Napster has put a new twist on the notion of being a loss leader. It has actually managed to sell more songs for rival online music services than for its own product, according to a survey conducted by a university customer.
Not a single University of Rochester student admitted to buying a song via Napster during the Fall 2004 semester. Instead, eight per cent of the students turned to the likes of iTunes and Musicmatch to buy songs they enjoy. That's an ominous sign for a company spending millions to seed the university market with music in the hopes of unseating Apple as the clear leader in online music.
Most troubling for Napster, things don't appear to be improving on the music purchase front. During the Spring 2004 semester, a whopping 1 per cent of students did buy tracks off the Nap. Now no one does.
The situation worsens with Napster's small number of specialty "buy only" songs not included with its standard service. Two per cent of students purchased such tracks from Napster, while 39 per cent turned to rival services to secure their songs.
The University of Rochester has boasted about being one of the Napsterized schools that force music rental services on students in the hopes of curbing P2P file-trading. In almost every case, Napster offers such schools a massive discount off its $9.95 per month fee, making it easier for the schools to stomach the cost of opening music shops. The schools also typically receive hardware donations from unnamed sponsors.
Napster has spent tens of millions on a massive marketing campaign, attacking the "$10,000" cost it takes to fill an iPod. (This is a meaningless statistic when you consider that iPod owners are free to add their existing CD collections and those of friends to their device at no cost.) In addition, Napster has subsidized device makers, attempting to create interest in the non-iPod music player market. This strategy left Napster reporting a $24m fourth quarter loss.
A host of companies, most notably Napster and Real, appear convinced that consumers will buy into the concept of renting their music. This strategy requires a massive cultural change in which people must accept restrictions on when and how they can listen to music that is of lower quality than a CD. If you pay a monthly fee forever, you receive all the music one could desire. A decent idea until you realize that most people nurture their music collections to reflect their tastes and don't want access to all the blather ever created.
For the rental model to succeed, Napster and others would, er, have to turn a profit at some point. The companies appear to believe that a critical mass of consumers would deliver black ink.
But in today's reality, hardware makers - mostly Apple - are the ones making serious cash off online music.