How the record companies made the world a worse place for everyone, including themselves

Imagine yourself as a record company with a large steady stream of profit coming in. Then one day, someone appears to try to take some of that stream away from you. What is probably your first reaction -- to go after whoever is causing the trouble. Simple, primitive, but generally effective for dealing with such situations.

This probably isn't too far from the mindset of record companies around the end of 1999. Napster appeared on the scene, record companies felt their profits threatened, and consequentially they launched a full out assault against Napster.

However, the situation was much more complex than Napster just causing the record companies some trouble. The files supported by Napster, mp3's, had been around for some time. Mp3's were popular not only because they were easy to transfer over computer networks, but also because people could turn their computers into supercharged jukeboxes with mp3's, adding things like visual effects and crossfading. Plus, mp3's could be used on portable devices that were quite a bit more convenient than discmans.

Mp3's, or something very similar, was bound to be the way that music would go for a large portion of the population. The problem for the record companies, though, was the ease with which these files could be transferred between individuals, as this would potentially result in fewer record sales.

Before Napster, mp3 trading was decentralized. Most trading took place using FTP servers. With such decentralized trading, there was essentially no way that record companies could have extracted any profits from these trades.

However, with Napster, everything became centralized. Millions of people were trading, but they were all trading at a central location simply because Napster was so easy to use. Napster may partially have been an annoyance, but it also centralized the behavior that the record companies were worried about.

Why should centralization matter? Because centralization allows control which means profits can be made. If you didn't like a certain FTP server, you could just try another one. But to get access to the wealth of files available on Napster, you had to connect to the Napster.

Napster could control who connected to it and, consequentially, fees could have been collected for the use of the Napster service. Studies indicated that people would have been happy to pay $5 to $10 a month for Napster. Money from these fees could have been paid to record companies and to artists.

Additionally, with these fees, the record companies could not have been much worse off than they were even before mp3's. Even then, consumers would copy albums from friends or join CD clubs to avoid paying full price. It has been reported that the average consumer buys six albums per year. Comparing this with $60 to $120 per consumer per year does not look bad at all.

Plus, the record companies would not have needed to produce anything. Consumers would have been doing all the work. The record companies would have had no CD's, cases, or liners to produce and no distribution costs.

What a wonderful world this would have been. Record companies would have been making money, artists would have been rewarded for their work, and consumers would have been able to freely and easily receive music and enjoy it in all the creative ways that mp3's can be enjoyed.

Might consumers have left Napster to avoid the fees? Possibly. But the fact that so many people were using Napster would have made it hard to leave as the returns to scale in file-sharing are tremendous. Plus, Napster could have implemented measures to guarantee the quality of the songs available, or it could have made it so that all its songs were normalized to the same volume level. Any of these would have made it unlikely for people to seek out alternatives.

Anyone who thought clearly about the situation knew that if Napster went down, other services would have appeared that would have been more robust to a fight with the record companies, and these might not have been as easy as Napster for the record companies to secure some profit from. There was just too much consumer demand for this type of service. Some entrepreneur would try to tap into it.

And look where we are now after the record companies did shut Napster down. There are dozens of file trading programs, and several file-sharing networks that are themselves decentralized. It is hard to imagine the record companies making any money at all from the current programs, but even if they do, it is even harder to imagine that that money would be even close to how much money they would have made if they had teamed up with Napster.

Plus, consider how much the record companies have spent so far on trying to fight all the file trading programs and how much they will keep on spending. Additionally, from a social perpective, law enforcement and legal resources are used as part of the battle on file trading that could have been used in other useful ways.

Consumers also are worse off. They have to worry about the programs they use containing "adware" or "spyware." And they have to constantly switch from programs that are being attacked or taken down by the recording industry.

And most importantly, consumers would collectively have an interest in royalties being paid to artists so that artists would continue to have incentives to make the music that we enjoy. Without the fees that Napster would have provided and given the tendency of people to free ride, it appears that the incentives that we will be able to provide artists will fall dramatically.

If the record companies had teamed up with Napster, wouldn't consumers then have missed the movies and TV shows that they can download now? Probably not. Most likely, Napster would have developed Napster Movies or Napster TV as fee services negotiated with the appropriate industries.

Couldn't the recording industry just team up with some file trading program now? Again, probably not. In 2000, we were in the unique situation where everyone was using Napster, and there was really no reason for anyone to take the time to develop a competing program. Now however, with dozens of such programs available that are free, it would be much more difficult to start a pay service.

You have to give credit to the Germans here, though. The one record company that figured all this out was Bertelsmann, and it worked out a deal with Napster, likely in hopes that the other record companies would figure it out also.

For the other four major companies, however, even with how shrewd we expect our corporate officers to be, they displayed little more than the simplistic mindset described at the beginning of this essay. And because of that, every single one of us involved, including artists and record companies but perhaps with the exception of the adware companies, lives in a worse world now than that which we could have lived in.

Keep in mind, too, that every album you buy just provides more money for the legal fund of these bozos.

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