A Crushing Defeat For Napster - Company Business and Marketing

Industry Standard, The, August 7, 2000 by Laura Rich

A court ruling threatens to shutter the popular service. But that doesn't mean the end of music-sharing on the Net.

THE MUSIC INDUSTRY HAS OFTEN looked like the most clueless of old-economy stalwarts in trying to adapt to the Internet. Instead of working with new technologies, it has fought them in court -- even at the risk of alienating its most fervent customers. But its battle to defend the status quo is suddenly looking a lot less futile.

In a decision that rocked the Internet Economy, U.S. District Judge Marilyn Hall Patel last week ordered Napster, the wildly popular MP3swapping service, to remove all links to the major labels' copyrighted material from its directory -- a move that would effectively shut the company down.

The Recording Industry Association of America had sought the temporary injunction as part of its copyright-infringement suit against Napster -- and Judge Patel, in a decision that openly mocked Napster's defenses, indicated that she considers the case all but decided. Napster filed an emergency appeal seeking a stay of the order, but no decision had been issued as of midday Friday.

Patel's decision provoked outrage among Napster's 20 million users, with many vowing to switch to the dozens of alternative music-sharing services that have sprung up over the past year [See story, page 59.]

Many of the legal issues surrounding online copyright protection, moreover, remain unresolved, and it will take many more lawsuits -- and possibly more lawmaking -- to work them all out.

But for the music companies and their compatriots in Hollywood and book publishing, the ruling offered comforting assurance that battling copyright infringement on the Net is not necessarily a lost cause. And it should, at the very least, buy them some time to get their own digital music offerings up and running.

Clearly, though, the Napster issue is much bigger than the legal system. In just over a year since its May 1999 launch, Napster has brought the peer-to-peer exchange of music into the mainstream and given it legitimacy, profoundly changing consumer expectations. Tens of millions of people are now accustomed to downloading whatever they want to hear for free. The labels claim they are defending the rights of artists, but many artists -- and fans -- are not at all sure that the record companies are on their side.

"Stopping the process of file sharing is like trying to control the rain," says Chuck D, frontman of the rap group Public Enemy and an outspoken online music proponent.

But the RIAA, emboldened not only by the Napster decision but also by an April court victory over MP3.com, sees the world very differently.

"The marketplace is a little awkward now, but it will be fixed in time," says RIAA President Hilary Rosen. "But I don't think anyone should hold their breath that the music industry will work with the technology industry so that anybody can get music for free. Consumer expectations should be realistic."

That's a lot to ask of a public that has little incentive to stop swapping free MP3s. And the labels have been slow to offer many alternatives. Holding back from launching their own sites, they chose instead to hedge their bets by contracting with a broad range of third-party providers, including Launch.com and Musicmaker.com.

More recently, the labels have tiptoed into the realm of subscription services. Two weeks ago, EMI unveiled a digital distribution effort, essentially 100 albums and 100 singles from its catalog. It charges consumers $2 per download for singles -- hardly enticing in a world filled with free music files. EMI's price tag is only a slight discount over the $2.50 charged by Sony Music, which made its first foray into digital distribution last spring, releasing 50 downloadable singles through its own site, the Tower Records site and a few dozen others.

Universal is in development on a $25 million streaming subscription service to be launched on its Farmclub.com site. Bertelsmann-owned BMG Entertainment, which has mostly kept clear of the fight, may also have the beginnings of a strategy. Two weeks ago, the German media conglomerate purchased online music retailer CDnow, which already operates a digital-download service. Warner, the last of the Big Five, may be in the best position of all to capitalize on the download market, thanks to the pending AOL-Time Warner merger.

None of these efforts, though, will find it easy to draw users away from peer-to-peer exchanges that offer music for free.

In response to charges that they're late to the game, music industry executives explain that building the so-called digital rights management systems needed to track usage and receive payments from consumers is complicated and time-consuming. Even now, their efforts often seem half-hearted. And with each label taking a proprietary approach, the result is likely to be a morass of different standards that's almost guaranteed to alienate consumers.

"The labels need to realize they're not recognizable brands to consumers," says Peter Gotcher, a partner at Redpoint Ventures, which has investments in music sites Music Match and Myplay.com. "They need someone to aggregate all available music."