December 19, 2001

 

 

 

The Honorable Nancy Victory

Assistant Secretary

Communications and Information 

United States Department of Commerce

Room 4713 HCHB

1401 Constitution Ave., NW

Washington, DC 20230

 

Attn: Josephine Scarlett

 

Re: Comments on Deployment of Broadband Networks and Advanced Telecommunications

 

Dear Assistant Secretary Victory:

 

Napster, Inc. appreciates the opportunity to comment on the issue of deployment of broadband in the United States.

 

Founded in May 1999, Napster, Inc. pioneered person-to-person file sharing and created one of the most frequently downloaded software applications in the history of the Internet. Napster provides music enthusiasts with an easy-to-use, high quality service for discovering new music and communicating their interests with other members of the Napster community. The service enables users to locate and share music files, send instant messages to other users, and create Hot List bookmarks. In October 2000, Napster partnered with Bertelsmann AG to develop a membership-based service. Edel Music and TVT Records joined the alliance in January 2001. In September 2001, Napster signed a landmark accord with the National Music Publishers Association (NMPA) for a proposed licensing and settlement agreement. Napster has been attempting, for at least 18 months, to obtain licenses from the major record labels, in furtherance of a membership-based service that insures that songwriters, artists, and other rights holders are paid.  To date, no licensing accord has been reached with the major labels.

 

The surge in our country’s economic growth between 1995 and 2001 is attributable primarily to the investment and attention to information technology. [1] Yet, it is widely agreed that this growth may not be sustainable if the U.S. does not encourage the deployment of the infrastructure necessary to continue the information technology revolution.  Such an infrastructure is one of high-speed connections that allow consumers to utilize the opportunities of Internet connectivity: the so-called universal broadband environment.  The eventual benefits to the U.S. economy from broadband adoption by U.S. households could be $500 billion per year.[2]

 

To date, supply-side issues have dominated the broadband infrastructure debate among policymakers and regulators, and supply-side issues appear to be the focus of this particular NTIA Request for Comments.  Yet, it is also becoming readily apparent that another important element in achieving universal adoption of broadband is generating high consumer demand for broadband services – demand sufficient enough to earn an adequate return on the investment for deployment in underserved areas.  Indeed, the Notice of the Request for Comments opens the door to a more thorough examination of demand issues and asks: “What is the current status of  . . . demand for broadband services in the United States.”  The Notice urges that commentators “address potential underlying causes of low subscription rates.” [3]

 

There is relatively little dispute that broadband penetration is high in most urban and suburban areas and that, notwithstanding its availability, broadband take rates among residential consumers are unacceptably low. Two broadband access technologies that leverage the exiting telecommunications infrastructure – DSL and hybrid fiber coax (HFC; or Cable modem) – are primarily responsible for the current penetration, while robust development has been seen in the areas of terrestrial wireless and second generation broadband fiber to the home (FTTH). [4] Although cable access is available in over 70% of U.S. homes, the user take rate is less than 20% (similarly low take rates have been present in DSL services). [5] It has been reported that there are over 62.5 million narrowband subscribers compared to only 8 million broadband residential subscribers.[6]

 

This low take rate is due to a combination of factors, including the absence of robust and attractively priced Internet content services. Consumers do not see the value in paying an additional $40 per month for broadband services.  A recent survey commissioned for the Information Technology Association of America found that more than 70% of those who could subscribe to broadband services lacked interest in doing so and cited high costs among the reasons for not subscribing.  In addition, 44% of these same people would buy broadband were there compelling entertainment and other robust services available.[7] 

 

Given the low take rate, one attempting to identify the market’s necessary demand generators should consider the public opinion cited above. In addition, policy makers should consider those services that have witnessed the greatest growth among users moving from dialup to broadband services. According to reports, entertainment is the only category to grow in terms of absolute hours and time spent online between dialup and broadband users. [8]

 

The original Napster service serves as an excellent example of the important role content services can play in driving broadband demand.  During the peak of the original Napster’s growth, some broadband services attributed over 40% of their traffic to Mp3 data.[9] Napster users drove demand for high-speed Internet connections, faster computer processors, larger computer hard drives, and CD-RW drives.  As a result, one study concluded that Napster and other file sharing music services were driving a transition to broadband Internet connectivity, increasing new computer sales, and allowing the PC to “get its second wind.”[10]  There was also evidence that the array of content available via the Napster service was helping to bridge the digital divide by providing “have-nots” a compelling reason to connect to the World Wide Web.[11]

 

The National Academy of Sciences has agreed that generating demand for content services through the development and experimentation of services must be among the principles that guide broadband policy over the next several years. [12]More diverse content, applications, and services will create new sources of demand and help attract individuals and communities to make further investment in broadband. Today’s demand level has been based largely on a limited set of applications (e.g. email, Web browsing and limited audio streaming). There is a significant gap between the capabilities of current and future broadband services.  Revolutionary media services and applications have been touted but are generally not available in the public market.[13]  The National Academy also found that increased ties between communication technologies and the content and applications that run over them could result in an Internet that is balkanized, is less open in character, or less supportive of application and service innovation.[14] 

 

A balkanized Internet of the sort the National Academy warns of appears to be what consumers can expect from today’s entertainment industry - a balkanized Internet that will stifle demand for broadband services and, in turn, undermine supply-side efforts to achieve full deployment and universal adoption.  There is little doubt that consumers have seized on the idea of obtaining music online and that file-sharing services are the preferred method for doing so.  In fact, users have installed Napster over 90 million times since the company was founded in 1999, and the Napster service had seen as many as 10 million unique users per day.  Numerous other companies, attempting to take advantage of this consumer demand since Napster scaled back its service in its continuing effort to comply with the court’s orders, have offered their own file sharing services.  And, as many in Congress predicted, these sites are becoming increasingly popular as Napster makes the transition to a licensed service – and many of these companies are located overseas.[15]

             

A challenge for the entertainment industry and Internet services is to channel this clear demand for ephemeral content into legitimate, reliable, robust, ubiquitous and reasonably priced services.  Unfortunately, legitimate services trying to obtain licenses from the major record labels are hampered by the incredibly complex and inefficient music licensing procedures that often involve multiple licensors for music.  And the major record labels, instead of licensing services like Napster, have formed two separate online music distribution initiatives.  These label-owned services do not compete with the lucrative distribution channel for CDs. Specifically, Sony and Vivendi-Universal have launched a music subscription service dubbed Pressplay (previously named Duet) and EMI Group, Bertelsmann, and AOL-Time Warner have launched MusicNet.  Both services have launched in recent days and it is apparent that these new services do not meet the consumer demand for a robust online music distribution service. Of the Billboard Top 20 major label CDs for sale the week of December 10, 2001, not one was available for download on the MusicNet service.[16]  Media reviews of the services have been exceptionally harsh,[17] and both services are reportedly the subject of antitrust investigations by the Department of Justice and the EU since the recording companies’ stakes in Pressplay and MusicNet.[18]  As USA Today writes:  “After each skirmish in the war over music, the entire music industry seems more bent on taking the long walk off a short pier. Customers? Who needs ‘em?”[19]

 

In short, the balkanization of services the National Academy mentions is already taking place. The window for offering licensed/sanctioned services sufficient to drive consumer demand for broadband remains open but policymakers must recognize that the legitimate services must be robust, deep, scalable, reliable and priced competitively. 

 

Napster has been the leading innovator in the market for online music.  So too has we been a leader in attempting to navigate the complex terrain of licensing with the goal being to offer a robust membership service that gets artists and songwriters paid.  Our efforts have paid off in the form of agreements with the NMPA and many others.  But, to date, we have been unable to secure the licenses we need from the major record labels so that we can offer the robust content services Internet consumers expect – content services of the sort that are necessary to generate the demand of the sort adequate to insure adoption of broadband.  Indeed, not a single operational online music service offering consumer-friendly downloads has been licensed by all of the major labels and all of the major publishers. 

 

We are prepared to work with the NTIA and other interests to develop a national broadband strategy provided it recognizes that central to any such strategy is the generation of consumer demand through attractive, reasonably priced content services.  Central to the content services issue is an examination of the complex licensing regime that exists for independent services and the licensing practices of today’s entertainment industry. 

 

Thank you for considering our views and we look forward to working with the NTIA.

 

                                                                        Sincerely,

 

 

                                                                        Manus Cooney

                                                                        Vice President for

Corporate & Public Policy Development

 

 

 



[1]               See,  “The $500 Billion Opportunity: The Potential Economic Benefit of Widepsread Diffusion of Broadband Internet Access;” Robert W. Crandall & Charles L. Jackson (2001), Criterion Economics, L.L.C.

[2]               Id, at 2.

[3]               http://www.ntia.doc.gov/ntiahome/broadband/frnotice_111401.htm.

[4]               See, National Academy Press, “Broadband: Bringing Home the Bits’” Committee on Broadband Last Mile Technology Computer Science and Telecommunications Board, Division on Engineering and Physical Sciences, National Research Council, (2002). 

[5]               Morgan Stanley Dean Witter, July 2001.

[6]               See, CyberAtlas, August 13, 2001 August 8, 2001.

[7]               Winston Group Survey, September 2001.

[8]               See, Media Matrix, Mar. and Sep. 2000; and McKinsey and JPMS analysis.

 

[9]               Konrad Hilbers, The Aspen Technology Summit, August 2001.

[10]             See Napster on the Rise, PC Pitstop Research Report, January 2001.

[11]             IDC, Canadian Internet Commerce, “Napster: The Killer App” February 2001.

[12]             See, National Academy Press, “Broadband: Bringing Home the Bits’” Committee on Broadband Last Mile Technology Computer Science and Telecommunications Board, Division on Engineering and Physical Sciences, National Research Council, (2002).

[13]             Id. At S-5.

[14]             Id.

[15]             See, Information Week, “Napster Shut Down Feeds Dutch Peer-to-Peer Startup” July 16, 2001; and CNET, “Net Music’s Groundhog Day” July 17, 2001. Two of the services that are growing in popularity are located in Amsterdam and Israel and 6 of the top 10 programs downloaded on CNET are file sharing services.

[16]             Statement of Congressman Chris Cannon, House Judiciary Subcommittee on the Courts, The Internet, and Intellectual Property hearing  “The Digital Millennium Copyright Act Section 104 Report,” December 12, 2001.

[17]             See, “Music Industry Off Tune,” USA TODAY Editorial, December 19, 2001; and “A Potential Hit and Miss  on the Music Front,” The Washington Post: "MusicNet,. . .represents one of the worst consumer bargains since the DivX pay-per-view DVD scheme.  . . .  Those behind PressPlay, a competing [major label] subscription system, seem on their way to making the same mistake. Should you stick with MusicNet and accumulate 100 songs that you like, it's not clear what you could do next. You could cease further downloads and simply pay rent on those 100 tracks until the end of time. You could buy the CDs containing each song, eating your subscription costs to date. You could open a second account and sink deeper into the quicksand.   Or you could just copy the songs off a friend's collection or a file-sharing service. That may not be legal, but the major labels can't expect people to choose anything else if "bargains" like MusicNet are the best they can offer."

[18]             See Testimony of Hank Barry, CEO, Napster, Inc., “Online Entertainment: Coming Soon to a Digital Device Near You?”  United States Senate, Committee on the Judiciary, April 3, 2001.

[19]             See, “Music Industry Off Tune,” USA TODAY Editorial, December 19, 2001