Napster Didn’t Decimate the Record Industry

By Llewellyn Hinkes Jones

The common narrative of Napster is that a lone programmer, Shawn Fanning, developed the file sharing software in his basement which would eventually allow everybody with internet access to copy music for free, enabling music piracy on a grand scale.

It became so popular across college campuses so quickly that it simultaneously destroyed the record industry along with major retailers like Tower Records, while earning the ire of the Recording Industry Association of America (RIAA) and bands like Metallica.

But Napster’s existence only lasted a few years, from about 1999-2002. While quantitative and anecdotal evidence points to it being popular, along with other sharing services, the evidence that it decimated the record industry is less apparent. Napster and the internet-writ-large certainly affected the music industry, but it didn't destroy it.

Napster may have decimated total revenues by encouraging the industry to move away from physical sales for marketing. But major record companies earn their profits in a myriad of ways and physical album sales are sometimes just a small portion.

No Longer at the Peak of Sales

Music industry revenues started declining in 1999 around when Napster was launched, according to numbers from the RIAA. But revenues were at historic highs in 1999, driven by compact disk sales.

By the year 2004, when Napster had effectively died out, music revenues for the year were still the tenth largest of all time. By 2015, music industry revenues were at a relative nadir of about $15 billion, which was about where they were thirty years earlier.

While RIAA numbers for total sales revenue and sales volume show a marked decline starting around 1999-2000, reported sales for major recording companies like Sony and Warner Music barely budged from the growth of music piracy.

According to numbers compiled by Numhub from financial filings, revenues for Warner Music, which produced numerous Metallica albums, actually increased from 2001-2009. Besides a dip following the financial crisis, revenues were at an all-time high in 2017.

Sony Entertainment, which includes its music business along with other sectors, did see a significant downward swing after Napster appeared, with total revenues being halved from 719 billion yen per year to 355 billion.

But during Napster's heyday from 2001 to 2003, music sales actually increased, from 612 billion to 636 billion yen, higher than what they were in 1997 (564 billion). And total revenues in 2017 are now at a high-water mark of 800 billion yen.

Similarly for Vivendi, revenues tanked around 2002 folowing Napster's growth, by about €20 billion, but operating incomes barely changed.

It was as if a huge chunk of revenue generated by the company had no effect on the company's profits.

Warner’s Private Equity Takeover

While the internet may certainly have affected physical music sales, other significant factors in the music industry were also at play.

According to the book The Buyout of America, Warner Music was the largest producer of new records in 2003. But in 2004, a collection of private equity groups including Bain Capital, Providence Equity Partners, and Thomas H. Lee Partners, headed by Scott Sperling took over the company.

The buyout enabled Sperling to purge employees and artist contracts, and the company was then used as Sperling’s “personal till” according to the book, borrowing millions to pass on to the private equity firms. This was only a few years after Metallica sued Napster for cutting into the band’s potential revenue and the band delivered a list of copyright-infringing users to the company’s doorstep.

The company survived despite the cuts largely because a large portion of its revenue came from rereleases, which didn’t require as much in the way of staffing or new music.

Tower’s Over-Expansion

Similarly, the major music retailer Tower Records pointed to internet piracy as the source of its demise before it filed for bankruptcy in 2006 according to comments from its CEO at the time.

But revenues and profits pre-Napster were not that different at Napster’s zenith in 2002 according to financial statements from its parent company MTS, Incorporated. Revenues from 1996 to 2001 hovered around $1 billion a year with little major fluctuation.

A 2003 financial filing listed a decline in revenue compared to the previous nine-month period a year before, partially due to internet piracy and the closing of multiple Tower Records locations. But the decline from both causes was only 4.6 percent.

The music retailer had been losing money for years—even pre-Napster and at the height of CD sales—and it expanded far beyond its sales could ever accommodate according to news reports during its bankruptcy filing.

The Internet, Not CDs, Were the Marketing Tool of the Future

While Napster or internet sharing at large may not have led to a large collapse in music sales revenue, the industry certainly has changed since 1998.

Digital streaming via companies like Spotify now account for over 40 percent of revenue according to RIAA numbers, yet total revenues are still comparable to what they were thirty years ago.

Record companies have always relied on rereleases, licensing, and various other revenue sources that don't include physical sales for a majority of their revenues. CDs, or any physical format for that matter, serve largely as marketing.

They are effectively loss leaders where record companies make little in profit (after production, distribution, and taxes) as a sacrifice for the potential hits—the potential tent poles that pay for the less than successful artists.

With Napster and internet file sharing in general, artists could be marketed without the burden of physical sales, like when Radiohead's album Kid A appeared on Napster before it appeared in stores.

Published: October 31, 2018