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New business models emerge in Net music

Napster 2.0 to enter a landscape changed by the music industry

SAN FRANCISCO -- Napster is playing by the music industry's rules this time.

Roxio Inc., the new owner of the seminal file-sharing service's brand

name, will unveil details of its Napster 2.0 music service in New York Thursday. A federal court shuttered Napster in 2001 after the world's largest record labels sued it for allowing widespread digital piracy. But Roxio has struck deals with those same record labels and expects to make more than 500,000 songs available online.

Napster 2.0, due before the holidays, combines elements of the two most popular business models emerging in digital music -- streaming over the Internet and downloads. And this time around, the former renegade service is entering a landscape that has been changed by the music industry's cooperation.

The lawsuits filed last month against 261 people accused of sharing copyrighted music over the Internet is only one part of the recording industry's fight to reclaim control over how its music reaches consumers. After years of uncertainty on how to curtail the growing threat from file-sharing programs, record labels are finally striking less-restrictive deals with dozens of technology partners.

"The industry is being dragged into the future," said Jerry Goolsby, a business professor at Loyola University in New Orleans who studies the music industry.

The rush of companies offering or working on download services signals that established technology companies believe broad audiences are ready to pay to download songs.

Since Apple Computer Inc. launched its iTunes Music Store, which has sold 10 million songs, established e-commerce and computing players have signaled their intention to follow. The success of iTunes comes in spite of the fact that the service is available only to the 3 to 5 percent of computer users on the Macintosh platform.

The most recent entrant was Dell Inc., the leading maker of personal computers. Following the path set by Apple, Dell said last month that it would soon introduce a digital music player, as well as a music-download service to fill the player with songs. Dell would not reveal details about the service, such as how many songs it plans to offer, or whether it would also allow streaming music.

But the company's entry suggests a new level of maturity in the music download market.

"We're entering businesses where we fully expect to make a profit," CEO Michael Dell said.

Musicmatch Inc. last week became the first Windows-based music service to extract the same user conditions as iTunes, including looser restrictions on burning songs and copying them to digital music players., Sony, and RealNetworks Inc., whose Rhapsody service is the most popular subscription service, have all discussed plans to create their own online music stores. Roxio acquired the rights to the Napster name for $5 million, then bought the Pressplay music service for $40 million to build Napster

2.0. The vast majority of music is still sold in stores, but Internet sales are increasingly rapidly.

About 4.5 percent of global music sales this year will come through downloads, subscriptions to streamed music, and online sales of tapes and CDs, according to a report by Informa Media Group, a British consultancy. That figure is expected to rise to 11.9 percent by 2008.

Analysts with Forrester Research and Jupiter Research believe subscription services like Rhapsody and America Online's MusicNet will draw fewer users than download stores, but their monthly subscription fees will bring in more revenue.

Although streaming and downloads are becoming the default business models, a Silicon Valley start-up is trying to use elements of file-sharing technologies to bring together sellers and buyers in a legal music marketplace. Mercora Inc., a 10-person company founded by veterans of the antivirus company, has been quietly building a virtual music marketplace that will launch in a beta test in November and fully in January. The company is still negotiating deals with record labels.

A search for an artist will yield not only his songs for download, but also tickets to his concerts, T-shirts sold by merchants, and used CDs for sale or barter by other fans, said Mercora chief executive Srivats Sampath.

"Think of it as eBay for digital music," he said.

The service, which requires a software installation and will not be immediately available for the Macintosh operating system, includes elements of peer-to-peer technologies like Kazaa. Users can see what songs their friends have purchased and listen to 30-second clips. But copy-protection software by Microsoft Corp. prevents users from trading copyrighted songs for free, Sampath said. "We've implemented this to the letter of the copyright law," he said.

The start-up plans to take a percentage of the revenue from downloads of songs by the largest labels, like and iTunes do.

But Mercora also plans to allow independent labels and artists to publish and distribute their music. The company will try to gain money from those artists and other merchants by selling advertising and sponsored search results.

Michael McGuire, an analyst with GartnerG2, a research division of Gartner Inc., said music services need to do better jobs of building community, which Mercora is trying to do. He has not seen Mercora's service, but he was skeptical of its chances. "Part of the transition to this new model is fewer, not more, middlemen," he said.

Chris Gaither can be reached at

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