Interview: Napster CTO Bill Pence, Part 1

BetaNews: Is the subscription pricing superior to an a la carte pricing model?

Bill Pence: We've always thought so and continue to think so. We were big advocates of subscriptions a year ago when it was really not fashionable to be advocates. Ever since we launched Napster back in the fall of 2003 we've been the strong number two just on pure a la carte sales to Apple, and we continue to be even though we don't market or push that part of our service.

We've always continued to believe that there would be a customer education component required, so that over time consumers would begin to realize that a subscription model was preferable. It is sometimes hard in the abstract to explain that to the consumer, but we typically find that once customers have experienced both, the subscription is the more attractive play. We offer a choice because it depends frankly on your demographic group.

Younger consumers are much more much comfortable than those of us, including myself, that are a bit older who at one point owned a CD collection. The ownership versus access thing is something that is a bit generational too. We believe that subscription will carry the day in the longer term.

BN: How are royalties paid to the record companies with a subscription pricing model where customers are allowed to listen to an unrestricted amount of music? For instance, Real is subsidizing its Rhapsody service with advertising.

Pence: I don't think that we go into the royalty mechanisms. We don't subsidize or put advertising into our service in the subscription tier. We've never felt that was a particularly attractive idea for a consumer who is paying to access a service. The royalty mechanism in a subscription is usage based, as you probably know, but we don't break it out into any more detail than that.

BN: How is Napster's relationship with Microsoft and how is it evolving?

Pence: We have a very solid relationship with Microsoft. We have been working with them for several years now and we've probably been the first deployed of just about everything they have, which obviously includes the recent Janus DRM. You may not be aware, but we are the first ones to deploy a ten foot application on the Media Center Edition. The relationship with Microsoft is strong and very symbiotic; I think by being some of the early users we stretch their system quite a bit in terms of making it actually work in the real world versus just coming out of the laboratories there. So I think they derive a lot of benefit as well.

I talked about the Media Center, but we have also been working with them on their home networking strategy around media extenders and media connectors. Our service works on Pocket PC and smartphone devices as well. We see the mobile space as still somewhat up in the air, and we have a very pragmatic approach to it.

BN: What challenges are there in brand establishment? There is high brand familiarity, but is Napster getting its new brand message across?

Pence: We do brand tracking studies all the time and when we were first in the process of re-launching the service the brand recognition was very, very high - 97 percent. There were certain attributes that came out very high: innovation, cool and that kind of thing. But also the notion of free content was a very high brand attribute in the early days.

As we have continued to track the brand attributes, one of the things we have been pleased with is that we have not seen any diminishing around innovation and cool and "a place for music," but the attribute that people associate Napster with free content has greatly diminished. So, we have clearly gotten the message out that the brand and the service are back, but it is now a legitimate pay service without sacrificing any of the positive brand attributes.

BN: How does Napster respond to barbs that it has sold out?

Pence: What a loaded question. In the day that Napster was running free I was not at Napster at the time, but involved in this business. There were a lot of surveys going around with people asking, "Why can't we get a service like Napster that has the all you can eat catalog but just give us a fair monthly price?"

Even in the day Napster was "illegal" there were people saying, "What we want is a pay version of Napster and we would be happy to pay." And I distinctly remember all of these discussions.

So basically, we have created a close as possible replica of the original Napster experience, including replicating a lot of the commanding features that were in the original Napster service such as looking at other peoples' collections and sharing playlists and things like that and for a flat monthly fee. We don't think that we have sold out, we think that we have provided a great service - one that is legal and respects copyright owners and pays artists.

BN: Speaking of brand names, is Rhapsody To Go infringing on Napster To Go's brand name? They sound an awful lot alike.

Pence: I don't have any comment on that. Obviously they just launched that last week and that would be a question for our legal team. We don't have any comment on it, but are very pleased that every article that has come out about Rhapsody To Go in the same breath mentions that Napster launched a similar service a few months back. As expected, being the leader in this has a lot of benefits and Rhapsody and Real are definitely playing a copycat game here.

BN: Will Apple go the way of the Walkman and become commoditized?

Pence: I've been working in computers and technology for twenty some years and I have never seen a hardware business that hasn't commoditized. I certainly have never seen a consumer hardware business that didn't come under intense price pressure and commoditization. I think that there's no question that Apple's ability to differentiate the product and maintain price premiums is going to erode and I fully expect that portable MP3 players will look more and more commoditized over time.

Then there's also the wildcards: Does this functionality get swept into cell phones, for example. Does it go the way of the digital camera? You can certainly buy high-end digital cameras, but you know it's pretty commonplace to find them in cell phones now and obviously there's been huge commoditization in that business and it's very, very difficult to differentiate.

I believe that it is going to be difficult and Apple will have less of an ability to differentiate.

Continue to Part 2 of the interview with Napster's Bill Pence