Amid all the hubbub about Napster, few people seem to be asking the question that will truly determine if this company changes the music world:
Is this a good business?
You know about the copyright issues, unless you just landed on Earth a few minutes ago. But few people seem to care if Napster's business model actually works.
Hummer Winblad Venture Partners obviously thinks so. The well-known venture capital firm led a group that recently agreed to invest $15 million in Napster's latest VC round.
Adherents of Napster believe the company will lead a file-sharing revolution by decentralizing data on the Internet. Peer-to-peer networking is supposedly the Next Big Thing on the Internet. Who needs eBay (Nasdaq: EBAY) when you can link auctions conducted by each seller individually?
You have to admire the VCs' ability to package P2P as something new on the Internet, especially when you consider an entire industry has been doing it for years.
The PC game field has revolved around Internet P2P far longer than Napster has existed. It's almost impossible these days to make a commercially viable PC game that doesn't include IP networking. Several gaming communities have been around for awhile, including Heat.net, owned by SegaSoft Networks, which traces its ownership through various companies (including Sega Enterprises) in Japan's CSK Group; MSN Gaming Zone, from (duh) Microsoft (Nasdaq: MSFT); and Battle.net, from Blizzard Entertainment, whose Diablo and War/Starcraft series rank among the most popular P2P games.
Playing is easy. Log onto these websites with a basic membership, which is free on all of them. Pick a game -- you usually have to own the game CD to play online, but not always. Scroll through the list of available players for that game. Link up with some of them and off you go on a merry path of digital mayhem. Players link to each other directly, instead of playing a game hosted on a central server.
(Ok, technically that might not be true. On many if not most of these games, one player's PC actually acts as the "host" for everyone else playing the game. Still, most of the processing is handled on each person's computer.)
Let's see how these communities justify their existences:
- Heat.net gets money from advertising, "premium" memberships, and probably some e-commerce deals, judging by some of the promotions on the site.
- MSN's service combines advertising with some "premium" games that require monthly fees to play. Some of those premium games -- Asheron's Call and Hercules & Xena, for instance -- are server-hosted worlds of their own, but most MSN-compatible games are P2P. MSN also provides the largest Internet forum for Microsoft's games, such as the Age of Empires and Close Combat product lines.
- Battle.net is completely free of fees and outside ads, because it's a showcase for Blizzard's own games.
I don't know if these businesses pay for themselves, but at least they generate something. In some cases they're a way to sell other software.
Now where does Napster get money? Where would any of these supposed P2P revolutionaries make money?
Unlike PC games, most of this file-sharing software is free and needs to stay that way, or else most people won't use it. Napster's current client doesn't provide for advertising, although I suppose that could change; still, pure advertiser-driven models haven't been very successful on the Internet, a few massive portals notwithstanding. Besides, any potential advertiser on Napster will want targeted user data -- downloading preferences and such -- which would pit Napster against privacy advocates.
Napster could offer paid services, such as some sort of advanced file-sharing for businesses. But how would that be superior to the centralized models corporations use now? A Wall Street Journal article last week quoted an investor in a P2P company called InfraSearch -- which by its own founders' admission has yet to figure out a profitable model -- claiming "about 100 uses" for peer-to-peer networking.
Hey, anyone can dream up useful functions for anything. But when you eliminate the middleman and offer the software for free, how do you make a living from it?
Napster sees a next level, which is why it brought in a new CEO along with Hummer Winblad's dollars. That's usually the first stage toward an initial public offering or prepping the company for a buyer.
Had Napster come out three years ago, it would have been an easy IPO candidate. But these days, Wall Street has soured on high traffic, we'll-get-earnings-someday business models.
Napster might look for a rich acquirer. I could see Napster bundled with browser, e-mail and groupware, but none of the major players in that field -- Microsoft, America Online (NYSE: AOL) with Netscape and IBM (NYSE: IBM) with Lotus -- is likely to pay much for P2P. And Microsoft seems to be betting the future on server-based computing with its .Net initiative.
Perhaps you could combine Napster's functions with large databases, but you've got Microsoft there again, along with Oracle (Nasdaq: ORCL), a company even more crazed about centralized systems.
How about P2P and B2B? Imagine tying in the marketplaces of Ariba (Nasdaq: ARBA) or Commerce One (Nasdaq: CMRC) with peer-to-peer. But isn't Electronic Data Interchange already dying?
In any case, there are more broad-based P2P technologies (like InfraSearch or Pointera) that might work better with business needs than Napster does, at least in its current form.
On the other hand, AOL just might see benefits from Napster, especially if it can be customized to keep people connected to each other inside the proprietary AOL network for longer periods. It's also a way to leverage Time Warner's enormous music database.
And AOL already has P2P experience with the ICQ messaging system. Of course, only AOL executives know if ICQ makes any money worth mentioning.
Most of AOL's marketing to date has promoted the more server-oriented Instant Messenger, rather than ICQ. Nonetheless, you can easily dream up ways to link ICQ (or even IM) and Napster.
AOL and Napster? Probably sounds horrific to many of the Netheads who form Napster's core user base, but I can't see a better business combination. Deride it as purely speculative if you want -- but you can say the same thing about the whole notion of a profitable Napster. 22GO>