Music Piracy: Interview from the Front Line

In this week’s A&E section we take a look at the problem of online music piracy, its effects on consumer behavior, and one company’s response to its devastating impact. Elaine Chang is a Harvard Business School RC student who spent her last three years working for Universal Music Group’s Global e division and its joint venture with Sony called Pressplay (now Napster 2.0). She was directly confronted with the problems of online music piracy and worked extensively on promoting a fee-based service.

HARBUS: Elaine, what attracted you to the music industry?
Elaine: What drew me to the music industry, and what interests me about media and entertainment in general, is that it is such a powerful vehicle in shaping popular culture, both in terms of predicting future trends and its ability to react to current trends in the market. I’m particularly drawn to music on an emotional level – we all have songs or bands that we can relate to, moods that only music can inspire, and memories that are instantly brought back when a certain song is played. Working in the music industry was of particular interest because my role exposed me to both the business and creative dimensions of the industry. While my role gave me the opportunity to work on strategy and operations, I also got to see the sexier side of the business with respect to artist development and marketing and programming.

HARBUS: What was Universal’s reaction to online piracy in the heyday of the old Napster?
Elaine: While the RIAA posed a solid legal threat to music pirates, reaction inside Universal was mixed in terms of how to deal with the problem. There were still questions as to how widespread the problem was, how easily the file sharing phenomenon could be replicated, and to what extent piracy impacted sales. The file sharers presented a fundamental threat to the traditional business model and changed the way consumers viewed and accessed music content. Universal has traditionally been very responsive in dealing with such developments and committed specific divisions of the company (including Global e) to undertake new business initiatives that were responsive to technology ranging from its own proprietary downloads to music subscription services.

HARBUS: How was the idea of Pressplay launched?
Elaine: The concept of a music subscription service was always something that many of the record companies considered. Digital delivery allowed consumers to access, ideally, a universe of music content in an on-demand fashion. This seemed like a logical next step in the evolution of the music business where consumers would be charged a fee to access digital content. The challenge lay in the actual creation and operation of the service as it is both complex and expensive to develop the subscription infrastructure – security and tracking – and acquire all the necessary content to make the service compelling enough to use. Two major camps eventually emerged in 2001, with Universal teaming up with Sony to launch Pressplay and BMG, Warner, EMI, and Real Networks combining to found MusicNet. Despite a large aggregation of labels on both sides, there was still the problem that customers couldn’t get all of their music in one place. There is not much association between artists and labels, so it was important to be able to offer all artists on one site.

However, cross-licensing was extremely difficult, and there was still a great deal of uncertainty over how to price the product.

HARBUS: Why was there such uncertainty over pricing?
Elaine: Wow, now that’s an excellent question. You guys really are amazing interviewers. And you’re both spectacularly good looking – why aren’t you both models?

HARBUS: Journalistic integrity. Sure, we could be on the catwalk dating supermodels and partying every night, but we always wanted to get to the bottom of a story. But back to pricing.
Elaine: Of course. Part of the difficulty stems from the three types of services: streaming, downloading, and burning. Streaming is where you listen to music directly playing across the Internet. The advantages are that you don’t have to fill up space on your hard drive, however you also never “own” the music. Downloading is where you physically take possession of a song, and burning is where you are able to download a song and burn it onto a disk. The difficulty in pricing these activities is to decide how much customer value you’re creating and evaluating the cannibalization effect on CD sales. Plus, you must make sure to cover all of your expenses.

HARBUS: So what was your role at Universal?
Elaine: I was mainly involved with business development and analysis. There were two key challenges facing Press Play: on a macro level we needed to change consumer behavior away from expecting free music toward a fee-based service, and the other was establishing a brand presence. My primary role was to seek out distribution partners for the service, from Yahoo to Gateway to MSN, we signed a number of partnerships that gave us visibility to the consumer, as well as providing an avenue for selling our product. Specifically, my job was to find partners, structure deals, work the negotiations, and push the deal through. I was also involved with looking at new businesses and different ways to sell music access – from TV to wireless to airplanes to cars. I did a lot of research on consumer behavior, particularly into how and where consumers were using music to see what value we could create for them.

HARBUS: How do you see the online music industry evolving over time?
Elaine: The future is going to be very competitive. Although Napster 2.0 and iTunes are the dominant players right now, other entrants will emerge as consumers become comfortable with the service. As awareness of the illegitimacy of pirate companies like KaZaA becomes more apparent, customers will hopefully switch to fee based services. I think there will still be a place for CDs in the near-term, as consumers still have a desire to own a product and shop at retail outlets. Digital music will become increasingly popular due to its portability and instant gratification.

Customers have really evolved to on-demand consumption, from digital
cameras to TiVo to video on demand. The ability to hear songs in real time and immediately download them to your computer or transfer to a portable device or burn to CD is what the customer wants. Our job is to figure out how to deliver that in a way that makes economic sense.

HARBUS: What are the advantages of Napster 2.0 over free services or iTunes?
Elaine: The key differentiation is service. While both companies offer the same music, Napster 2.0 provides a number of different pricing plans (including the a la carte model of tracks for $0.99), exclusive programming, and a well-designed, consumer-friendly interface.

Programming will continue to be a key differentiator between the services.