competitors in creating a shopping interface for items related to the music, such as shirts, collectibles, CDs and the like, but this is another potential revenue stream the company could exploit. (http://www.boston.com/business/globe/articles/2003/10/06/new_business_models_emerge_in_net_music?mode=PF)

The goal of Napster's re-birth is a total shift in the way that people listen to and pay for music. Driven by behavior and research, Roxio has a vision of music everywhere, anytime.

"He (Gorog) declined to provide details on pricing or subscription rules terms. On the subscription side, Gorog said downloads would be tethered within the PC environment. Over the next year, he said Napster would embrace complete portability, including the ability to transfer tracks from the PC to the car and to the entertainment center in the living room.

'We're working with hardware and technology partners to ensure a seamless, integrated platform to make the music available everywhere. Within 12 months, Napster 2.0 will deliver on that vision,' he said."

(http://www.atnewyork.com/news/article.php/2240801)

If Roxio succeeds in executing a profitable model for downloadable music, it will be well-positioned to lead the segment, although there are others currently in the space, which would not be bad for a $5.3 million investment. Roxio appears to have an advantage both in the relationship of its current brand to the legacy Napster customer base, as well as the benefit of strong industry alliances for co-marketing and bundling deals that will enable Napster software to ship on most new consumer PCs. The question is, are the customer ready to pay?