Shawn Fleming was a 19-year-old college dropout who in 1999 created Napster. In the first three months of 2001, 2.5 billion files a month were being downloaded, validating the economist’s theory of demand, which states that the lower the price, the larger the quantity demanded, especially a zero price. Nevertheless, from the music industry’s perspective, when you have millions of potential customers breaking the law, you do not have a crime wave, you have a marketing problem.
The point is not to argue the highly contentious legal issues of copyright and private property law, particularly as it relates to digitally downloaded music files. The more precise point is the lack of understanding of value by the music company executives. By keeping their focus on the inside of their companies, they completely ignored the external value potential of easily obtaining music files. It took Steve Jobs of Apple Computer to capitalize on this opportunity with iTunes—which at the time of this writing has a 70 per-cent market share on the legal downloadable music market—in an eerily analogous manner in which he capitalized on the personal computer opportunity invented at Xerox’s Palo Alto Research Center, validating Mark Twain’s line, “History doesn’t repeat itself—but it does rhyme.” Had the music company executives been focused on the outside of their companies— studying, analyzing, and innovating what their customers found valuable— they could have invested many millions into productive research and development rather than throwing away that sum down the judicial sinkhole. Yet the Napster saga is just one in a long history of revolutions taking place out-side the confines of an existing industry, in what the Austrian economist Joseph Schumpeter labeled “creative destruction.” The reason entire indus-