Napster model could make ISPs subsidize record labels

At the core of Napster's proposed subscription model is an idea so simple the record companies should fall all over themselves adopting it: Make other people pay for millions of dollars in costs the labels pick up today.

The music file-swapping company on Tuesday offered to hand record companies US$1 billion over five years if they were to allow their copyrighted works to be traded on its network, which is set to become a tiered subscription service as early as July.

Napster is struggling to shepherd a legal truce with the record industry before a federal judge acts on last week's appellate court ruling and effectively shuts down the service.

Regardless of whether Napster succeeds in burying the hatchet with the record labels, its plan to create a legal subscription service highlights many of the key problems facing the industry as it seeks to create a sustainable online distribution model. Although downloading is considered "free," it is anything but--the costs are simply hidden.

By taking advantage of Napster's peer-to-peer model, the record industry could create a subscription service that moves much of the Net's priciest features--network bandwidth and storage costs--to subscribers and their Internet service providers.

For subscribers who might pay a few dollars a month in return for all-they-can-eat music, taking on roles as nouveau Net storage facilities might be part of the bargain. But for ISPs already worried about networks clogged by today's Napster use, this could be an expensive proposition.

"There's no question that's the case," said Aram Sinnreich, an analyst at Jupiter Research. "The ironic thing is that the record companies' worst fear is losing control of distribution. But the upside is that they offload the distribution cost."

Several major ISPs declined to comment for this story. But previous actions taken by ISPs and private institutions that play the same role show just how much of a concern it could be.

Last April, Cox@Home, a cable modem service from Excite@Home and Cox Communications, sent a letter to several hundred subscribers warning them that they were potentially violating that ISP's terms of service agreement by allowing hundreds of megabytes of files to be uploaded from their computers. Similarly, dozens of college and private business networks have clamped down on student and employee use of Napster, citing clogged networks and bandwidth costs.

An Excite@Home spokeswoman said the company has no official policy on Napster as yet. If the economics for ISPs do grow dangerous, Excite@Home may consider moving to a tiered subscription model, in which some subscribers might pay more for unlimited uploads, for example.

"We would certainly want to look at working with a legal Napster," Excite@Home spokeswoman Alison Bowman said.

Far from free
Since its explosion into the public consciousness, the Net has been viewed as a way for individuals and companies to publish online cheaply. But for all the talk, business models have been slow to evolve, and profits have been even slower.

Much of the delay in the online music world is attributable to incessant legal skirmishing and the reluctance of major music labels to lose control of their copyrighted works online. But it turns out that the cost equation hasn't looked so good either.

"The idea of free distribution on the Internet is a myth because everybody that's providing part of the tool set that you need isn't licensing it to you. They all want a piece of each sale," said Ted Cohen, vice president for new media at EMI Recorded Music. "Because of bandwidth, because of initial licensing fees, the early trials showed it was as expensive--if not more expensive--to distribute digitally."

Similarly, companies that offer access to streaming services face steep costs associated with content delivery, contributing to several closures among streaming pioneers.

According to online media delivery company Supertracks, for example, sending 90 minutes of streamed music a day to a single listener costs about US$81. That can add up to a lot of money for companies relying on typical free, ad-supported Internet business models.

By pushing content onto someone's PC at the edge of the network, delivery expenses could be shaved to just US$15, the company said. This week, Supertracks launched a new service, dubbed Bridgeport, to do just that.

Peer-to-peer's subsidy system
One of the most attractive features of models such as Napster--at least to the potential content owner--is that it takes many of these costs and moves them to the consumers.

Like other peer-to-peer models, Napster functions without a central storage facility for the songs traded using its network. All the songs are hosted on individual members' computers.

Similarly, when a song is transferred online, the file goes from one computer up through that subscriber's ISP network into the public Internet, and then through the downloader's ISP to the destination computer. Assuming the subscribers are paying for unlimited Net service, it's the ISPs that pick up the tab for this bandwidth.

This aspect clearly delighted the Bertelsmann executives who have partnered with Napster to create a subscription service.

At a press conference held Tuesday in San Francisco, Bertelsmann E-Commerce Group President Andreas Schmidt explained the money that the record companies could save by distributing songs on Napster instead of using CDs, trucks and retail outlets--at least US$2.40 per CD, in a world where the labels currently make only 35 cents of profit per disc sold, he said.

"If we do this, we will have almost no additional costs but have additional revenues coming in," Schmidt said. "If we switch (to Napster), all these delivery costs, all these distribution costs, go away."

Looking for the benefit
It's not all a bad deal for ISPs, however.

Some note that a legal Napster subscription model would be the best advertisement possible for the advantages of high-speed Net service. The gain to ISPs in new broadband subscribers might well overshadow the burden of picking up distribution costs.

"Anything that shows off the power of broadband is great," Excite@Home's Bowman said. "Even more than video, music is the killer app right now."

Peer-to-peer experts note that there are ways to take some of the burdens off the ISP, which Napster hasn't done yet with its system. Onetime Napster rival Scour, for example, returned search results that were inside the subscriber's own network if possible. This speeded download times and took some of the financial burden of big file transfers off the ISPs, since they no longer had to pay for the expensive connections to the public Internet.

"You can be smart about how you coordinate transfers," said Travis Kalanick, a Scour founder who is pursuing a new peer-to-peer-based venture. "You can (arrange the network) so transfers happen at the edge, and ISPs don't foot the bill."