How They Got Us To Pay For Music Again

Napster made music free in 2000 and the music industry was never the same. So why are we still paying for music decades later? Chris talks to Osher Günsberg and consumer behaviour expert Dr Paul Harrison about Shawn Fanning, Metallica's war on Napster, and why a service that’s convenient will usually beat a service that’s free.

• 0:00Speaker 00

  What happens when something you really want, like good music, goes from being expensive to being free? Usually it's just stealing and most people won't do it. But what if it's online socially acceptable? You know, that it's against some rules, but punishment is not a thing. And it's just a song, you know, or maybe a few hundred. Well, in that case, the whole music industry will change forever. And that is exactly what happened in the year 2000, thanks to Napster. And it all happened within a few months. Napster made it possible for people to share music for free. It is a chaotic story with a 19 year old named Sean Fanning at the centre.

• 0:45Speaker 00

  But as always, it's about more than just him. It's about us. It's about what convenience and cost means to us and what it can take from us in the long run. This is how we got here. And in this episode, we're going to be talking about Napster and the music industry. And as always, I'm joined by our excellent producer, Rob. Rob, g'day.

• 1:06Speaker 01

  Hello, good to be here.

• 1:07Speaker 00

  Well, is it? You've had a flu.

• 1:09Speaker 01

  Uh, yeah.

• 1:10Speaker 00

  You're soldering on and I appreciate that.

• 1:11Speaker 01

  Yeah, I'm brought to you by influenza today.

• 1:14Speaker 00

  We're safe, we're distancing.

• 1:15Speaker 01

  Yeah.

• 1:16Speaker 00

  But I'm glad that you're feeling a little bit better.

• 1:18Speaker 01

  Thank you, thank you.

• 1:19Speaker 00

  A little bit probably.

• 1:20Speaker 01

  Just a little bit. Enough to be here. We've moved this time slot twice now, so.

• 1:24Speaker 00

  Yeah, I know, I'm sorry about that. We're gonna have to spark you up though. And I'm gonna spark you up by asking you, what was your first album that you bought?

• 1:31Speaker 01

  I'm actually really proud of this.

• 1:32Speaker 00

  Here we go.

• 1:33Speaker 01

  The first album I ever bought was Toxicity by System of a Down. And it's a great, I'm stoked about this because back in primary school, my best friend at the time, Mado, shout out, gave me strict terms that if I did not have this, I wasn't cool. So I remember being with dad at JB Hi-Fi. And this was my dad. My dad was just shopping for vinyls for himself. And I remember going through the sections in the rock into metal, finding that album and bringing it to my dad and saying, dad, if I don't have this, I'm not cool. And it's plastered with like 18 plus things all over. And he's like, are you sure? And I'm like, dad, I'm not cool unless I have this. And I was like, grade five. And he's like, okay. And that was number one.

• 2:15Speaker 00

  Dads are always looking around in that situation for mum like, am I, is it, am I doing this? Should I do this? I'm doing it, I'm doing it.

• 2:20Speaker 01

  There you go.

• 2:21Speaker 00

  You wanna know mine's less cool.

• 2:22Speaker 01

  What was it?

• 2:24Speaker 00

  Why Do They Rock So Hard by Real Big Fish?

• 2:28Speaker 01

  Nice.

• 2:29Speaker 00

  Which is a ska band.

• 2:31Speaker 01

  Yeah.

• 2:32Speaker 00

  Ska was big in the late 90s, early 2000s. And I was 10 or so.

• 2:37Speaker 01

  Yeah. I was thinking it might have been like a So Fresh compilation or something like that?

• 2:42Speaker 00

  No, I mean, I had older, I have older sisters, so I got their stuff when they were finished with it. But I decided at that age that I was into ska. So it was Mighty Mighty Boss Tones, Real Big Fish. And then, you know, it developed into skater stuff like, you know, Melancholin and

• 2:57Speaker 01

  Yeah, yeah.

• 2:58Speaker 00

  Unwritten Law and all that sort of stuff.

• 3:00Speaker 01

  My, my second CD was the Eight Mile soundtrack, just so I could play Lose Yourself on repeat.

• 3:05Speaker 00

  Wow.

• 3:05Speaker 01

  As, as you would want to as a

• 3:06Speaker 00

  This is why you're so hyped up to this day.

• 3:08Speaker 01

  It's true.

• 3:09Speaker 00

  You're always ready to go.

• 3:10Speaker 01

  It's true, it's true. It's all got that heart edge about me.

• 3:13Speaker 00

  I'm really excited because I feel like this conversation about downloading music and buying CDs is gonna bring up some good stories from you, Rob. But before we get into all that, should we do two truths and a lie?

• 3:23Speaker 01

  Yeah, let's do it.

• 3:25Speaker 00

  Righto, here we go. The way this works is I say three facts, two of them are true, one of them is a lie. You decide which you think is the lie now and then see if you change your mind as the story goes on. All right. Fact one. The German engineers who invented MP3s tested the format over and over by using the song Scatman by Scatman John.

• 3:49Speaker 00

  Can we hear a bit of that?

• 3:50Speaker 01

  Yeah, absolutely. Why not?

• 3:58Speaker 00

  The sound of a decade, really.

• 4:01Speaker 01

  What a classic. All right.

• 4:02Speaker 00

  Absolute classic. I'm so glad we were able to get Scatman John happening on this show.

• 4:07Speaker 01

  Yeah.

• 4:08Speaker 00

  Okay, so keep that in your mind. That was fact one. Fact two, by 1999, the search term MP3 had overtaken the search term sex as the most searched word on this early internet.

• 4:21Speaker 01

  Okay.

• 4:22Speaker 00

  That's fact two.

• 4:22Speaker 01

  Okay.

• 4:23Speaker 00

  Fact three, the hit song My Happiness by Powderfinger probably made the band about 1.25 million dollars in royalties alone, according to industry sources, not the band.

• 4:34Speaker 01

  Wow.

• 4:35Speaker 00

  Yeah, that's, that's kind of ballparking what that one successful song would have been worth at that band. So they're the three facts. Have a guess. If you're listening or watching Have a Guess as well, Rob, where are you going with that?

• 4:48Speaker 01

  Yeah, I mean, Scatman John, I don't know how big he was in Germany. So it's hard to know if these, you know, these boffins were just sitting around scatting.

• 4:58Speaker 00

  They might have been.

• 4:59Speaker 01

  Yeah.

• 5:00Speaker 00

  I would have loved it if, that's now the image I'm gonna have in my head forever. As they invent. You know, it could be a fact.

• 5:06Speaker 01

  It could be a fact.

• 5:07Speaker 00

  The fact, this is the thing, it's totally unclear.

• 5:09Speaker 01

  Hard to know. Fact two, I mean, people are pretty perverted, particularly on the internet. So I feel like sex will always be topped up.

• 5:16Speaker 00

  Yeah.

• 5:17Speaker 01

  Um, in the search engines.

• 5:18Speaker 00

  Fair point.

• 5:20Speaker 01

  And then Powderfinger, like, like that was a great Australian band, but like, I don't know. Like, did they make that much money globally?

• 5:26Speaker 00

  Well, we're gonna talk about Powderfinger again here. And it's gonna be one of those ones where Australian listeners and viewers are gonna know, but overseas people might not. But so, look, they're the facts. Which one are you gonna go?

• 5:38Speaker 01

  I'm gonna say that the Powderfinger is a lie.

• 5:40Speaker 00

  Okay.

• 5:40Speaker 01

  Because I feel like that's a lot of money.

• 5:41Speaker 00

  All right.

• 5:42Speaker 01

  Yeah.

• 5:43Speaker 00

  I'm not gonna, you know me, I'm not gonna tell you.

• 5:45Speaker 01

  And also I kind of hope that Scatman John's true.

• 5:48Speaker 00

  But you said you thought sex was wrong.

• 5:50Speaker 01

  Yeah. Oh, yeah.

• 5:51Speaker 00

  You're saying bullshit to all three.

• 5:52Speaker 01

  Yeah, maybe I am saying they're all, no, no, sorry.

• 5:54Speaker 00

  They're all false.

• 5:55Speaker 01

  No, two, two is the, two is the lie.

• 5:57Speaker 00

  Okay.

• 5:57Speaker 01

  Two is the lie, people are perverted.

• 5:59Speaker 00

  Two is the lie, according to Rob. You know, jot down your, your own thoughts, we're gonna return to that a little bit later. And we're gonna get into this whole bonkers story right after this word from our podcast partners.

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• 7:55Speaker 00

  And the reason why I say that, over the decades, audiences, they had grown. Globalisation had happened. The penetration of music retail, I mean, that was huge. TV and movies now being used to effectively grow audiences beyond what the radio could have achieved. And now, on top of all that, the internet is pushing things along too. And while massive artists dominated the world stage, lots of local stages were being dominated by local bands too, who were making pretty solid money. I remember watching a cable TV channel here in Australia called Channel V. I watched it all the time. Rob, do you remember Channel V?

• 8:33Speaker 01

  I do. They used to have like live, and it wasn't a stream, it was TV, but they would have live coverage of a music festival. And when you were young and weren't old enough to go, you could watch it.

• 8:43Speaker 00

  They had heaps of stuff. There was totally dedicated to music, played music videos, which were obviously like a massive thing when a new band or musician or pop star released a new one, like everybody had to watch it. Otherwise you weren't cool at school the next day. They, as you say, they did live shows, artist interviews, everything. And most of the time, when I was watching it, I was watching Osha Gunsberg. He was kind of the main host on a lot of the shows, particularly the one after school. And he's done a lot of stuff since then, like The Bachelor, Bachelorette, Australian Idol, tons of stuff. But to me, he's the perfect person to ask about what the music industry was like in 1999. And basically, he says it was thriving in a way that people born more recently might struggle to imagine.

• 9:28Speaker 01

  The music industry was making money. At the time, like selling round pieces of plastic with music on it was a great business model. There was like 60% margins on it, dude.

• 9:36Speaker 00

  And he says that the money wasn't just confined to the top end of the industry.

• 9:42Speaker 01

  The live music scene in Australia was absolutely pumping. Like your favourite band wouldn't just play your town, they would play your suburb. And bands would go on 40, 50, 60 day tours around Australia. Australian bands would do this and they'd play these beer bands that were 1500, 2000 capacity. Okay, and all cash bars, right? There was, there was money to be made.

• 10:08Speaker 00

  Okay, but what kind of money? What would a solid, well-regarded, kind of top tier Australian band have been making back then? In late 90s, early 2000s, Australian dollars?

• 10:20Speaker 01

  So I'd say the Powderfinger song My Happiness, right? That was a single off their album Odyssey number five. Let's just say

• 10:26Speaker 02

  Powderfinger's My Happiness, the album sold around 550, 60,000. So it was 10 times, 11 times platinum. It's a lot.

• 10:35Speaker 02

  Let's say My Happiness gets played four times a day because it's a big rock song on the 60 rock stations in Australia for a couple of months and then over the next three years or so, maybe twice a day or, you know, twice a week. All right, that's around 70,000. That's it. 70,000 plays. That airplay alone and those album sales alone would have netted the band like one and a quarter million, split six ways, but with you put the management in there as well. Like, that's a decent, that's a living. That's you paying your mortgage. That's before you've even gone on tour or sold a T-shirt.

• 11:09Speaker 00

  And I'm using Osha to jump ahead for a second, but it's important to compare that with the situation today.

• 11:16Speaker 02

  Like you put those same numbers into what you get now off of Spotify or something and the money is just, I figured it out. When I knew I was talking to, I was like, what's the songs on this? Let me figure this out. So yeah, around 75,000 spins of that song on the rock station that we imagined. Okay. That would get you 0.0035 cents per stream.

• 11:42Speaker 02

  And the band would get roughly $268, split six ways. All right.

• 11:54Speaker 02

  That is not a career.

• 11:56Speaker 00

  That's so important because being a musician at a local level could be a career in the 90s, but not really now. Something huge happened in between and it all started with a download. I don't know. You might've been at school or uni. Someone tells you about a website that lets you download music completely for free. And the one that everyone was talking about in 2000 was Napster. And it's been a pretty long time. So let's define it. Napster was a peer-to-peer file sharing service. People opening up their hard drives to pass music between one another. It had a search function and it kept a central directory,

• 12:40Speaker 00

  which kept track of who had what file, which meant that strangers could share with each other easily and efficiently. And to state the obvious, there is nothing more damaging to an industry than someone giving the stuff away for free on a massive scale. It ruins all perception of value. I mean, you might argue that this has happened to lots of artistic and non-artistic industries over the years. I mean, think about TV, movies, art, books, academic research, you name it. Fair enough. If you look hard enough, you can probably find it for free online. But for most of those types of things, it's been a bit more

• 13:20Speaker 00

  considered and a bit more business minded. But Napster and music, it was just chaos. It was like a bomb went off and the guy who detonated it was Sean Fanning and he was only 19 years old. Rob, can you imagine altering the course of an entire industry when you were 19?

• 13:44Speaker 02

  It's crazy. I mean, I, I, I actually remember that there was another person who claimed that they created Napster and he was played by Seth Green in the movie The Italian Job. Do you remember that?

• 13:57Speaker 00

  I do.

• 13:57Speaker 02

  And he was the Napster guy.

• 13:58Speaker 00

  Yeah, God.

• 13:59Speaker 02

  And that was the whole bit, the hacker.

• 14:00Speaker 00

  That movie?

• 14:02Speaker 02

  Yeah.

• 14:02Speaker 00

  Oh, I might get this wrong, but I'm pretty sure that came out in like 2003.

• 14:06Speaker 02

  Yeah, probably around there.

• 14:06Speaker 00

  And that just goes to show, it was such a massive thing that everyone in the world, they were able to drop a reference like that into that movie and everyone was like, ha.

• 14:16Speaker 02

  I get it. Yeah. Whereas now we're like, what, what are you talking about?

• 14:19Speaker 00

  Totally. So no, it was absolutely everywhere. But as for how Sean Fanning actually did it, well, MP3s, they'd already been invented. A bunch of German geniuses developed the technology in a place called, and I'm gonna mess this up, Fraunhofer Society in Erlangen. And they were led by Carl Heinz Brandenburg.

• 14:40Speaker 02

  Yep.

• 14:40Speaker 00

  Do you like that?

• 14:41Speaker 02

  Shout out Carl.

• 14:42Speaker 00

  Carl Heinz. Absolutely. Now, they did this by experimenting with different methods and by checking the quality by playing two songs over and over again. The first one was Tchaikovsky's 1812 Overture. It's really loud. Everyone kind of knows it. In fact, it has cannons in it. Good one to test. You hear this?

• 15:10Speaker 00

  And then later they used Suzanne Vega's song Tom's Diner, which is more modern vocally led. So it was another good one to test.

• 15:23Speaker 00

  It's a good song. You remember this song?

• 15:24Speaker 02

  I do remember this song.

• 15:26Speaker 00

  You were telling me about a, um, a cover version.

• 15:29Speaker 02

  Yeah, there's a cover version by a couple of German bands and the original on YouTube has 26 million views, but the cover version has 243 million views because one of the guys has an extraordinary voice.

• 15:41Speaker 00

  I didn't realise he was German. I've seen the clip.

• 15:43Speaker 02

  Yeah.

• 15:44Speaker 00

  Unbelievable.

• 15:44Speaker 02

  Really good.

• 15:45Speaker 00

  So it turns out the Germans quite like this song.

• 15:46Speaker 02

  Yeah, there you go.

• 15:47Speaker 00

  There you go.

• 15:48Speaker 02

  It's a classic.

• 15:49Speaker 00

  Classic. Overall, it ended up being a version of the third main method that stuck. So the final product was named MP3, which stands for MPEG Audio Layer 3. And of course, MPEG is its own acronym. So there's layers to this name. German boffins, can you say? It was released to the world in 1995 and very quickly became a sensation. People started sharing audio files, including licensed music with each other pretty much straight away. In fact, by 1999, MP3 became more searched than sex on the internet.

• 16:27Speaker 02

  Wow.

• 16:28Speaker 00

  There you go. But it was not, for the most part, centrally organised. And so that's where Sean Fanning comes into things. He's a young programmer whose friends sometimes call him Napster because of his nappy hair, which gives the search directory that he invents a name. It spreads throughout American college campuses almost immediately and then goes viral. In fact, here's the breakdown of how quickly this happened. Napster launched in June 1999 to 30 friends. Basically no marketing, no advertising whatsoever. By the end of that year, it had 150,000 users. So within six months, three and a half million

• 17:13Speaker 00

  files traded or transferred. Every song you could think of, including brand new music, was on there and users very quickly developed the understanding, thanks to this tool, that music can be and should be free, which is massive. I think it's safe to say that Sean Fanning did not know what he had done, or at least the extent of the impact. I mean, how could he? He was 19. And of course, it doesn't take the music industry long to set Napster in its sights because record companies had already been tackling piracy, as they call it, for a few years. And then they see Napster's search function, centralise

• 17:56Speaker 00

  servers and wild growth, and they start sending cease and desist letters almost immediately. But the letters, they go unanswered. It's a bit like nobody's home because nobody really is. And the company's basically Sean, who can be sometimes found asleep on the office floor, a few programmers, his uncle John, who had failed at several business ventures and apparently was quite difficult to work with, Sean Parker, yes, the Sean Park, the Sean Parker, Rob, that was played by Justin Timberlake in the movie The Social Network.

• 18:34Speaker 02

  That's him.

• 18:34Speaker 00

  He was there for this too.

• 18:36Speaker 02

  Oh my God.

• 18:37Speaker 00

  Yeah. Wild. And they also had a CEO named Eileen Richardson, who came from a venture capital background. And she had this big plan to turn Napster into a proper business, charging 99 cents per download, but that never happened. This was such a loosely formed business and so young that it was in no way equipped to deal with the type of legal mechanism being used on it. So not much happened for months. Of course, in those months, Napster's growth was going vertical. So it didn't take long for the whole thing to become a cultural phenomenon and then reach a spectacular breaking point. The biggest musicians in the

• 19:17Speaker 00

  world were getting more and more furious because their business was being drained by free downloads. Napster had this search function. So within minutes of a band releasing a new album, the artists could see people getting it for free in real time. I mean, they must've been pulling their hair out. And here's the part most people of a certain age remember. And that is that Metallica became the face of the anti-Napster campaign. And everyone remembers it because it was such an incredible news story. I mean, the drummer, Lars Ulrich, actually turned up to Napster's office in a limo with 13 boxes

• 19:57Speaker 00

  containing the names of 335,000 users who had illegally shared Metallica songs. And they were demanding that they be banned. He was saying that they were thieves, which is...

• 20:13Speaker 00

  Wild. I mean, imagine that happening now. Napster's own staff rallied a crowd outside the office to chant, [BLEEP] you Lars. Metallica's website got hijacked and the words, "Leave Napster Alone" were put in bold in the middle of the page. I mean, it was going nuts. But Napster was spooked and their backs were against the wall. So they did delete the accounts of more than 317,000 people. Metallica then sued three universities for having internet good enough to run Napster on and not policing it. Which, Rob, I mean, that's such an unhinged thing to do.

• 20:56Speaker 00

  They were just kind of just throwing haymakers around, I think.

• 20:59Speaker 01

  Just seeing what sticks.

• 21:00Speaker 00

  I'm really cross about this and I'm just gonna be angry in courts.

• 21:04Speaker 01

  How dare you have good dial-up internet?

• 21:06Speaker 00

  Yeah. I mean, how do you, I mean, how does a college respond to that? Jesus. So who's this? Metallica? What are they suing us for? Our internet's too good? Ah.

• 21:17Speaker 00

  And yes, I mean, this is a story about Metallica going berserk. But there was a line of famous people right behind them. Bon Jovi, Alanis Morissette, Blink 182, Christina Aguilera, DMX, Bryan Adams, Faith Hill, Amy Mann. I mean, they're just to name a few, all loudly complaining about Napster. In fact, here's Aerosmith singer Steven Tyler talking to Joe Rogan years and years later on his show, The Joe Rogan Experience, about this.

• 21:46Speaker 03

  When Napster came along, I [BLEEP] hated that prick.

• 21:51Speaker 00

  Yeah.

• 21:51Speaker 03

  He stole my, you see, they started stealing our songs. Yeah, great.

• 21:54Speaker 00

  Right.

• 21:55Speaker 03

  Take all the albums we've ever done, take all the albums Nuno Bettencourt, take all the albums that [BLEEP], you know, the Rolling Stones ever did, put them in a box over there. Now all my friends can have access to that box.

• 22:07Speaker 00

  Right.

• 22:07Speaker 03

  No one knows about it.

• 22:08Speaker 04

  Anybody can do it. It's peer-to-peer. Everyone's sharing songs.

• 22:11Speaker 03

  And I'm sure people are listening to me now and saying, what a prick. He's [BLEEP] rich old [BLEEP].

• 22:14Speaker 00

  Right.

• 22:15Speaker 03

  But what's happened is, is it's become the norm.

• 22:20Speaker 04

  Well, it's become the norm.

• 22:21Speaker 00

  Now, he's talking about that eight years ago. So this is way, way after everything happened and he's still angry. Which, from a business perspective, is totally understandable. These guys had clout and lawyers and they were used to doing things their way. And the most incredible thing to me is how quickly everything happened. The first lawsuit against Napster was filed in December of 1999. Metallica filed its suits in April of 2000. Dr Dre followed in May. Sounds like I'm making it right. I'm not. In February 2001, an appeals court ruled against Napster,

• 23:05Speaker 00

  finding it would be liable for copyright infringement by its users. And by July of that year, its servers were taken offline. And the company filed for bankruptcy and liquidation in mid 2002. So the whole episode only lasted a couple of years. That's it. And Steven Tyler was right. You can see how Napster was in the wrong and they knew it. They were facilitating the bypassing of payment for copyrighted music and internal emails used in court showed that they understood that. And big musicians, they wanted this to exist inside a courtroom.

• 23:47Speaker 00

  They were extremely reluctant to see any of this as a turning point that would have lasting impacts. They wanted things to go back to the way they were, for good reason. Things were sweet. Musicians and producers meticulously created albums. You know, they ordered the tracks. This one goes before this one. They released the strongest singles as a means to market the whole album, which they would sell for more. They recorded music videos for the exact same reason. And the whole album, yeah, I mean, they were selling for $18 to $30, depending on the year and the currency. And I'm talking about Australia in the late 90s, early 2000s.

• 24:26Speaker 00

  Now, an important point here is that all of this created a big, big conversation. And it wasn't all musicians on one side and all college kids on the other. Chuck D from Public Enemy said music sharing was, quote, "Power going back to the people after decades of the industry controlling exactly what got heard and at what price." Radiohead's album Kid A leaked on Napster a month before release. And instead of fighting it, the band just kind of leaned in and it became their first number one record. And Courtney Love published an essay outlining exactly how much a record label makes compared with the artist.

• 25:09Speaker 00

  I mean, to be fair, her point was not that piracy was fine. It was just that this system that we're all fighting to protect, I mean, it wasn't all that fair to begin with. So the debate was off and running. And Osha Gunsberg says, "Some music greats actually saw the future in this moment really clearly."

• 25:29Speaker 02

  In 2002, David Bowie, there's this famous quote. I'll have to read it because I don't want to mess it up. I won't do his accent, but you can imagine how he said it. He said, "Music itself," David Bowie said, "music itself is going to become like running water or electricity. You'd better be prepared for doing a lot of touring because that's really the only, only, unique situation that will be left." So everyone is busy suing teenagers in court, right? Trying to build their own file sharing platforms or destroying people's computers. David Bowie's like, "Mate, just build a great tour and get on the road because this is already done." He could see it. He could see it. So there was a line that back in the day, you would give away the concert ticket so people would buy the album.

• 26:13Speaker 02

  Now you give away the album so people buy the concert ticket.

• 26:16Speaker 00

  And right there, that crystallizes the change that took place. Because Bowie was right, of course. That is what happened. The whole economics of running a band as a business ended up flipping just like he said it would. It went from making money from the album to making money from ticket sales. Lots of musicians and lawyers were trying to destroy this new online system. They were trying to go back to the way things were. And hardly anyone, including me, telling this story now, has spent enough time thinking about the users, the people downloading the music. But, I mean, that's all consumer psychologists tend to do. And so I spoke with one.

• 27:01Speaker 05

  We actually should be saying, what is it telling us about what our people really want and what problems is it solving? Consumer behaviour at the edges of a market is often telling you a story and telling you as an industry, something that's actually really important about your future.

• 27:18Speaker 00

  That is Dr Paul Harrison. He's a lecturer, MBA director and head of consumer behaviour at Deakin University. He's also a professor at universities in France and Italy. So he knows this stuff. And after the break, he's going to explain why nobody really pirates music that much anymore, even though it's still free, and why we went back to paying for it every single month, either with money or by listening to ads. Stay with us. We'll be back in a second. The old finance playbook, a steady job, property, super and patience, got a lot right. It's just not the whole picture anymore. The team behind IG Markets has 50 years in the industry.

• 28:00Speaker 00

  They've watched that system change and they've built something to sit alongside it. IG Markets is that next piece. Shares, ETFs and crypto all in one app. Simple, accessible and designed for people who want to take a more active hand in what they're building. This is new money. IG Markets believes every Australian deserves more ways to invest and they're here to help you find the way that suits you. Search IG Markets or download the app. IG Markets, this is new money. Crypto is unregulated and high risk. Shared trading services by IG Australia, P T Y L T D, A F S L 515106. Crypto services by IG Digital Assets Australia, P T Y L T D.

• 28:46Speaker 00

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• 29:22Speaker 00

  Welcome back to How We Got Here. Now, Napster was sued into oblivion 25 years ago. In fact, here is a news clip from a few months ago, which is marking the occasion. Let's have a look.

• 29:32Speaker 06

  Today marks 25 years since a copyright ruling against Napster changed the music industry forever. If you don't remember, or if you don't know, Napster was a very popular platform where people could upload and download songs for free. Could you imagine? Dozens of record labels, though, they were angry about it. They sued and on this day back in 2001, a federal appeals court ruled that peer-to-peer music file sharing websites like Napster could be held liable for copyright infringement. It was the first case of its kind. Napster shut down just a few months after that ruling. And then two years later, Apple launched the iTunes Store,

• 30:14Speaker 06

  which then revolutionized how people pay for music online today.

• 30:19Speaker 00

  There were some technical avenues that Napster could have taken to survive. Buyouts going legit, but it wasn't well managed enough to walk that tightrope. And the shutdown kind of felt inevitable. Of course, it's not like it was completely on its own. LimeWire, Morpheus, dozens of copycats, maybe hundreds.

• 30:37Speaker 01

  Good old LimeWire.

• 30:38Speaker 00

  Probably thousands of them. Good old LimeWire. I mean, that was the one that I destroyed my computer with.

• 30:44Speaker 01

  Because this is peer-to-peer sharing, there's no sort of protection or quality control of what you're actually getting. So most of us who were teenagers in the mid 2000s downloaded a virus off LimeWire at some point.

• 30:57Speaker 00

  It felt like a virus sharing site.

• 30:58Speaker 01

  It basically was.

• 30:59Speaker 00

  This is back when there was a family computer in the computer area of the house.

• 31:04Speaker 01

  Yeah, and you nuked it into oblivion with viruses. And it wasn't until like one night, your mum or your dad was like, I've just got to send some emails. And you'd be like, Chris, what the is going on?

• 31:16Speaker 00

  I was trying to download, damn it, my Blink 182.

• 31:18Speaker 01

  Yeah.

• 31:19Speaker 00

  God damn it.

• 31:20Speaker 01

  Yeah.

• 31:21Speaker 00

  Oh, look, that's a firm memory I suspect a lot of people will connect with.

• 31:28Speaker 00

  Some people still use them, but I think it's safe to say that peer-to-peer file sharing is not the mainstream way to get music these days. So what changed? Why would you turn your back on the free thing?

• 31:45Speaker 00

  Because Spotify and Apple, they've built incredibly strong business models despite the products. The music still being clearly available to be downloaded for free. Now, according to Dr. Paul Harrison, most of this comes down to convenience and cost. And pirating music has never really been that convenient.

• 32:05Speaker 05

  You had to use the software. You had to know somebody or get somebody to train you to how to use the software. You had to go searching for files. The downloads were often slow and they also took, they would drop out and you'd have to kind of re-upload and find it again. Often the quality of the files was pretty bad. You'd get viruses, you'd kind of incorrectly download songs. I have memories of songs that would jump around. And then the legal alternative was, yeah, that was part of, it was illegal, but to some degree, once those legal alternatives appeared, things like Apple Music and then Spotify and Pandora, it actually started to remove that friction.

• 32:45Speaker 00

  So interestingly, the question of legality was never really a big part of whether a normal person would steal music or not.

• 32:53Speaker 05

  People make judgments based on what they need at that point in time. And so there's a couple of things that's going on that's a little bit different from, I guess, what you would think is normal crime or normal stealing when it comes to music, particularly with digital music. One of the things is for a lot of people, it felt a little bit like a victimless crime. A digital file on Napster, what ends up happening is as far as the consumer or the human is concerned, nothing visibly disappears. The original of the music remains and the consequences to some degree are abstract. We don't really know. And so what we do is we rationalize, we say, well, nobody's really losing anything anyway. The record companies make enough money anyway. The artist doesn't receive much of that money.

• 33:38Speaker 05

  Everybody else is doing it. All of these are all of those excuses, but we do this all the time. We break the law all the time for convenience. Like many people, not me, but many people go over the speed limit a lot of the time. And again, we know that that's against the law. And for the most part, we think, yes, speed limits are important, except when I have a, I'm in a hurry or something like that. And I think again, sitting underneath all of that is that guilt is much more complicated when you're experiencing the benefit of your behavior immediately.

• 34:10Speaker 00

  Victimless crime, he says, like punching someone in the dark.

• 34:16Speaker 01

  Yeah.

• 34:17Speaker 00

  Obviously. Nelson Muntz quote.

• 34:22Speaker 01

  Great scholar.

• 34:23Speaker 00

  I'm sure Dr. Paul Harrison knows all about Nelson Muntz. So people didn't have much of a problem with pirating music because it was illegal.

• 34:32Speaker 00

  The system had friction. So a smoother model with a few ads or maybe a modest monthly subscription fee, sure, we'll go for that. And over time, the clean, easy to use, safe systems that don't give you viruses, Apple, Spotify, they start to rake in users. The music train came off the tracks, but it ended up heading back into the commercial world that we have known forever.

• 34:58Speaker 01

  I've got a friend who is still an active pirate.

• 35:02Speaker 00

  Yeah.

• 35:03Speaker 01

  Of both music and film and TV.

• 35:05Speaker 00

  Yeah.

• 35:06Speaker 01

  And you think he's been hacked because he'll just send you a link and you're like, what's going on here? And then an hour later he'll go, oh, check out this new website. You can get this, this and this. And I'm like, I don't have the time or energy to save the $15 a month to do all these steps when I'm quite happy to pay the convenience of just going click. I'm now watching on Netflix or on my Spotify or Amazon Prime.

• 35:31Speaker 00

  I mean, that's the exact mechanism. That is how this thing works.

• 35:34Speaker 01

  Yeah, because I did it back in the day when I was in uni.

• 35:36Speaker 00

  You had more time and it was kind of like, you know, it was either that or the analog version. I mean, there was, there was no kind of frictionless, seamless sort of thing to do. But I mean, the reality is pretty much all media exists in one or more of four buckets. Buy it and own it, rent it for a set period of time, subscribe to it or get it for free with advertising. They have always been the way people make money from commercial media, whether it's news, music, TV, movies, podcasts, whatever. I mean, we just came back from a break where we heard from our podcast partners. So this is bucket four. In the old days, music was a buy it and take it home system.

• 36:19Speaker 00

  You'd get the album as it was released, you'd play it at home with your friends, whatever you want. It's yours. Napster broke that by making the songs available for free. So the music industry was forced to shift to one or more of the other buckets. And subscriptions and advertising were the two that stood out. And both of those are now extremely big systems for engaging with music. Whether it's Spotify or Apple or YouTube, you can be a paid subscriber or you can use it for free with ads attached to it. And it's safe to say that that worked. I mean, Spotify is now the biggest music streaming platform in the world. What's interesting is seeing how people use it when given the choice between free with ads

• 37:03Speaker 00

  and payment with no ads. So Spotify has about 780 million users. About 480 million are free users and about 300 million are premium subscribers. So that's roughly 60 40 split. Interestingly, Spotify reported its first full year profit in 2024. So it took a while, as it often does with these Silicon Valley type of businesses, but it's another one of those big tech companies that prioritized growth over profit until it reached critical mass and then market power and fees help it claim those profits.

• 37:45Speaker 00

  Later is now. It's worth more than a hundred billion US dollars on the New York Stock Exchange. Daniel Ek is the founder and executive chairman. He's worth about 12 billion. And another good nugget about Daniel Ek, he was briefly CEO of a torrent business called U-Torrent, which seems a lot like the whole Napster thing, but it was different technically because it was a legal utility. Though he clearly understood the industry extremely well and figured out how to make a lot of money from that huge pivot that happened. And this, this is the accepted system now for accessing music, but is that a destination people are happy with?

• 38:30Speaker 00

  People who are really thinking about it, like Osha Gunsberg, they don't seem too happy. Ask them about their old physical music collections.

• 38:41Speaker 02

  I just gave it all away. And I'm so sad now because I, I used to actually own my thing. And now I, I pay a small monthly subscription to access the thing that I love, that I own, that my memories are attached to. The song that was playing the first time I, you know, danced with my wife at, at my wedding, the song that was playing when my son was born, the song that I had my first kiss to. All these things I don't own anymore. I have to pay someone to access them. And I have put myself in that position and I really don't like it.

• 39:14Speaker 00

  Of course, he's not alone. I think a lot of people feel like that. Owning was clunky. You could lose your CD or your record, it could get damaged, but we owned it and now we don't. What Osha's describing is seller's remorse and it is powerful. That said, it would be irresponsible to present this incredible set of innovations in a purely negative way. If a kid in a country town, say, is okay with the occasional ad, then they can listen to pretty much any piece of recorded music ever for free on Spotify. And that is not nothing. It's never as simple as, look what they took from us.

• 39:54Speaker 00

  But it's a mix of huge consequences that we're now living with. And a good question is, is this a destination or is this another stop along the way? Consumer psychologists say it is definitely the second one.

• 40:12Speaker 05

  If you think about it, 150 years ago, people would have to go to a music hall or a concert hall to listen to music. And then records appeared and then, you know, DVDs or CDs appeared. And now we're into, well, you used to have to, again, with early days of Apple Music, you had to download it and own the digital file. Now it's streaming. And so music itself is an evolutionary technology. Humans are very comfortable with that. And I think, again, it wasn't that, you know, there were lots of criminals out there wanting to be pirates, but actually it is the natural evolution of where music goes.

• 40:46Speaker 00

  So the story isn't finished. It's just not in the middle of a two-year chaos cycle led by a 19-year-old in a baseball cap right now. The incentives have changed. It is much, much more difficult to earn a living as a musician now. And that means fewer people will try, I think. What we've got is something more established and less colourful. Less action at the fringes. And that is usually where the interesting stuff happens.

• 41:15Speaker 00

  And if that interesting stuff is what you want, then the advice is to get stuck into it.

• 41:22Speaker 02

  Our experience of being in Australia and our cultural experience of being in Australia is unique and it is valuable. Hunt out, seek out things that reflect your experience as much as you can through music, through film. I'm not just talking about a reel of, of some guys that have made on their phone doing some comedy. I mean, like, that's called great and stuff, but like, what's something permanent? What's just not something that's gonna just kind of vanish? If you see someone you like, if you see like a sketch crew on Instagram or TikTok, or you, you hear a song, buy the thing. Get on their Patreon, get on their Substack, buy the merch, go see them live, support them.

• 42:01Speaker 02

  Without our arts, without our artistic reflection of our culture, we become this strange, weird echo of other versions of the English language experience of the world, and it is not an Australian experience. Support those people because we need to show the people that are coming up that it's worth committing your life to reflecting our cultural experience through music, through song, through art. Please.

• 42:28Speaker 00

  Ooh, it's a big, big, serious note to end on, Rob.

• 42:34Speaker 01

  Yeah, he's right. If you want to support people, go buy tickets and go see them. That's really the way to do it. Yeah.

• 42:41Speaker 00

  Get on their Patreon, whatever it may be. If you like what they're doing, got to get behind them. It's an important note, I think.

• 42:47Speaker 01

  Definitely, definitely.

• 42:49Speaker 00

  Should we do two truths and a lie reveal?

• 42:53Speaker 01

  Let's do it.

• 42:55Speaker 00

  Okay. So fact one was the German engineers who invented MP3s tested the format over and over again using the song Scatman by Scatman John.

• 43:05Speaker 01

  I'm devastated that this is.

• 43:06Speaker 00

  That's the lie.

• 43:07Speaker 01

  Oh, I'm so sad.

• 43:08Speaker 00

  I know. But I think it's very safe to say that they would have been listening to it anyway.

• 43:14Speaker 01

  Yeah.

• 43:14Speaker 00

  Everyone in the world was jamming out to that.

• 43:16Speaker 01

  We're all scat men or women at some point in our lives.

• 43:18Speaker 00

  It was the scat. It was weird in the nineties. Like we had all these big moments of really niche type of music that kind of became big for a bit, like scatting, ska.

• 43:27Speaker 01

  Yeah.

• 43:28Speaker 00

  You haven't heard about ska in years?

• 43:29Speaker 01

  Nope.

• 43:29Speaker 00

  But at the time it was.

• 43:31Speaker 01

  It was all the rage.

• 43:31Speaker 00

  It was all the rage. Brass bands and the people doing their little leg kicks on stage.

• 43:36Speaker 01

  Yep. Alien Farm, yeah.

• 43:37Speaker 00

  Fact two was, I mean, we already know which one the lie was, but fact two was the search term MP3 by 1999 had overtaken sex as the most searched word on the internet in those early days. That's true. That's wild.

• 43:49Speaker 01

  Hmm.

• 43:50Speaker 00

  In fact, three was the hit song My Happiness by Powderfinger, probably that made the band about 1.25 million dollars in royalties alone, according to industry sources, that's Osha, not the band. And that is as true as it can kind of be, given that it's not come directly from them. So, yeah, I think that's Napster, you know? That's Napster in the music industry, Rob.

• 44:16Speaker 01

  It's an interesting story. You know, the, the power of convenience is obviously one of the biggest things here.

• 44:23Speaker 00

  That's right.

• 44:23Speaker 01

  I'll ask you, do you know what the difference between an MP3 and a WAV is?

• 44:29Speaker 00

  God, no.

• 44:30Speaker 01

  Yeah. So for the.

• 44:31Speaker 00

  I don't know what the difference between a JPG and a PNG. I don't know any of these things.

• 44:36Speaker 01

  Yeah. So shout out to all the audio files out there. But, you know, as, as we.

• 44:41Speaker 00

  As a deep joke, shout out to all the audio files out there.

• 44:44Speaker 01

  Yeah. As, as, as we explained earlier in the episode, you know, why the MP3 was made, it was because it had to deal with, you know, the internet of, of the age. But the thing is that a compressed audio file doesn't actually sound as good as an uncompressed one. Because you're taking the full waveform of sound that has all the little bits and then all the things that the artist has created. And you've mushed it down to a smaller size. So it is why, when you listen to stuff on Spotify, you stream, it actually sounds a little bit shitter than it could sound.

• 45:18Speaker 00

  Yeah. I mean, I think there's lots of different threads going on here. There's what Osha talked about, which is that he used to have his physical music, which is a good thing to have. But, you know, he, he told me he had 300 kilos of the stuff, like, you know, that's, that's a big deal. You can see the appeal of being able to do it digitally, but then, you know, as you say, the quality may not be as good. And now all of a sudden you're in a sort of a constant subscription situation.

• 45:40Speaker 01

  Yeah, exactly.

• 45:42Speaker 00

  You know, I think to me, it's kind of the perfect story to end this first season of how we got here. Because it's one of the best examples of disruption, impact, consumer response that I can kind of think of. But that is the end of our first blast of 12 episodes. We are going to be back for more. I'm really excited about that. Thank you very much for listening and thank you, Rob, for being with us today and throughout the season.

• 46:11Speaker 01

  Till next time.

• 46:11Speaker 00

  Till next time. It has been a pleasure. Thank you to Osha Gunsberg and Dr. Paul Harrison for speaking with me for this episode. Thank you again to our podcast partners, IG Markets and Mortgage Choice for their support this season. I'm excited to let you know that there will be more. And thank you again for listening and watching. See you soon.

• 46:31Speaker 00

  You downloaded a four-minute song over 45 minutes of dial-up and it was worth every second. Napster made music free and for a while, the whole industry acted like that was a problem that would just go away. Piracy felt like the end of the music business. Turns out it was just the start of a very expensive lesson in adapting or dying. The labels that survived weren't the ones that fought hardest. They were the ones that worked out where things were headed early. IG Markets has seen where things are heading in the investment space. Their new app gives you access to shares, ETFs and crypto, all in one app,

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