Napster CEO Pitching a New Tune to Labels
The company shut down its service three weeks before he arrived, prompting millions of customers to defect to competitors. To get it restarted, he must persuade suppliers to change their business models and customers to pay for something they can get for free.
The suppliers, meanwhile, are suing for copyright infringement, putting the company at risk for the largest damage award in the history of U.S. copyright law.
That’s what Konrad Hilbers walked into in July when he became chief executive of Napster Inc., the beleaguered online song-sharing company based in Redwood City, Calif.
Hilbers’ job is to make peace with the major record labels and transform Napster’s service, once a hotbed for music pirates, into a legitimate and profitable distribution system for digital music. To do so, he’ll have to win the labels’ support for a new approach based on high volume and rock-bottom prices.
But Hilbers is running out of time. The company has plummeted from the pinnacle of the Internet music world since early March, when U.S. District Judge Marilyn Hall Patel forced Napster to crack down on piracy. The service has been completely sidelined since July 2, again on Patel’s orders. Now, many of its former devotees wonder whether Napster even matters any more.
The company is caught between the enmity of record companies and the expectations of consumers, who associate the Napster name with an unlimited supply of free music, said Mark Mooradian, an analyst at the Jupiter Media Metrix research firm.
“I view a Napster comeback as one of the most difficult propositions imaginable,” Mooradian said.
The task is daunting, but Hilbers traveled a similar path in the late 1990s. As an executive at the newly formed AOL Europe, Hilbers had to overcome resistance from lumbering European phone monopolies to offer consumers unlimited time online for a flat monthly fee.
“This environment of trying to change legislation, fighting with monopoly kind of infrastructure owners, bringing this all together for a consumer offering that makes sense, that’s very much a battle that I’ve seen before,” Hilbers said in a recent interview.
The 38-year-old Hilbers spent the first six months of this year as a top executive at BMG Entertainment, one of the five major record companies, so he has an insider’s understanding of record-company economics. His admirers say he’s a good manager, skilled at developing technology and rallying workers around a goal.
More important, he has the strong support of BMG’s parent, Bertelsmann, which has pumped in a reported $100 million to keep Napster alive as it develops a new service that compensates record companies and music publishers.
“I personally asked Konrad to leave BMG and to join Napster because strategically it is for me a key priority,” said Bertelsmann Chairman and Chief Executive Thomas Middelhoff. “Today what they need is experience and structure, and that is what Konrad can deliver.”
Raised in northern Westfalia, Germany, Hilbers earned a degree in business from the University of Muenster, where he specialized in marketing and operations research. In 1991, he received his doctorate in applied computer science from the University of St. Gallen in Switzerland, where his topic was information systems management, or “how large corporations deal with new information technology.”
Since then, much of his career has been spent in media companies owned or backed by Bertelsmann, a German conglomerate. An early stint at a Bertelsmann-owned television services company in New York convinced Hilbers that he wanted to be the one running the show, making all the critical decisions about company administration and marketing. The media business is so fragmented and compartmentalized, Hilbers said, it’s possible to obtain that kind of power at a fairly young age.
In 1996, Middelhoff summoned Hilbers back to the continent to help build Bertelsmann’s fledgling Internet service provider, a joint venture with America Online. Hilbers worked his way up the ranks from chief financial officer of AOL Europe to head of AOL-owned CompuServe Europe and finally to chief operating officer of AOL Europe.
Hilbers learned from that experience to “always try to do what the consumer wants and not just adapt to existing industry structures and make the consumers buy what you want to sell them.” That meant bargaining with the telephone companies and lobbying regulators and lawmakers at every level of government for an end to the per-minute charges.
The goal was to fuel demand by making the service seem more affordable. And it worked--AOL Europe grew to nearly 4 million subscribers by the time Bertelsmann agreed to sell its share to AOL in March 2000.
“Konrad did a spectacular job, and this at least was the reason I asked him to rejoin Bertelsmann after we divested AOL Europe,” Middelhoff said. Early this year, Hilbers came back to the United States as chief administrative officer at Bertelsmann-owned BMG Entertainment.
Hilbers’ transatlantic work history is reflected in his family. His wife, Rita, is Italian, his 7-year-old daughter was born in Germany and his son, 6, was born in Manhattan.
They live in Menlo Park in the Bay Area, where they indulge in Hilbers’ many outdoor pursuits, such as hiking and bike riding.
Hilbers arrived at BMG shortly after Middelhoff ousted Strauss Zelnick as head of the company. Among other things, Middelhoff and Zelnick had clashed over Bertelsmann’s efforts to turn Napster into a legitimate, copyright-friendly file-sharing system.
Middelhoff said Hilbers started the restructuring process that has slashed costs at the label, whose corporate staff is half as large today as it was in Zelnick’s tenure. Hilbers isn’t critical of BMG, but it’s clear that his entrepreneurial impulses didn’t map well onto the established ways of doing business in the record industry.
“I was seeing a lot of urgency in the situation that BMG was in,” Hilbers said, citing the company’s losses, reorganization and lackluster digital strategy. Accustomed to an “e-mail, instant messaging, 24-by-7 kind of work style,” Hilbers found himself in “an industry of pick up the phone, have lunch with the right person, go to the party in the Hamptons, and join the club in St. Barts.”
“I probably was pushing too much for the BMG taste, and that basically led me to believe that maybe this is not the right place to be in,” he said. That’s when Napster officials offered him the chief executive’s job. On Middelhoff’s advice, he accepted.
Yet he also was a member of the board of directors of the Recording Industry Assn. of America, the trade group leading the legal assault on Napster. “I think in general, those relationships [with the RIAA and executives at other labels] were good relationships, and that I can build on those early days of my relationships with them now,” Hilbers said.
Hilary B. Rosen, president and chief executive of the RIAA, said Hilbers is charming and relentlessly optimistic. “Most people view him as a good guy trying to do the right thing in a very difficult circumstance [at Napster].” Asked whether Hilbers could rescue Napster, Rosen replied, “That’s a good question.”
Like many Silicon Valley entrepreneurs, Hilbers is casual and not self-conscious--so much so that he gave a speech recently with his hair in windblown disarray. He also has the edgy energy of someone whose mind is racing ahead, waiting for everyone else to catch up. His accent betrays his German roots, but Hilbers is accomplished enough in English to have published books in both languages.
Known for an open-door approach, Hilbers said he likes to spend time with co-workers in and out of the office. But the first order of business at Napster was an attitude adjustment.
“The spirit of the whole organization was to some extent still connected to the wish to get Napster back the way it was,” Hilbers said. It took intense discussions and a few changes in top management--including new vice presidents of technology, operations and marketing--to get a team committed to building a legitimate, successful business, he said.
One role that has not changed is that of founder and chief technical officer Shawn Fanning, the 21-year-old programming whiz who created the Napster software.
Hilbers has tried the same approach of open communication with the major labels, but four months of talks have produced no settlements and no licenses. He is urging the labels to accept a portion of Napster’s revenue, rather than charge the company for each song downloaded. His pitch is to allow users to download a certain number of songs each month, building larger and larger collections that they could keep as long as they paid their membership.
“He has a vision that I think a lot of people share, which is, in a few years the average person’s music collection can be three to four times what it currently is, which is due to digital storage,” said analyst P.J. McNealy of the GartnerG2 research firm.
Jay Samit, a senior vice president at EMI, said his company is still talking with Napster. But Hilbers hasn’t yet presented a business model that works and is sustainable, Samit said.
Hilbers said the major labels haven’t been willing to grant licenses until their lawsuit has been settled. For Napster, the two issues are inseparable--there’s no point in settling without licenses, because the company can’t launch a service and collect revenue without them.
According to online music company executives and analysts, leaders of the major labels are convinced that the Internet undercuts their bread and butter--CD sales--so they insist on prices or restrictions that protect those sales. But those terms also may doom the new services to failure because they won’t be able to offer consumers enough value.
The music industry is making a big mistake by trying to compare physical CD sales to online distribution, Hilbers argued. “What they don’t seem to believe is that consumers will obtain huge libraries of music in the future, much bigger than what they ever bought through physical retail.”
The incredible popularity of Napster’s free service, which peaked at 60 million active users sharing 375 million song files, helped convince some key members of Congress that the record labels weren’t moving quickly enough to satisfy the public’s demand for music online. The Justice Department has launched an antitrust investigation into the industry’s licensing practices, scrutinizing the two online music distributors owned by major labels.
Hilbers is counting on that pressure, along with consumer demand, to help Napster reach deals with the labels. The company hopes to have enough licenses in place to launch its long-delayed new service early next year.
He has the financial support of Bertelsmann, but the supply of money isn’t endless, Middelhoff said. “[There is] no open checkbook. There’s clearly an understanding what is possible and what’s not.”
The labels and Napster officials agree that Hilbers’ arrival has improved the negotiating climate, but they wish he’d gotten there sooner. Executives on both sides say a settlement last year could have shifted Napster’s huge following into a legitimate fee-based service instead of scattering them to other free ones. Naturally, they disagree on who’s to blame for that not happening.
The most compelling reason for the labels to join forces with Napster was the company’s once-mammoth following, which has effectively been reduced to zero. The name “Napster” still has some allure for consumers, but as analyst McNealey noted, “Every day the new service doesn’t launch, the brand value drops.”
