17 Jun
2015

Industry report -

Napster reborn?

Fraserburgh

Co-published

A wise and pithy client once told me that if I wanted to get her business, I should identify a problem that was so irritating that she would be willing to pay me to make it go away. This is the crux of the problem for IP professionals: for most CEOs, even IP litigation is not on their top 10 list.

CEOs (and boards of directors) care about the things that shareholders (and analysts) view as important. These are stock-price relevant factors. To my mind the top three are:

  • market share (units sold);
  • revenue (price per unit); and
  • margins (profitability per unit). 

Anything that improves these numbers by an appreciable margin gets their attention.

But it is always hard to link intellectual property directly to the bottom line. Where it is possible (as in the rare case of line item-identified licensing revenues), you run the risk that a corporate activist will ask why the cash cow is not separate from the operating business. The ongoing fight between Jana Partners and Qualcomm over the future of its licensing business (which represents 65% of earnings before interest, taxes, depreciation and amortisation) is a case in point.

One area where CEOs are increasingly sensitised is the emergence of new technologies, competitors or business models that may eat up their market share or undermine their revenues. This is one reason why corporate venture capitalists are among the most active investors, seeding potential disruptors and acquiring the survivors. In industries such as software, where the 'hockey stick' can be vertical, a disruptive entrant can eat market share before an incumbent is able to respond. This is the reason why fast growing start-ups are snapped up for fully loaded prices in transactions that are as defensive as they are offensive.  Facebook’s $1 billion acquisition of Instagram is the exemplar for this phenomenon.

No industry or company can afford another Napster. In 1999, the year that I founded my first start-up, Shawn and John Fanning, together with Sean Parker, founded the now infamous peer-to-peer MP3 file-sharing service. Napster ran for two years and disrupted an entire industry. It was eventually shut down for copyright infringement by the Recording Industry Association of America following lawsuits from the unlikely bedfellows of Metallica and Madonna. However, there was plenty of evidence that Napster actually stimulated record sales by reaching an audience that was previously impervious to promotion. Irrespective, Napster catalysed change in a moribund industry that ultimately found a way to monetise the file-sharing technology. Without Napster, there would be no Spotify and probably no iTunes (which itself was based on an acquired technology called SoundJamMP). Napster met my client’s criteria in that it irritated CEOs enough to:

  • get sued and shut down; and
  • restructure an entire industry around the offending business model.

Today we have a new Napster phenomenon emerging – only this time it is around live streaming videos. Periscope is the high-profile bad boy for now, generating acres of newsprint as a result of live Twitter streams from the Mayweather-Paquiano world championship fight and the US Open. But other services focused on sports and live concerts are emerging, such as Meerkat (another Twitter-based app) and Jukely, which offers customers the chance to see live bands for a monthly subscription. The legal position of these services is interesting, as copyright may not necessarily be infringed by their use. UK law firm Harbottle has pointed out that trespass may be the offence being committed (at least in the United Kingdom) by, for example, live sporting events.

So what is the correct response from live events organisers, content owners or brands which feel that they are suffering at the hands of live streaming apps? Throw out their customers? Ban them? 

If the history of Napster teaches us anything, it should be that the best strategy for coping with technology-driven disruption is to adapt and adopt the disruptor into your business model. Or perhaps to offer a superior service that allows you to monetise the streaming style of viewing. 

It seems to be clear – with the relentless migration of viewers away from television and onto phones and tablets – that consumption of media has changed dramatically from the model which many broadcasters were established to serve. Savvy content owners and advertisers have understood this and have driven and supported the emergence of new media and consumption models.

Some platforms have thus far struggled to find acceptance from the mainstream by virtue of being too early, mostly in the venture capital-backed world. Companies such as NPTV offer institutional quality-streaming services that allow users to manipulate what they see and create individual customised video streams that, in turn, generate individual user profiles for advertisers. My belief is that this is the media consumption model for live events in the future: self-edited productions that may be shared in real time. These services could be free, but will provide content owners and distributors with the platform data for latent commercialization. 

One thing is for sure: live video streaming is not going away. The only question is who the winners are, and which venture capitalist has backed Napster and which has backed Spotify? 

For those who can’t remember the end of the Napster story, despite the best efforts of the US bankruptcy judge (who blocked Bertlesmann’s bid for the company), Napster did not die. After a series of owners, including Best Buy, Napster is now part of the Rhapsody streaming music service. Napster changed an industry, generated a new one worth billions of dollars and provided a blueprint for future disrupters. Streaming video innovators are treading a very similar path.

For further information please contact:

Chris Donegan
Fraserburgh

This is a co-published article whose content has not been commissioned or written by the IAM editorial team, but which has been proofed and edited to run in accordance with the IAM style guide.

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Finance