Will Bitcoin Meet Napster’s Fate?

Daniel Cawrey
Sep 24, 2014 at 23:37 UTC
Updated Sep 26, 2014 at 11:54 UTC

Napster

Seemingly out of nowhere, a technology appears that changes the way people think about an established industry. Vested interests see it as a threat and become determined to ensure it does not undercut existing profit structures.

Sounds like the synopsis of the story about bitcoin up to this point? Well, yes, but digital currency isn’t the first technology to meet the resistance of incumbent parties.

The music industry, for example, faced a signifcant threat from peer-to-peer technology in the late 1990s. In fact, 15 years ago, controversial file-sharing service Napster was one of the biggest stories around.

The company’s peer-to-peer technology enabled users to connect to vast music libraries stored on hard drives around the globe, and then download those files with the click of a mouse. More than a decade later, the music industry hasn’t been the same since.

Of course, even at its peak, there was widespread agreement among market observers that Napster had changed the face of music. But, besieged by lawsuits, Napster today survives only as a shadow of its former self. Instead, business interests took advantage of its legal troubles, legitimized the technology and profited from it.

The result could provide an interesting history lesson for bitcoin, illustrating what happens to incumbents when rivals look for ways to innovate a novel idea out of existence.

The streaming model

While Napster provided a revolutionary way for people to use peer-to-peer connections to download music, the problem was that it essentially freed published works from record label control.

Napster allowed anyone to obtain music – that others previously had to pay for – absolutely free. It’s demise ultimately helped Apple dominate the music downloading industry, and later gave rise to streaming music platforms like Pandora and Spotify in what has become an increasingly important model for the sector.

Streaming may someday be the only way people pay for music. Source: RecodeStreaming may someday be the only way people pay for music. Source: Recode

At its peak, Napster had 60 million users and, despite its controversial business model, even raised millions from investors, though this did not protect it from a subsequent and very public lawsuit.

The Recording Industry Association of America (RIAA), music publishing’s trade and enforcement group, took great umbrage at the idea of people not paying proper licensing fees for music. There were also prominent musicians who did not like the idea of free music, although many figured that something like Napster was inevitable.

Eventually, Napster was forced to cease operations by the RIAA, which filed a lawsuit for copyright infringement, and its remains were later bought out by another company.

All of this is captured in the movie Downloaded, which, in the spirit of its subject, is available online for free.

Copyright vs government control

Ultimately, Napster’s story shows what can happen when industries face the threat of decentralization and lower-cost pricing structures.

Because of bitcoin, financial technology could evolve similarly, developing into a model where everyone pays for access to a worldwide financial network in a way that echoes streaming music.

“[Downloaded is] a very interesting movie,” said Fabio Federici, whose startup Coinalytics tracks bitcoin-related data. However, he added, “there’s no copyright on the dollar bill”.

The parallel between music and money does end in that there are different legal protections involved. For recorded music, it’s protected under copyright law.

Money, in turn, is protected by various governments that for a multitude of reasons want to protect sovereign currencies. Is that more or less dangerous than copyright law? It depends on where you live. In the US, the federal government has taken the stance it can ardently compete with digital currencies such as bitcoin.

David Andolfatto, vice president at the Federal Reserve and a professor at Simon Fraser University, told an audience in St. Louis last April:

“I think that the Federal Reserve can compete with bitcoin as a currency.”

Andolfatto conceded at the time there are technical aspects native to bitcoin that the US central bank cannot compete against. He specifically pointed out the payments rail bitcoin has as having global applications beyond the dollar.

Bitcoin versus the dollar in the eyes of the US central bank. Source: Federal Reserve of St. LouisBitcoin versus the dollar in the eyes of the US central bank. Source: Federal Reserve of St. Louis

Creative destruction and innovation 

Aside from music and finance, other industries are being disrupted, and in the process, are having to confront regulatory standards that may be antiquated. Napster is just one company that fought an entrenched industry, experiencing opposition. Bitcoin may face even bigger scrutiny.

Even multibillion-dollar companies like Uber, which seeks to provide better transportation services through technology, or Airbnb, which has developed a way to obtain lodging via excess housing surplus previously unavailable, are not immune to obstacles.

The battles that these startups are having in their respective industries may only be a proverbial drop in the bucket for what decentralized digital assets such as bitcoin may face.

While providing new consumer convenience, Uber has displaced scores of taxi drivers. This is due to its lower barriers of entry versus the high overall costs it takes to operate and license a cab.

In Airbnb’s instance, its platform causes regulatory issues in locations where commercial lodging is not permitted in residential areas. This is true despite what some Airbnb hosts may think about the ability to rent out unused living space.

Bitcoin volatility and transactions. Source: Bank of EnglandBitcoin volatility vs. transactions concerns the banking industry. Source: Bank of England

To date, bitcoin’s volatility problems have arguably brought it the most regulatory scrutiny. Further, bitcoin competes directly with government money, which can be grounds for outright prohibition in some places.

This has included Bolivia and Ecuador, though local groups are trying to change the legal standing of digital currency in their jurisdictions.

Could bitcoin become the Napster of money? The answer depends on how you view the question. Napster has certainly had a impact, but it failed to ever live up to its potential as a business. As such, the company’s history may provide an important warning for the bitcoin industry.

Bitcoin could potentially be replaced by something else, something more favorable to governments and banks worldwide – something Apple Pay, ironically enough, is already trying to accomplish.

Image credit: 360b / Shutterstock.com / Andrew Mager

Disclaimer: The views expressed in this article are those of the author and do not necessarily represent the views of, and should not be attributed to, CoinDesk.

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