Snapster

Very clever scheme from Robert X. Cringely to legally subvert the current music distribution model - he calls it "Snapster":

First the law. Snapster is built on the legal concept of Fair Use, which allows people who purchase records, tapes, and CDs to make copies for backup and for moving the content to other media. So a CD can be copied to an MP3 player, for example. But to remain legal, the MP3 player should be that of the CD owner and not that of another person. CDs can be lent, sold, or borrowed, but in order to make backup or media-shifting copies, the copier must own the original CD. If the original CD is no longer owned by the maker of the backup or media shifting copies because the CD has been sold or given away, any copies should be destroyed under U.S. copyright law.

Snapster is all about ownership. Snapster will be a company that buys at retail one copy of every CD on the market. Figure 100,000 CDs at $14 each requires $1.4 million. Snapster will also be a download service with central servers capable of millions of transactions per day. Figure $100,000 for the download system and bandwidth for one year. Throw in $100,000 for marketing and $400,000 for legal fees and the startup capital required for the business is $2 million.

Snapster has to be a public company. It would have its IPO as soon as possible after all those CDs have been delivered. It must be a public company right from the start of operations. Say Snapster goes public on NASDAQ at $20 per share. The IPO sells one million shares (10 percent of the company) netting $20 million minus underwriting fees. So almost from the beginning, Snapster has millions in the bank and a market capitalization of $200 million. What is critical here for the business success is not the price per share but the broadest possible ownership of shares. But the way those additional shares would be sold would be through stock splits, not supplemental offerings. This means that early investors would benefit greatly from being early investors and the Snapster founders would benefit most of all.

....Each Snapster share carries ownership rights to those 100,000 CDs. You see, Snapster is a kind of mutual fund, so every investor is a beneficial owner of all 100,000 CDs. Each share also carries the right to download backup or media-shifting copies for $0.05 per song or $0.50 per CD, that download coming from a separate company we'll call Snapster Download that is 100 percent owned by Snapster. With one million co-owners each downloading one CD per month, gross revenue would be $6 million per year. If they download an average of 10 CDs per month revenue grows to $60 million per year. At these download volumes and with the very low cost of running the service, the $200 million market cap is justified even at the lower sales level. At the $60 million sales level, the share price ought to rise. Now grow the business to its logical size of 60 million users. At 10 CDs per user per year, Snapster download revenue would be $3.6 billion or about a quarter the size of the current recording industry, which it would effectively replace. With 90 percent profit margins, Snapster would be making $3.2 billion per year in profit.

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Article Author: Eric Olsen

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