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Snapster

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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.

    ….Look at it from the perspective of the music consumer. Since Snapster would have only a quarter the revenue of the system it replaces, that means consumers would be getting more music for less money. And as Snapster owners, which they would have to be by definition, consumers would benefit from the many Snapster stock splits it would take to reach 60 million beneficial owners, and then the increase in stock price beyond that. This is more benefit than these same people ever got from the record companies. And since Snapster would quickly become the most broadly traded stock of all, this transfer of wealth would have a broad benefit.

    ….What is more problematic is what Snapster, as essentially a repository of oldies, would do to further grow its business and maintain earnings growth. This is the same question as asking what Microsoft will do after the age of the PC is over. The company could diversify and go into other businesses. It could extend the concept of a mutual fund even further and strictly manage its excess profits as investments. Or it could find some way to plow the money back into the music business, which I think would be best, but I can’t see exactly how it would be done. Still, it is a good idea.

Hmm, I am pretty hopeless with finance, but as he says, the real problem is how to assure the continued flow of new music. I very much enjoy the calculated ruthlessness of the scheme, however.

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About Eric Olsen

Career media professional and serial entrepreneur Eric Olsen flung himself into the paranormal world in 2012, creating the America's Most Haunted brand and co-authoring the award-winning America's Most Haunted book, published by Berkley/Penguin in Sept, 2014. Olsen is co-host of the nationally syndicated broadcast and Internet radio talk show After Hours AM; his entertaining and informative America's Most Haunted website and social media outlets are must-reads: Twitter@amhaunted, Facebook.com/amhaunted, Pinterest America's Most Haunted. Olsen is also guitarist/singer for popular and wildly eclectic Cleveland cover band The Props.
  • Cringely is always on the cutting edge. I love his articles. If you ever get a chance to see the special he did for PBS on the PC wars called “Triumph of the Nerds”, be sure to check it out. It is a little cheesy in spots, but you won’t find a more complete analysis of Apple vs. Microsoft and the inception of the PC industry.

  • By rights, this sounds absolutely straight up. It can’t fail.

    Well, it might. Basically the RIAA needs to find a judge to just make up something. It might not be even vaguely legitimate. Why couldn’t a million people co-own a CD?

    Never, however, underestimate the power of lawyers and bureaucrats to just arbitrarily make crap up.

  • They also have this crazy ability to take completely unrelated things and apply them to new things. Like when they apply 75 year old laws about electricity and toasters to the internet. I love that stuff.

  • i especially loved this line:

    “The second reason I am doing this is because I don’t like the current situation in the recording industry where power is concentrated in the hands of executives who are doing all they can to stop the rotation of the Earth.”

    nice.

  • Eric Olsen

    I still want to see creators get paid, though, and am not sure where that money comes from in this system.

  • The worst (and best) aspect of blogs, is that anything can get published! : )

    Rgds
    Greg Tingle
    Media Man Australia
    http://www.mediaman.com.au
    http://mediamanau.blogspot.com

  • Jamin Demitrov