Napster was the turning point. The online peer-to-peer file-sharing service was founded in June 1999, and the music industry was forever changed.

The service allowed anyone to share what turned out to be millions, if not billions, of digital music files for free.

Editor’s note: This is the first part in a series that highlights pressing data issues for the real estate industry. This article details some challenges and successes relating to digital music, and draws parallels between the music and real estate industries.

Napster was the turning point. The online peer-to-peer file-sharing service was founded in June 1999, and the music industry was forever changed.

The service allowed anyone to share what turned out to be millions, if not billions, of digital music files for free. Almost immediately, the Recording Industry Association of America filed a lawsuit against the company for copyright infringement.

As a result, Napster shut down the service in its original form two years after its founding. But there was no turning back the clock.

"Napster set off a (chain) of events that has led to where things are today," said Mike Masnick, founder of the Techdirt blog, which focuses on how government policy, technology and legal issues affect business innovation and growth.

Masnick will speak during the first-ever Inman News Data Summit, which runs from July 25-26 in San Francisco and precedes the Real Estate Connect conference.

While Napster brought digital piracy into the mainstream, Masnick said he believes the service’s most disruptive effect was to change music’s distribution model.

"I think that the free aspect of it is certainly a factor, but I think people overplay the free and underplay what it was: leveraging technology to be able to distribute things in a much more efficient manner," Masnick said.

Before Napster, big-name recording companies such as Warner Music Group and EMI controlled how music was created, promoted and distributed. Such companies continue to have major promotional clout, but they are no longer the only game in town for artists set on success.

In recent years, direct-to-fan music marketing and distribution platforms such as Topspin, TuneCore, and Bandcamp have enabled artists to strike out on their own and keep more of the associated revenue. 

"Traditionally, (the way) to be successful as a recording artist was to sign a deal with one of those major record labels, and because they were the gatekeepers, the deals they signed were very favorable to them and not to the artist. Now they can route around those guys," Masnick said.

Technology has played a similar role in shaking up what Masnick called the "gatekeeper model" in other industries, including the real estate industry.

"Industries with the gatekeeper model … have certain players that have acted as gatekeepers or a form of middlemen," Masnick said.

"What technology and certainly the Internet have created are ways to break down that system in that you don’t necessarily need to use the same gatekeepers as you used in the past.

"With the music industry, in a big and noticeable way, that has been happening for over a decade. In the real estate industry, it hasn’t had as big (of) an impact — yet." 

In general, middlemen "are not bad; in fact, they’re quite useful," Masnick said, but they have to figure out what their role is as evolving technology changes how their industry works.

For instance, as consumers now have ever more real estate-related information at their fingertips from both third-party and industry sites, the role of the real estate professional has shifted from gatekeeper of information to enabler, Masnick said.

"There is still a role for middlemen to (help consumers) understand the process and the pitfalls and the best practices (of real estate), but their role is no longer as a gatekeeper," he said.

One way real estate professionals can adapt is to change the way they look at the market and what they can do to make the consumer experience better, Masnick added.

"These companies need to realize they’re not at the center of this industry and their role is to help (consumers) rather than process them. Because when you no longer need a gatekeeper, the company that wins is the one that provides the best customer experience," he said.

"Providing more value to the customer, rather than being the biggest or the baddest or most well-known in the market, becomes more important."

Masnick points to the business model of online brokerage Redfin as an example. Redfin offers consumers access to more in-depth listings data via its Virtual Office Website (VOW) portal than traditional brokerages typically provide.

Clients typically find a home on their own through Redfin’s site and a Redfin agent helps them negotiate and close the deal.

"The basis of Redfin is to build up this platform that makes use of the Internet and different APIs to enable technology to … in some ways cut out the traditional gatekeeper role," Masnick said.

"The experience of users is (better). They get a lot more information and a lot more knowledge than they would have otherwise.

"In some ways, a service like Redfin … (is) about empowering the user to do more directly with the technology," he added.

Nonetheless, Masnick acknowledges that "Redfin has some traction, but I don’t think that (it’s) been the runaway success that some people hoped it might be."

He attributes that partly to the heavily regulated nature of the real estate industry — regulations differ by state, which he said makes innovation difficult for startups.

"There are limits on what Redfin can do and what other companies can do," and multiple listing services have their own set of rules that brokerages must navigate, he noted.

Both the real estate and music industries will have to deal with questions of whether certain laws "make sense" as technology advances, he added.

"In the real estate business, there are certain laws about who needs to be involved in the process of buying and selling real estate," such as lawyers or title officers, Masnick said.

"It would be relatively easy to set up systems that could manage the process in a clear and above-board manner, which wouldn’t require such people be involved. No one builds it because you can’t do that, but it would be easy to do so," he said.

Legal issues continue to have an effect on the music industry. Earlier this month, major Internet providers AT&T, Verizon, Comcast, Cablevision, and Time Warner Cable signed a voluntary agreement to cooperate with the music and movie industries in cracking down on suspected copyright infringers, reported technology news site Ars Technica.

Since its original shutdown, Napster has been acquired by Best Buy and is now a legal, subscription-based music service. Consumers have now also gotten used to such paid digital music platforms as Apple’s iTunes. Startups such as Vevo and Spotify are also livening up the industry.

In the first half of 2011, sales of music albums rose year-over-year for the first time since 2004. The 1 percent rise was led by digital album sales, which rose 19 percent and are on track to set a new sales record by the end of 2011, according to a report by consumer research company Nielsen.

New business models 

Many musicians have learned to embrace the Internet and have adapted to devise business models that work. Classical music composer Walt Ribeiro in May 2009 launched For Orchestra, which offers orchestral arrangements of pop songs. Each week, he arranges a song on the iTunes bestseller list from artists such as Lady Gaga, Bon Jovi and Madonna.

"I don’t deal with any licensing for CDs because mechanical sales (digital) are much better for me. As a result, I don’t deal with manufacturing, distribution or overhead — which keeps me efficient," Ribeiro said.

He chooses the weekly song by polling those on his mailing list and followers on Facebook and Twitter.

"My business model today is based on the idea of ‘current and trending’ music. The reason why orchestras are dying is because Beethoven isn’t a trending topic on Twitter, but Lady Gaga and Radiohead often are. Today’s audiences aren’t against Beethoven’s music, but they already heard it all before, and orchestras have become boring, predictable, and out of touch with today’s works," Ribeiro said.

For Orchestra reached profitability in February 2011. Connecting with fans and giving them a reason to buy is a business model that works for many musicians, according to Masnick.

For instance, he said, a few years ago Trent Reznor, leader of the industrial rock band Nine Inch Nails and a recording industry critic, left his record label and started giving away his music for free. But he didn’t stop there.

He built a community website for fans and offered premium packages at various price points. These included 2,500 ultradeluxe, limited-edition packages at $300 each that included physical CDs, artwork, photographs, DVD and Blu-ray discs, complete with Reznor autographs.

"(Reznor) offered tremendous value that people wanted to pay for," Masnick said.

Less than 30 hours after Reznor offered them, the 2,500 packages sold out, earning a total of $750,000. With all of the premium packages combined, Reznor took in $1.6 million in the first week alone.

Mike Masnick, founder of the Techdirt blog, will speak during the first-ever Inman News Data Summit, which runs from July 25-26, 2011, in San Francisco. The event precedes the Real Estate Connect conference, which runs from July 27-29.

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