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Will Napster 2.0 save music?
Now legitimate, Napster could be just what the industry is looking for.
October 6, 2003: 10:57 AM EDT
By Eric Hellweg, CNN/Money Contributing Columnist

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SAN FRANCISCO (CNN/Money) - Today visitors to can watch an animated cartoon in which the famous catlike Napster icon -- a Jonny Quest-level hero to many under-30-year-olds -- breaks out of jail, resuscitates itself in the hospital, and storms into a murderous record-company meeting (where fat-cat execs are fleecing fledgling online music services, natch).

Firmly standing its ground, Napster demands its own deal, which is signed by the ink that splatters from a pen stabbed through another online music service's back.

Welcome to brand revitalization, Napster-style. The animation seems to assert, if somewhat brutishly, Napster's new position: "Yeah, I'm back, and now I gotta play nice with the labels, but I'm doin' it my way."

Napster 2.0, which launches on Thursday, faces many challenges in defining its new position, but the service arrives at a turning point for legitimate music services: A market is finally developing that is resonating with consumers.

Last week MusicMatch launched its new la carte Jukebox service, which is winning raves for its ease of use and licensing arrangements. Earlier this year, launched, and though the company's licensing deals are more hit-and-miss (a result of being the first Windows-based la carte service), its prices can't be beat: 79 cents for most single-song downloads.

It's all about the licensing

Licensing issues can't be overestimated. In the first iteration of music services (mostly subscription-based), the usage rules were far too restrictive to appeal to anyone other than record-company lackeys.

But the industry is finally loosening its grip, thanks in part to some heat from Washington. The Senate held hearings a couple of years back to examine the impasse between the labels and the would-be digital distributors. Since then, the industry's nosedive has only accelerated, and the labels have begun to change their tune.

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The first digital service to benefit from this dtente was Apple's (AAPL: Research, Estimates) iTunes. Now, with licensing far easier, others are jumping in.

"We made a decision to pass on every generation of licenses that was available before now," says Dennis Mudd, CEO of MusicMatch. "We've been working with the labels for six and a half years to try and get these licenses."

Right out of the gate, Napster 2.0 carries a considerable advantage over its freshly minted competitors: Its song library contains 500,000 titles. This number dwarfs the holdings of its nearest legitimate rivals, including the much-vaunted iTunes (which offers 200,000 songs). MusicMatch claims that it will also have 500,000 songs by year's end.

Ironically, Napster's arrival in the market brings us closer to the moment the record industry has been waiting for: when several legitimate music services exist, with sizable catalogs, decent -- if not perfect -- usage rules, and pricing that's trending downward.

Will the brand be enough?

Roxio's (ROXI: Research, Estimates) stock has enjoyed a steady run-up for about the last year, reaching a 52-week high last month. Investors are clearly eager to see Napster return to its position of dominance in the online music market -- and make some money to boot.

However, in order to become profitable, Roxio will have to invest in advertising. It will probably need to spend more than its competitors on marketing, since its brand carries both negative and positive cachet -- negative in that users aren't accustomed to paying for the service, and positive in that it is regarded as cool to tens of millions of music lovers who used Napster until its demise in 2000.

Gene Munster, an analyst with U.S. Bancorp Piper Jaffray who rates Roxio a "strong buy," says he thinks Napster's brand will all but guarantee its success. He recently conducted a survey and found that 93 percent of respondents knew of the Napster brand, compared with 15 percent who recognized RealNetworks's Rhapsody service. Sixty-seven percent of the respondents said they were interested in purchasing music online.

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"People want to buy digital music, but they don't know what's out there because there's no big brand," Munster says. "Because of the Napster brand, people are going to check it out. If Napster can do it right in the first three months, they'll establish themselves." Piper Jaffray conducted banking for Roxio in 2000.

One final piece of the puzzle is missing, however: Apple's wildly popular iPod portable digital music player is not currently compatible with Microsoft (MSFT: Research, Estimates) Windows Media. MusicMatch and BuyMusic both use the Windows Media format, and it is expected that Roxio will as well (a Roxio representative wouldn't comment on the service before its launch).

For these services to truly resonate with the masses, they'll need to work on the iPod. That's expected to occur when Apple launches its Windows version of iTunes, which is scheduled to happen before the end of the year.

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