You can thank Shawn Fanning for never having to walk into a CD store to buy the latest album. The way you buy music is a direct result of a brainstorm that swept the world and permanently changed the way you buy music. Napster was the brainchild of Shawn Fanning, who created the program in his dorm. Unfortunately, like many great thinkers, his idea was too early and would later make others rich but bankrupt him.
An Idea Whose Time Had Come
The music industry was making a fortune and the artist wasn’t seeing much of it. The average cost of a CD was $17, but only $1 of that was seen by the artist. Napster offered the opportunity to substantially increase the profit of recording artists without much effort. The recording would remain the same, but it was in the selling and ultimately, in the manufacturing that the changes would take place. This sounded great to the artist, but it left a lot of people at the labels uneasy. It potentially meant lower quantities of CDs being produced and perhaps even getting rid of them completely, which would not be good for labels.
Crunching the Numbers
The promise of sales was staggering. Napster went from 1 million users to over 50 million in about seven months. This meant millions of people were psyched about the idea of buying their music online. It started out as a free music download service, but its intent was to sell music in a membership format. Users could pay either $5 per month or $1 per download making the potential monthly earnings $250 million or an annual $3 billion. With such exciting potential, even if the music industry had wanted to participate, existing contracts did not have a digital distribution agreement. To sell music online would require a whole new contract for existing recording deals. BMG decided they liked the idea and opted in with a huge investment in the hopes they could broker business deals with fellow record labels. The fact Napster had nabbed one record label to back them up gave them hope that other larger labels would see the potential and eventually want to jump on the bandwagon. Unfortunately it was just the opposite.
In Comes The Lawsuit
With all its potential, Napster made an enemy of the one association it needed. They were sued by the Recording Industry Association of America (RIAA) on behalf of the recording labels and lost the first round. They were awarded a stay allowing them to continue operating during their appeal. In the end they lost that too. The name and logo was sold to at a bankruptcy auction and they operate under this name today. Ironically, the RIAA lost billions of dollars in potential revenue to other online music downloading companies, the very companies they had warned them were a far greater threat. Eventually the other companies were shut down as well.
The history of how music downloads came to be so popular, did you ever realize the history behind it. Do you think the recording industry should have went after the other companies?
**This is a partnered guest post**
Toni Patton
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