Napster: Show Me the Money

It’s easy to see why college kids love Napster, but why do venture capitalists seem to love it so much?

Napster is a small California company that distributes via its Web site a much-ballyhooed piece of software that makes it easy for music fans to swap songs over the Internet. In yesterday’s Wall Street Journal, Kara Swisher’s “Boom Town” column noted that VC’s are “giddy” about Napster, though perhaps they’re wrestling with ethical dilemmas, since the software’s main attraction is that it allows consumers to stockpile music they haven’t paid for. In the May 1 Fortune, venture capitalist J. William Gurley becomes the umpteenth onlooker to declare that Napster simply cannot be stopped. After all, he notes, Napster has snagged 9 million users in six months, and “it took America Online 12 years to reach 9 million users.” Six weeks ago, Fortune’s other VC columnist (what’s up with that, anyway?), Stewart Alsop, publicly mulled over whether he would invest in Napster, seeing as how it’s the future of the music business and so on.

I get why Napster is a cool thing for music fans. But there is a problem with Napster as a business: So far, there’s no money involved. None. Not only does Napster have no profits, it has no revenues. Not only does it have no revenues, it has no business model. Yes, Napster is popular, but it is also free, and emphatically so (which kind of suggests a little problem with Gurley’s comparison to AOL). It’s popular, in fact, because it is free and because it lets you get things for free. The entire brand identity of Napster is “free-ness.” Why would the kids who have made it popular pay for it? Meanwhile, Napster’s “proprietary software” has apparently proved pretty easy to copy–several imitators already exist.

Napster’s CEO has asserted that the software maker is “the MTV of the Internet,” so perhaps the thinking is that ad sales will be the cash cow, or that record companies and/or artists will partner with Napster to sell artist merchandise. That’s possible, I guess, but Napster so far has been sued by the Recording Industry Association of America, Metallica, and Dr. Dre, so the company doesn’t seem to be doing a great job racking up future allies.

Again, I understand that Napster is popular, and that it is a real threat to the back-catalog portion of the record business. So I get the potential downside. And in fact, I would get Napster as a feature of some service that costs money, in the way that instant messaging is a free feature that enhances AOL. I do not get why anyone would want to fund Napster. It’s one thing to spot a trend, but it’s something else entirely to figure out whether that trend will result in big profits, and for whom. Right now, betting on Napster seems like betting on casual Friday or the tattoo–sure, it’s more popular than it used to be, but where’s the money in it?

Napster as an investment only makes sense, really, as one of those pie-in-the-sky “concept plays,” a dot-com that will “aggregate eyeballs” and figure out how to “monetize” them later. But I thought we did away with all that silliness after the most recent Nasdaq tumbles, didn’t we?

(To read more about Metallica’s Napster suit, click here.)