RIAA takes on P2P: The Empire Strikes Back

If ever there were a case of an industry looking like it was down and out for the count, it would be the recording industry. The Recording Industry Association of America (RIAA) is essentially a cartel that represents the major labels, their interests and their investments.

At the turn of the millennium, Napster began to gain steam in the online music marketplace through a superior yet simple service that answered a clear need. Word of mouth advertising spread the music like wildfire and industry insiders found themselves on the outside looking in.

But Napster's viral effect was almost too good for its own good. It had grown from a couple hundred users to over 50 million worldwide by allowing people to share music files with one another – for free. The majority of you may have used this or another file sharing service and seen that it works wonders. Dr. Dre and Metallica may have even warned some of you to stop. Thanks to these artists and government intervention, the RIAA managed to shut down Napster. Even though alternative services managed to pop up, the RIAA gained momentum.

Despite owning the rights to the music catalogues, none of the major five labels has been able to do much in distributing these online. After all technology was not the barrier as Napster and other services like it proved. What was the barrier? Greed, arrogance, misunderstanding and a lack of customer service to start with. Ultimately it was because the labels did not go on the offensive. When Napster was around, the labels considered such rogue applications as the villain. They were willing to cut deals with one another and make concessions. But with Napster out of the way and a legal precedent to take out new services like Scour, Morpheus, Kazaa and WinMx, they began to think about seizing the opportunity. Even then, they were too slow to make a difference.

The key term in this debate is "consumer" and not "user." After all, people were accustomed to downloading tunes for free but were not going to the record labels to do so.

The labels had to encourage users to pay and become consumers. This entailed offering a superior service. Jupiter Media Metrix forecasted sales of online music (in the form of download services and CD purchases) to hit $5.5 billion by 2006. The stakes were high but the labels were bleeding from the initial shock of Napster. According to one record label, the growth of piracy contributed to a decline in overall music sales of between 5 and 10% in 2001. What did the RIAA do?

Instead of taking action, the association hedged its bets. Labels joined forces and developed their own services. But this strategy did not win over consumers. The problem was that the RIAA took a defensive strategy against Napster and with one another. Yes, Vivendi Universal and Sony backed Pressplay while Warner Music, BMG, and EMI backed MusicNet. But having segmented services was counteractive to enticing consumers. They failed to recognize that the war was two pronged, with a short-term conflict against piracy and a long-term conflict against other music labels. Incidentally, Bertelsmann bought out Napster in May 2002 for a mere $8 million even though its BMG Entertainment subsidiary was suing it. This demonstrated that Bertelsmann had two distinct strategies for the short and long-term.

When Sony came out with the Walkman, they may have encouraged competitors to produce their own version as well. Only once demand picks up do you go after your competitors. This is the key difference in building primary demand versus selective demand. Palm Computing licensed its operating system to archenemy Handspring because in the words of their management: "you have to give up a piece of the pie to increase its size."

While Palm and Sony were open-minded and saw the greater picture, the RIAA were close-minded. Palm passed knowledge to Handspring because it knew that it was the best way to benefit the entire industry. In business, winning takes offense. Defense makes you a great takeover target.