Napster, mobile music and the future of mobile commerce

Wait, what - the Napster? Yes, they are still around. And they are making serious moves in mobile commerce and content. At the Mobile Commerce World event in San Francisco today, Brad Duea, President of Napster spoke at length about music and commerce in mobile. He was interviewed by Tom Wills, Senior Analyst from the Security, Fraud & Compliance division of Javelin Strategy. It’s a great interview - Brad addresses problems with operators, billing, licensing and labels. He also spoke about the differences between Napster and other big mobile music services like Spotify and Pandora.

Tom: What is Napster up to?

Brad: I’m going share some of the preogress we’ve made in mobile. I guess first and foremost, we were acquired last week by Best Buy for 120 million dollars. Now we’ve launched a pre-pay card service, for 5 dollars a month, that lets you download MP3s direct to your phone.

Tom: So how do things stand in terms of mobile for Napster right now? What’s the State of the Union in terms of monetising digital content?

Brad: Now is just the most exciting time to be in mobile. The networks have gotten fast enough to support these services. There are off-deck opportunities that are actually viable now, not just a part of carriers. There are so many great devices available that make things easier for the consumer. From an industry perspective, I’ve seen the attitudes of the carriers towards content develop over the last five years. Five years ago, we had an attitude that I call “the island”. Carriers only wanted to talk about the mobile device itself. We said things like “we’ve got a great mobile application, with PC integration” and the operators didn’t care. They said “we don’t want to hear about PCs, we want to know what you can build into the device itself”. This was “the island” phase. Then it developed to a point where people thought it was enough to side load. You put content on your PC and then sideload to your phone, they didn’t care about doing it over the air. There was no consideration for wireless transfer.

But these days there’s far more integration. I’m excited because it’s a totally integrated experience. For example, if you get one of our pre-paid card you can do everything over your mobile. You don’t even need a PC! But if you have one, then you can log onto your account with the same username and password. So it works with any IP channel… that’s what we mean by integrated. But frankly, some of thecarriers don’t like that! They want to stay on “the island”. But the integrated, multi-channel experience is ways better for consumers.

Tom: What do you think are the gaps between here and getting to that fully integrated, cross channel experience?

Brad: There are a few things, and they are all really big issues.

First is compatibility. A lot of people are talking about that. The question is “can you really guarantee the same access from every carrier?” For example there’s one carrier… I can’t name it… that is trying to block us. Another problem is whether users access the service from any phone? Having to develop a different app for all these different platforms and devices is a nightmare. WAP is great, because you can access it from almost every phone, but it’s not RICH enough. We can’t stream your playlists, for example. So that’s the compatibility issue.

Second is billing. So carrier-integrated billing is great for consumers. It’s easy and it’s quick. But as a service provider like Napster, you can end up handing 40% per transaction straight over to the carrier. And in the music industry, you’re already operating at a 10% margin. So that really doesn’t make sense. Integrated billing is definitely nice and easy, but because the labels tend to make us pay more for licensing on the mobile channel, and we have to pay the carriers… well, the songs will be more expensive for the consumer.

Third, there’s licensing from the music labels. Each time we climb a licensing Mount Everest with the labels, there’s another mountain right behind it. Here’s an example - we finally got the labels to agree to let us sell songs for 99 cent on PC… then they demand we charge more for the mobile channel. There’s no reason for this except gouging the consumer. We asked them why we had to charge more for mobile, and they said “because the consumer will pay more”. We eventually solved this, and achieved parity of price over the different channels, but now we’ve got streaming to deal with. Streaming is the next Mount Everest. Napster has a full, on-demand streaming iPhone app ready to roll. We haven’t released it yet though, because the labels want to charge THREE TIMES as much for that service as for our others. And we don’t want to hit the consumers with that. We want to have complete parity across all channels.

Tom: The difference between being on-deck and being off-deck is interesting. What do you see as the future in this battle?

Brad: Let’s talk about the pros and cons of both on- and off-deck.

Napster has been on-deck with AT&T for well over three years now. I have to say, we have found them to be a great partner. With AT&T we have gone from a side-loading service to an over-the-air service. Now AT&T helping us develop our integrated solution. The great thing about being on-deck is that the carrier is marketing you. It may be only a link in their music section… but these guys have 60 million subscribers. Just by being there you will see amazing traffic. And if the carrier does any additional promotion like banner ads on other areas of their site, you can get an incredible amount of traffic. But being on-deck is also great for the consumer. A consumer can go to our store on AT&T, click “buy”, get the MP3 immediately and be seamlessly charged on their bill. It’s very easy, very fast, very convenient. Not only that, but when you are partnered with a carrier - you will get access to all the handsets BEFORE they come out. You get to do early testing on devices, and integrate your service in a very close way with the device.

Now here are two really big CONs, the first of which I have already mentioned. When you’re on deck and you want to do billing, you have to pay the carrier 30% - 40%. You can probably cut a deal, but it’s still a huge drawback. The second problem is, who owns the customer? Sometimes when you’re on-deck, and the customer is actually using the Napster service and buying tracks… but the carrier will still own the customer. The consumer is dealing with the carrier and not you.

So now lets look at pros for off-deck. First, if you land that customer on your own, using marketing or retail traffic or any method, you are only paying 4% to a credit card vendor, rather than 40% to a network. That gives you much better margins. It also means that YOU own that customer across all channels your service is on. And with off-deck you can access subscribers from different carriers. If you’re only on AT&T, for example, you can’t access customers on Verizon or Sprint.

Tom: So why would any of the players who are not Telcos want to continue with on-deck as a long-term strategy?

Brad: Long-term is the key word there. So in the short-term, there are oddities you may not be aware of. For example, if you’re a site that’s generating a huge amount of traffic for a carrier, you might suddenly be blacklisted. The carriers want data traffic, but not too much. You can get kicked right of the deck if you generate too much traffic. So short-term it might seem ridiculous to stay with a carrier. But they are changing, developing. In the long-term, these are problems that will be ironed out.

Audience question: in terms of your new music service, why should a consumer use you instead of one of the existing streaming MP3 services?

Brad: Well, let’s name the big ones. There’s Pandora and there’s Spotify. Our big differentiators are that we are true on-demand, and we have no ads. Take Pandora - it’s more of a radio service. If you want to listen to U2 Pandora will give you one song by U2, then a couple of songs that sound LIKE U2, then maybe another one. Spotify is closer to us, but it costs 10 pounds sterling a month. Like I mentioned before, this is because of the labels and licensing. We want to do this cheaper, so our app isn’t out yet.