Napster popularity boosts gadget demand

The San Mateo, Calif.-based company is entangled in a daunting legal dispute with the Recording Industry Association of America (RIAA), which wants to shutter the popular site. And despite an estimated 20 million customers, Napster can't figure out how to collect revenue from file-swapping technology.

Not so with electronics companies, which are cashing in on Napster's popularity boom--and even the publicity surrounding its potential doom.

Although they are careful not to endorse Napster because of its bitter legal battle, many computer veterans praise the site for spurring demand for pricey devices. Regardless of what happens in the courtroom, experts say Napster has served nobly as a "killer app"--a catalyst to make people pine for faster, more expensive computers and related equipment.

"Napster has created a lot of enthusiasm around this market," said Mike Reed, vice president of marketing for S3's Rio division, which sells portable MP3 players. "It demonstrated that people want access to digital music online. I hope to see a lot of ways for people to get digital music online in the next year. The more access to digital music, the more this segment grows."

Napster was not the first site that allowed people to download music free of charge, and many file-swapping aficionados say that so-called peer-to-peer technology such as Gnutella is superior to Napster's server-centric software.

But Napster's 20 million users certainly make it the most popular file-swapping site. And publicity surrounding its possible demise at the hands of the recording industry has recently made it a martyred hero to college students and others.

Demand for MP3 players such as the Rio, which looks like a smaller version of the Sony Walkman and holds MP3s on a flash-memory card that can be reused, are partially to blame for creating a severe dearth of flash memory--possibly the most coveted product in the tech industry this year. With flash sales expected to climb from $4.5 billion to $10 billion this year, manufacturers such as Intel, Advanced Micro Devices, Atmel and Fujitsu are expected to reap substantial revenues.

PC and notebook manufacturers have made millions of dollars from customers who want better audio quality and the ability to burn music CDs on computers. Demand has become so great that few PC makers can scrounge extra CD-rewritable (CD-RW) drives to incorporate into already-announced notebooks that feature the popular option. MP3-encoded files can easily be converted to a format and transferred to a CD for use in car or home stereo systems.

As previously reported, Compaq Computer, Dell Computer and Gateway are desperate for "slimline" CD-RW drives, the slimmer versions of CD-RW drives used in PCs. Gateway stopped offering the drives six weeks ago but is expected be begin selling them again this summer.

"Clearly, digital music downloads have contributed to the surge in CD-RW sales," PC Data analyst Stephen Baker said. The market researcher estimates that about 40 percent of PCs sold at retail pack CD-RW drives, up from 1.7 percent a year ago and about 20 percent in September.

Hewlett-Packard offers CD-RW drives and MP3 authoring software in almost every consumer PC it sells. Compaq consumer systems include speakers with a digital audio port for plugging in MP3 players. Dell capitalized on the trend in June when it unveiled an MP3 stereo component.

"Digital downloading of music has put a huge, new application at the fingertips of computer users," said Matt Sargent, mobile computing analyst at La Jolla, Calif.-based ARS. "The digitization of music opens up a whole new parallel for computer users that wasn't touched upon three to four years ago...I give Napster quite a bit of credit. It brought a lot more people into it."

Net music poised for takeoff
Although demand for digital music-enabled hardware has been growing steadily for the past year, it may be ready to explode. Publicity surrounding a judge's decision to close Napster last week, culminating in a last-minute stay, made the company the fodder of front-page stories in newspapers and grist for radio and TV talk-show hosts.

According to Nielsen/NetRatings, Napster traffic rose 92 percent last week as a federal judge threatened to shut down the site for copyright violations at midnight Friday. The number of home Napster visitors increased to 849,196 on Friday, compared with 443,070 on Tuesday.

That's music to the ears of computer companies, experts say.

"The health of the computer industry depends on maintaining a fairly regular upgrade cycle...where people buy the newest computers with latest and greatest and fastest power," said David Brodwin, associate partner with Andersen Consulting in San Francisco. "Multimedia has been driving upgrades recently. Digital media in all its forms, especially music right now, have basically filled up the computer upgrade cycle for at least a generation."

The life cycle of a computer for a manufacturer is about nine months, while the average consumer keeps a computer for two to four years. Brodwin expects customer demand for music and, eventually, video to drive upgrades for at least two years.

Some even credit Napster for the growing demand for fast Net access--all the better to download MP3 files that typically run 3MB to 5MB in size. As customers crave faster Internet connections to download multiple songs and cruise the Web more quickly, cable modems are forecast to connect 46 percent of the 25 million subscribers in the high-speed Net market by 2004.

Alison Bowman, spokeswoman for Excite@Home, the largest provider of cable access, would not comment on whether demand for her company's high-speed cable modems correlated to the popularity of Napster or any other file-swapping software. Like many executives, she tried to distance demand for her product from demand for Napster.

"We've been pretty neutral on Napster and are still kind of just waiting for the outcome," Bowman said. "We just don't have anything else to say in terms of whether Napster increased demand. We are totally all about creating cool apps on the Web, but the server thing has been challenging," she said.

Excite@Home customers connected to Napster may allow other Internet users to download songs from their hard drives, essentially acting as servers. Residential Excite customers, however, are prohibited from using their connections to act as servers.

Evading legal headaches
It's easy to see why executives skirt Napster: The RIAA has been particularly aggressive in suing or threatening to sue entities that enable the sharing of copyrighted material. In late 1998, the recording industry sued Diamond Multimedia Systems, which produced the Rio and was later acquired by S3. It settled its suit with Diamond in 1999.

The five biggest record companies also sued MP3.com in January for its My.MP3.com service, a "virtual locker" that lets people listen to their music files via any Web connection. In June, MP3.com settled with Time Warner and BMG Entertainment. The companies get 1.5 cents each time a consumer stores a song using My.MP3.com and one-third of a cent each time the consumer listens to the song.

But lawyers say the computer hardware industry is on safe legal ground, regardless of whether companies capitalize on Napster.

"Creating hardware is not an act of infringement," said Andy Norwood, intellectual property attorney for Nashville, Tenn.-based Waller Lansden Dortch & Davis, "no more than having a VCR or tape recorder is."

News.com's Joe Wilcox contributed to this report.