Hayashi Nobuo ”Delving into the minds of the heroes of the digital revolution”
Steve Jobs: the man who lifted music streaming from the dark
──The fall of Napster and Apple’s dream
June 14, 2019
Apple held a special event on March 25, 2019 to announce a new product. But the completely different approach of the event surprised the journalists and analysts who came from around the world. There was no new product announced, but instead the event focused only on the service subscription model for online streaming business that delivers contents at a fixed price.
It was Apple who first introduced a legitimate and brilliant business model for online content streaming at a time when no one believed it could be turned into a feasible business. During its latest special event, Apple announced new modernized services based on the novel business model it first introduced in 2003. It announced services that offer contents and provide rich experience both to the user and the content creator, promising to focus its energies on these services going forward.
Apple has always been the top IT firm providing computers, smartphones, and tablet devices. Today, they are one of the big four companies collectively called GAFA (Google, Amazon, Facebook, Apple), a term that has become a keyword even in TV news. But this time, Apple did not mention any IT equipment or system, declaring instead that from now on it will focus on subscription services based on its own original contents. This in itself is very unusual.
Although business based on the streaming of rich contents has now become a commonly accepted model, it was a revolutionary idea that shook the world when it was first introduced.
Free access to any content you want
In 1998, Shawn Fanning was a new freshman at Northeastern University (major in Computer Science) when he decided to develop music sharing software. Unable to bear his roommate’s complaints about useless software for searching MP3 music files in the school network, he thought of finding a way to help.
At that time, students enjoyed music by using ordinary search software to find music files in a shared network. What they did was to store music files ripped from CDs into a server in the university’s computer room and listen to them during study breaks. They shared and bragged about their music collection with their friends by sharing the server’s IP address. As the universities’ networks improved in performance, students were able to share files stored in servers of different universities.
This was how MP3 file search software developed into something that enabled searching music files spread throughout the U.S. The music-sharing network spread widely as personally owned computers became constantly connected to the Internet. Once a new record was released on CD, before long you could find it on the net somewhere; so by downloading the music, you did not have to go to the CD store to buy it.
Using music this way, however, took patience; it took time to get a response when you launched a search. More so, the listed music files were sometimes not in the same format, and oftentimes you get an annoying ”the server is not found” response. And, at that time, people connected to the Internet using phone lines by dial-up, and since a different IP address would be used for every connection, even when using landlines, you had to try connecting many times before you could get through.
Shawn Fanning thought that something should be done about it, so he went on to create the Peer-to-Peer (P2P) platform that allowed users to let each other know what music they have and mutually receive and transmit files 1-to-1 instantly once their computer or server connects to the computer network. P2P is a 1-to-1 platform that enabled receiving and transmitting devices to share their connection information and quickly exchange files.
Starting a business with Sean Parker, who later became Facebook’s first president
Although Shawn Fanning, a new freshman, worked day and night to develop the epoch-making P2P program, it did not work out as he had planned. He realized that he could not finish the program if he continued to stay in college. He was determined to finish the program even if he had to quit college. His uncle who supported his college application allowed him to skip a year to finish the program. Devoting his heart into it, he finally finished the program in August 1998.
It was Sean Parker who encouraged him to create a business out of the new program and who then became the co-founder of Napster. Sean Parker, who later went on to become Facebook’s first president, had a sharp business acumen and was a very talented person.
Fanning’s new program was widely received by the public. The Napster website was named 2000 Best Music Site at the Webby Awards, which is considered as the Academy Awards for the web industry, and that year, Shawn Fanning was featured on the October 2nd cover of Time Magazine. Overnight, the number of users rose to 20 million.
Napster’s light and dark days
Looking back, we can only think of it as a terrible crime. Since users were able to freely exchange music shared on the network, yearly CD sales from 1999 to 2001 went down by more than 10% (according to Recording Industry Association of America (RIAA)). From 1999, worldwide CD sales went down by half within five years.
It was like having one of your friends buy one CD and share the music to fans all over America. But Shawn and Sean clearly had the odds in their favor. A prominent copyright lawsuit at that time was the Sony recorder lawsuit. In 1984, the Supreme Court ruled that using Sony’s video cassette recorder for recording TV programs for private use by viewers did not constitute copyright infringement. This ruling made it legal for music fans to rip music from CDs to their computers for their own enjoyment.
Shawn and Sean asserted that they were not selling or buying music; that they were merely providing real-time information about Internet addresses that point to the locations where music files are stored. They argued that if they were to be held responsible for illegal acts committed on linked servers and computers, then search providers like Google and Yahoo would have to be closed, too.
There was another law about linked information that lent credence to their cause. The Digital Millennium Copyright Act (DMCA), which was enacted in 1998, included a ”safe harbor provision” that shielded providers of information on links to infringing contents from liability as long as the link information was faithfully and legally administered. For example, when an illegally copied video was uploaded on YouTube, the provider would not be held liable if they took the proper measures to address the violation by immediately reporting the act or deleting the content upon its discovery. Based on this principle, Napster’s operators could not be held liable for copyright infringement.
But in an unexpected turn of events, RIAA’s lawyer somehow got hold of an e-mail that Sean Parker wrote when they were finalizing their business plan. The e-mail said, ”We need to be particularly careful about the Privacy Act; thus, we need to find a way to anonymously use the system. In particular, we need to have thorough safeguards for handling illegal copies; because we are not only consuming illegal copies, but we are in fact promoting them.” (Sean Parker’s testimony based on the Napster documentary movie ”Downloaded.”)
It was an offhand comment that revealed that the operators actually knew that they were dealing with illegal copies of music—forbidden treasures from the dark. The email was admitted as conclusive evidence that the operators recognized the illegality of their business, and they lost their case. On June 3, 2002, within less than 3 years, Napster was forced to shutdown its business.
Upending the environment for enjoying music
After Napster made a spectacular debut, and before its demise, in 2001, Apple launched ”iTunes,” application software for managing music on your computer.
It was a sophisticated application that allowed users to immediately find music they wanted to listen using the artist name, album title, or song title, and to create and enjoy playlists of their own favorite music. Although at the time of its release, there were already many jukebox-like applications for listening to music, they were not as user-friendly as iTunes. Enjoying music also meant having a beautiful jacket photo and the ability to seamlessly view information on participating artists, etc.
The important thing, however, was that the company’s top man himself loved music and thoroughly enjoyed using the software. Steve Jobs had chosen his favorite music from his own CD album and put them in iTunes to enjoy them. But it was lacking one thing: being able to enjoy the music stored in iTunes anywhere—while driving, while walking or jogging.
At that time, there were many types of portable MP3 players that play music stored in SD memory sticks. Rio, a US-made digital audio player, was sold and became popular even among enthusiasts in Japan. Although it varied depending on the player’s capacity, you could, however, only play a few dozens of songs. It was difficult and troublesome to set song titles, and uploading music ripped from CDs into Rio needed re-encoding, making it difficult to use unless you are an avid enthusiast.
This was unbearable for Steve, who wanted to use and enjoy the product himself. He was looking for something that you could carry around to freely enjoy music while taking a walk and that allowed you to instantly find music you wanted to listen to.
To make it portable, the product must have a reliable battery and sufficient memory. When the development plan was approved in 2000, the prototype did not have any of those features yet. This was a moment for Steve to exhibit his peculiar personality, or rather, his ”supernatural” mind, to create something that did not yet exist in the real world. For him, if you could not do that, you are worthless!
In February 2001, while developers were in a mad rush to find a solution to the problem, Jon Rubinstein, Senior Vice President of Hardware Engineering, on a visit to Japan discovered an amazing product at Toshiba—a tiny, high-capacity hard disk. Unable to find suitable use yet for the music player prototype, which was slated for completion in June that year, they were still at a loss how to sell the product. It was at this point that Rubinstein stumbled into Toshiba’s tiny, 1.8-inch (about the size of a dollar coin) hard disk with 5 GB capacity—more than a thousand times higher than the capacity of existing MP3 players at around a few megabytes. He must have been very excited to discover a completely new and groundbreaking device.
Right around that time, Steve Jobs was also in Japan to give a keynote speech at Macworld Expo/Tokyo. So Rubinstein hurriedly reported to Steve about it saying, ”I know how to do it now! All I need is a $10 million check (equivalent to 1.2 billion yen at the prevailing exchange rate)!” Steve agreed on the spot. (”Steve Jobs II” by Walter Isaacson (Kodansha)).
Once decided, things moved quickly at Apple. Rubinstein went back to Toshiba right away to close a deal to exclusively buy the entire production lot.
The product turned out to be great. On October 2001, the ”iPod” was launched for 399 dollars. With the catchphrase ”1000 songs in your pocket,” the new device sold like hot cakes, despite being an exceedingly expensive product compared to MP3 players.
Creating a framework for artists to be properly compensated
After delivering the iPod to the world, the next thing that needed to be done was to come up with a system to supply music to the device. Once a CD was inserted into a computer’s CD drive, the music was automatically uploaded to iTunes. The individual music information was then automatically synchronized from an Internet music database, and once the iPod was connected to the computer, the music in the iPod was automatically synchronized to that of the computer. Using very easy operations, users could bring music with them wherever they go. They could not, however, listen to new music right when they wanted to from the iPod.
Although it was possible to use a music-sharing app like Napster that allowed users to download directly to the iPod, Steve strongly objected to the idea.
When users wanted to upload music to their iPods, they could actually just easily find music on an online site somewhere. Users, however, were not satisfied with music acquired this way.
During the announcement of the iPod, Steve analyzed the situation saying, ”You can find the music you want on the Internet. You can actually get music from somewhere and upload it into your iPod, and enjoy music that way. But, are you happy with that? The quality of the music is not good; sometimes the sound even crackles. You’d hear noise along the way, and worse, at times the song would not even be complete. You couldn’t really enjoy music that way, right?”
If he wanted to simply earn money by selling iPods, he would have made it possible to just download music from the Internet. But this would be a bane for those who created the music. Intellectual property must be protected so that artists could receive the value for their musical works. He fought hard to create a framework that allowed the copyright owners to rightfully receive the benefits they deserved. He therefore created the iTunes store and recruited five major record labels that would support his cause. ”I had never spent that much time walking with people to convince them to do what’s right for them.” (”Steve Jobs II” by Walter Isaacson (Kodansha)).
It was unthinkable for a CEO of a major company to directly negotiate with a label owner. But Steve went ahead because he knew that this was the only way he could achieve success within a short time.
Apple also implemented a proprietary protection mechanism that prevented users from writing music uploaded to the iPod back into a computer, and allowing only the music you manage in your iTunes to be uploaded to your iPod. This therefore prevented music to be shared among friends, a strategy that became the key to successfully win the nod of the record labels.
The iTunes Store opened eventually in April 2003. Eddy Cue, the executive in-charge of the iTunes business, predicted that they would sell 1 million songs within six months. But he was in for a very big surprise because they in fact sold 1 million songs in only six days.
This success experience has significantly propelled Apple forward. The recent move to launch a subscription model to which it will heavily throw in its proprietary contents has been largely influenced by the same DNA that spurred the success of the iPod.
(Titles were omitted in the article.)