Just Managing: Napster Is a One-Hit Wonder

When I hear all the din about the power of Napster and MP3 to overthrow everything everybody knows about doing business online, an album title by Elvis Costello comes to mind: This Year's Model. Just as the tired tune about how e-retailers would tromp retailers played at the top of the hype list a year ago, so does this idea play in the media like the Macarena.

How about this thought: The digital distribution of songs won't change the fundamentals of the business. It might accelerate the core qualities of the music business, but in the digital marketplace, consumers will still turn to record labels for guidance.

Just ask Gregg Latterman, CEO of Aware Records, a small record label based in Chicago. "Napster doesn't threaten what I'm doing," says Latterman, who has a unique perspective as a small label in the big business. The relative smallness of Latterman's company (Aware has eight full-time and seven part-time employees) gives it a natural advantage over the traditional behemoths in the field as well as the new breed of venture-backed Web startups. Large established record companies can't adapt their tried-and-true ways of doing business without alienating scores of its employees; while new Web-born companies are forced to bet their venture money on business models that don't necessarily make money.

Latterman, on the other hand, has the best of both worlds. His small company has sufficient financial health to take chances without destroying itself, yet it has enough resources to adopt the relevant pieces of digital technology to its business model. As the head of a small business, Latterman knows how to keep all the pieces of his business model together, and he argues that all this focus on how the music is distributed misses the bigger picture.

"Everybody wants to believe that it is a time of great change - but it isn't," Latterman insists. "The heart of the business is still about finding great bands, making a great record and getting it out there for people to hear it. It's still the same concept," he says. "The only difference is how the music is delivered."

Like any record company, Aware adds value by finding and developing new acts. The company's core talent is finding small bands on the verge of breaking out and helping them hit critical mass. Latterman has made a splash through the company's annual compilations of unknown bands, which have featured selections by groups such as Hootie & the Blowfish, Matchbox 20 and Train - all before they were known by the general public. About 30 percent of the bands that have appeared on Aware compilations have gone on to sign record deals with major labels.

Latterman says this form of discernment has become all the more valuable as a result of the proliferation of music available on the Web. "The biggest fallacy that has ever occurred is that bands can go on the Web and explode," he says, saying that in most online opportunities, "you can get garbage [not the band] for free."

This doesn't mean that Latterman's a Luddite: Aware has radically improved its ability to tell fans about concerts in their area through compiling a rich e-mail database (previously it simply sent out postcards), and it sells a greater portion of CDs through its online store. He uses the emergence of the Web as a tool to strengthen the networks of fans that are critical to his company's breaking out new bands. He just doesn't believe that free distribution will destroy his business.

"At the end of the day, there will always be some physical part of the music - whether it is a disc or a chip or something that is password-protected," he says.

Nobody has claimed to understand how the craze in swapping music files will ultimately change the business. But one expert, partner Win Farrell of PricewaterhouseCoopers and author of How Hits Happen: Forecasting Predictability in a Dynamic Marketplace, says the emergence of networks to share files might ultimately serve to reinforce nascent bands rather than destroy them.

Just as gaming software has found a way to thrive under the threat of youngsters giving it away, the music industry will find ways to harness this rapid acceptance by a fluid market of fans.

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