Looking for Napster 2.0

Eight years after the debut of Napster, the pioneering song-swapping service, file-sharing programs remain hugely popular among consumers -- and equally unpopular among the major record companies and movie studios. This disparity raises the question: If peer-to-peer networks are so good at distributing valuable content to audiences of millions, why hasn’t anyone figured out a way to make money off of them?

It’s not for lack of trying. Executives at the original Napster planned to convert the network into a subscription service, but the company went bankrupt before it could obtain licenses from all the major labels. One of Napster’s contemporaries in the illegal file-sharing world, iMesh, got the licenses that Napster could not, but it hasn’t shown the ability to convert masses of free downloaders into paying subscribers (the privately held company hasn’t disclosed any data yet on its subscriptions). The former head of Grokster, Wayne Rosso, won the labels’ support long ago for a p2p network called Mashboxx that blocked illegal downloads, but he’s still in development and looking for cash.

The latest approaches pay less heed to selling downloads, focusing instead on hooking users with free content that can be monetized through advertising. These include Qtrax and the latest iteration of Mashboxx. Meanwhile, other p2p ventures, including Grooveshark, are supplementing downloads with on-demand streams. Whether any of them will succeed -- or, in several cases, whether they even get off the ground -- remains to be seen. But their business models reflect a shift in thinking about content online and how to make money off it.

The most conventional of the new breed of monetized p2p is Grooveshark, which is a throwback in a couple of ways. First, it features many of the annoyances of an unfiltered file-sharing network, most notably files with inconsistent or incomplete labels. That can turn searching for specific tracks into a chore. More significantly, Grooveshark has been talking to the labels and music publishers, but it launched without a full set of licenses. Therefore, much of what’s happening on the network is, technically, copyright infringement. That doesn’t bode well.

What’s different about Grooveshark is its blend of Kazaa’s try-before-you-buy capabilities with the iTunes Store’s pricing. People can play songs from other users’ collections for free -- that’s the try-before-you-buy aspect -- but it costs 99 cents a track to download a permanent copy that can be burned onto CD or loaded onto an MP3 player. It also has a number of social-media features. Users can share playlists and browse through one another’s collections, and they collect a commission on every track sold from their computer. That social layer, along with the software’s ability to recommend artists similar to the ones being searched for, make for a richer experience than most p2p networks.

The company faces some non-trivial hurdles, starting with its reliance on unlocked MP3 files. That might be a market imperative from the consumer’s point of view, but it has been a nonstarter for two of the four major record companies -- Warner Music Group and Sony BMG. And from a business model point of view, Grooveshark faces thin margins on the 99-cent downloads, and yet it has to pay royalties to the labels and music publishers every time a song is downloaded or streamed. (Company executives say they plan to pay the standard royalty rate for the downloads, plus a negotiated royalty on the streams.) If users do a lot of trying but not a lot of buying, the company will soon be bleeding cash.

Unlike Grooveshark, the as-yet unlaunched Qtrax won’t try to build a file-sharing community from scratch. Instead, it wants to build its service on top of Gnutella and other existing p2p networks, giving its users access to the millions of files already shared there. And it isn’t terribly interested in selling music; instead, it wants to sell ads and build ad campaigns around its users’ downloading habits.

Qtrax uses audio fingerprints to identify the songs available through p2p networks, making them much easier to use and more reliable. Just as important, the fingerprint technology enables Qtrax to enforce the terms set by copyright owners. Examples include allowing songs to be downloaded freely, attaching electronic locks to disable them after a limited number of plays, or blocking them outright. The middle option is the one chosen by the major record companies, which have agreed to permit Qtrax users a handful of free plays before instructing them to buy a permanent copy.

The locks could prevent the service from working with Apple’s iPod, by far the world’s most popular MP3 player, because Apple hasn’t agreed to let any other companies use its proprietary anti-piracy technology. But according to Qtrax CEO Allan Klepfisz, that sort of control is essential to unlocking the pent-up demand from advertisers to get into the p2p scene. Major advertisers stayed away from networks such as Kazaa because of the rampant piracy there. “Advertisers, because of fear, were sort of the last bastion of respect for copyrights,� Klepfisz said in a recent interview. “Now that they can go into a legal arena, they’re suggesting all sorts of creative campaigns,� which should generate more revenue than the typical online ad.

Similarly, Rosso said Mashboxx isn’t as concerned about selling music as it is “monetizing the activity around it.� Borrowing a page from Google, Mashboxx wants to sell ads tied to the searches people conduct for music on p2p networks. In addition to making p2p networks easier to navigate, its software has two basic purposes: impose the restrictions on shared files that copyright holders demand and match advertisers to the users to whom they want to market. The hope is that the improved reliability and the added features, combined with the labels’ blessing, will draw users in spite of the trade-offs. Like Qtrax, Mashboxx won’t give users a free way to fill their iPods, but it will provide a legal way to play songs on demand for free at least a few times.

Qtrax hasn’t launched yet, despite more than three years of work on the technology and the licenses. Until it does, it’s hard to predict just how much advertising the company will be able to attract or how much it will need to satisfy the labels’ royalty demands. Klepfisz said the U.S. debut will come before Christmas, with the service opening to the rest of the world shortly thereafter.

Rosso said Mashboxx is still looking for backers and needs cash to finish work on its software. Its business model faces the same challenges as Qtrax’s, but in an era of rampant free downloading, Rosso would rather be selling ads aimed at music fans than the music itself. “Record companies can’t make money selling it, why do they think anybody else can?� Rosso asked, adding that “the way to compete with free is to make [music] free. It has to be sponsored. It has to be subsidized.�

Jon Healey is a member of The Times’ editorial board and author of the Bit Player blog; click here to read more of his Opinion Daily columns. Send us your thoughts at [email protected].