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The Napster That Ate Hollywood

Another old economy business model prepares to join the vinyl record in the nostalgia bin

By Stephen Pizzo

WHAT HAPPENS WHEN AN IMMOVABLE OBJECT meets an irresistible force? Well, eventually equilibrium. But that takes a while, and at the moment of contact, it's all sound and fury.

That's exactly what you have been hearing from the music industry the last couple of months--fury. The online digital music revolution (the irresistible force) collided with the powerful recording industry (the immovable object), and all hell broke loose. By early this year nearly a third of those online were downloading music off the Internet and not paying for it, according to Forrester Research.

The recording industry, through its trade organization the Recording Industry Association of America (RIAA), sued two of the key players in the online music-sharing business, Napster and MP3.com. At this writing the legal score is recording industry 2, freeloaders 0.

For those who may not have been paying attention, new computer file formats--in particular MP3--compress large music files, allowing them to be transferred between computers quickly. Once music is "ripped" into MP3 format it can be easily shared with others online. Music fans promptly began passing entire albums around online. In less than six months what began as a novelty grew into a movement under the banner "Music wants to be free!"

Of course, not everyone agrees. Recording companies want music to be anything but free.

The recording industry watched the emergence of MP3 with growing alarm. That alarm turned to action last year when a 17-year-old college student, Shawn Fanning, wrote a program named "Napster" and put it up on the Net as a free download. Napster allows those who have MP3 music files stored on their computers to share them with others--free, of course. All users had to do was fire up their Napster program, log onto the Napster site and designate the kind of music or artist they were looking for. Napster would hook them up with those Napster-equipped computers out there that contained the music specified--sort of a music dating service.

Teenagers and college students were the first to glom onto Napster. Within a couple of months of its appearance, Napster was being used so frenetically by college students that they were clogging up campus servers coast to coast.

With the online buzz propelling it, Napster quickly became a website business. The San Mateo-based Napster hoped to leverage its fans' free spirits. Many of the Napsteristas adopted screensavers showing the late Cuban revolutionary Ché Guevara with the message "Napster: la Revolucion!"

See You in Court

THE RIAA HAS A MOTTO TOO: "No trespassing!" The RIAA filed suit earlier this year against both Napster and the website MP3.com and quickly won two first-round decisions. On April 28, a federal judge granted the RIAA a summary judgment against MP3.com. The website had made the full tracks of over 80,000 CDs available in MP3 format, in what the court decided was direct violation of copyright laws. Then, on May 5 in San Francisco, federal Judge Marilyn Patel ruled against Napster.

Clearly, little Napster had attracted some big-time attention. "The entire spectrum of American creative talent applauds Judge Patel's ruling," said Jack Valenti, president and CEO of the Motion Picture Association of America. "Napster is aiding and encouraging the theft of property and demeaning the concept of copyright."

The battles were not limited to the courts. The band Metallica, whose music had become one of the most popular commodities shared on Napster, took matters into its own hands. The band hired consultants PDNet to monitor the Napster service for one weekend in late April. Much to the chagrin of Napster users who assumed they were anonymous, PDNet was able to suck in over 335,000 Napster user names, catching individual fans red-handed swapping Metallica tunes. The band presented the company with 60,000 pages of computer printouts containing the user names and demanded that the company immediately block those users.

Metallica claimed that even though Napster, the company, never copied a single tune or hosted any on its site, it was nonetheless guilty of aiding and abetting a crime by knowingly providing the tool used by the pirates and acting as the communications hub for their illegal actions.

The company denied it had any responsibility for what its users do. Nevertheless, Napster agreed to Metallica's demand to block the users on the band's list. "Napster has always maintained that we would respect copyrights and act on any copyright infringement brought to our attention," said Napster's attorney, Laurence Pulgram. But Pulgram added that he thought Metallica's demand was the wrong approach, since they were only punishing their own loyal fans.

But there is solid reason for concern. Applications such as Napster (and now its many imitators) could gut the recording industry's old-economy business model. And, at least for now, the industry has no coherent Plan B. The RIAA lawsuits and the Metallica assault on Napster represent rearguard actions designed to buy time while the recording industry tries to figure out how to do business in a connected, digital world.

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Free Music: The revolution has begun.

Music Downloads: A list of online MP3 resources.

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SDMI--A Sonic Chastity Belt in the Making?

IT'S NOT THAT THE INDUSTRY didn't see this coming. No one understands the potential of digitized music better than the recording industry. They just underestimated the dynamic nature of emerging online communities and technologies. With billions of dollars a year still flowing in from good old-fashioned shrink-wrapped CDs, they were in no hurry to move to an unproven digital distribution model. Recording companies thought they could make the switchover in the same orderly way they moved from records to CDs--form a working group, set some standards and cut deals between competitors allowing them to exploit this new technology without opening the door to a lot of upstart competitors.

In 1999 the industry began work on SDMI--the Secure Digital Music Initiative. By joining forces, the giants of the recording and film industries hope to establish a set of standards that will enable them to provide digital films and music online in a common but secure format.

But if the recording industry thought that Net startups like Napster and MP3.com (both of which are members of the SDMI, by the way) were going to just sit on their investors' money and wait until SDMI standards were hammered out, they were fooling themselves. At dotcoms, business models are simple and fast: Be the first mover; develop, deploy, refine.

So, while recording industry representatives on the SDMI working group obsessed over whose ox might get gored by which proposed method or standard, Napster and others simply moved ahead.

That's when the talking stopped and the shooting started. The RIAA turned its lawyers loose, and some established artists like Metallica and Dr. Dre attacked on their own. "If they want to steal our music," said Lars Ulrich, Metallica's drummer, "why don't they just go down to Tower Records and grab them off the shelves?" The "they" Ulrich was ranting about, of course, were Metallica's own fans.

This was a risky course for the well-loved artists. Some fans took offense. "Give me a break!" wrote one fan who posted as "Anonymous" in an MP3 chat room. "I have been dropping 16 bucks an album for Metallica's music since I was a teenager. They made a fortune off us and now they accuse us of stealing from them. What nerve!"

And a group of former Metallica fans held a public protest, calling themselves "Ex-metallicafans.com." They were forced to use their bare hands to break up a collection of Metallica CDs after police confiscated their sledgehammer. Things were getting ugly.

Steve Curry, an executive with the music website EMusic.com, disagrees. "I think the band showed a lot of courage standing up for its rights," Curry said. "I think they needed to draw a line in the sand and say, 'This is our property and you can't just take it without paying for it.' "

But Napster fans counter that both consumers and artists are victims of recording giants that undercompensate artists and overcharge fans. As usual, the truth is more complicated than that. The core problem, some experts say, is within the recording industry itself.

"The music industry is afraid that if music is available online people won't pay for it," says attorney David Chidekel, who specializes in intellectual property law. "But that assumption is wrong. In fact, if the price is low enough people will pay for it."

The rub is that fans will not pay the high prices that are currently levied on CDs. And, in part, it is those high prices that are fueling the piracy. The solution, Chidekel told subscribers to On24, a website for investors, is that the recording industry must change their entire business model before they can hope to compete in a digital world.

"The trouble is the record companies approach the making of an album like venture capitalists," Chidekel said. "They pour up to a million dollars into each album and figure only one out of 10 will make them any profit. So, they have to charge a lot for each album. They need to find a less expensive way to produce these products. They need a total business-model change."

But a radical transformation of such an entrenched industry will take time, and in cyberspace, time is compressed. So, with no immediate options at hand all the record industry can do is hope that bombarding these little companies with lawsuits will keep them and their imitators at bay for a while. The two recent court victories may have the desired effect. The potential damages against MP3 and Napster are enormous.

"The RIAA seeks the maximum statutory damages allowed under the law, $150,000 per infringement, meaning $150,000 per song," says Los Angeles copyright attorney Lawrence Y. Iser, "An award could reach into the billions of dollars. The court might wish to fix the damages at a lower number so as not to destroy the company, but at a sufficiently high number to be sure that MP3.com and other similar companies are listening."

Ready to Talk

I THINK EVERYONE is getting tired of the constant litigation," said Robin Richards, MP3.com's president, following the court decision against the company. Two weeks later Richards announced that MP3.com had signed a licensing agreement with media giant BMI, allowing the website access to the work of 140,000 artists and composers whom BMI represents.

Even the general in charge of the record industry's assault on the MP3 world, Hilary Rosen, president and CEO of the RIAA, acknowledged that court action is only a stopgap solution.

"As a practical matter going forward, lawsuits get a lot of headlines and they raise a lot of passion," Rosen said. "But ultimately the future of music on the Internet is not going to be about legalities and litigation, it's going to be about how we bring music to fans, what are the new business models that people are adopting and how do you make all the new opportunities win-win."

But those soothing words may not apply to pesky little Napster. RIAA general counsel Cary Sherman told reporters not to expect a record-company alliance with Napster anytime soon. And, after Judge Patel's ruling against Napster on May 5, the RIAA was not holding out any olive branches to Napster.

"This hearing was Napster's attempt to escape responsibility for aiding and abetting widescale piracy and--not surprisingly--they lost," said Rosen, who added ominiously, "Napster just lost its last delaying tactic."

Repeated calls for an interview with Napster's founder, Shawn Fanning, met with no success. The company is keeping its young Dr. Frankenstein under tight wraps. A public relations firm hired by the company contended that Napster "could not make Mr. Fanning available for interviews right now because he is too busy working on a new version of Napster."

But toward the end of May, as the pressure mounted on the fragile little company, Napster Inc. quickly appointed a new chief executive and got some important financial backing. The company closed a $15 million round of venture funding led by noted San Francisco investment firm Hummer Winblad Venture Partners, along with money from Angel Investors LP. And it announced that it now had a former high-ranking member of the opposing forces as its new leader. Hank Barry, a onetime legal counsel for major media companies like Disney Online and A&M Records, is now Napster's CEO.

It's an Arms Race

DESPITE THE TWO RULINGS in the industry's favor, the matter is anything but settled. Like so much that the Internet has unleashed, for good or ill, once one of these genies is let out it cannot be contained again. And so it is with digital music file sharing. Already a clutch of little companies like Napster are rushing similar products into circulation attracted by the now-proven demand for downloadable music. But, like Napster, these new companies that wish to operate in the commercial realm are thereby subject to all the national and international legal pressures that can be brought to bear on them by groups like the RIAA. These upstarts will be annoying to the recording industry and expensive to fight. But that's a game the RIAA has a record of winning.

And what about the "open source" folks? Now they've jumped into the fray and, as history has shown, open source will not be denied. For those unfamiliar with the growing open source movement, it is comprised of programmers and developers around the world--some of the very best--who believe that the best way to produce good and useful software is to make its code free and open. (www.opensource.org)

How can open source be a threat? Ask Bill Gates, who now finds his dominant Windows operating system threatened by Linux, an open-source operating system that many claim is the best OS around. And it's free.

Open-source programmers have their own Napster clones available online. The most popular is called Gnutella. It, along with about a half-dozen other open-source Napster clones, can be downloaded from a website appropriately named "zeropaid.com." And, while Napster required users to connect to Napster's server to get matched up with the music they sought, open-source products like Gnutella do not, meaning that there is no single entity for the RIAA to sue.

Rounding up open-source media-sharing programs built to operate like Napster, only better, will be a losing battle. In fact, the recording industry would be wise to ignore them entirely, because history has shown that open sourcers only work harder when annoyed.

A Middle Ground

THOSE WHO ARE NOT at the extremes of this issue agree that the solution lies somewhere in the middle. "We have already found that middle ground," says Steve Curry of EMusic.com. "We just sold our one-millionth MP3 recording online. When we started this business people told us we were crazy, that we would sell one recording and everyone would just pass it around free and we would go broke."

But EMusic.com did not go broke. Instead, it signed licensing agreements with all the major record labels allowing them to post short, 30-second clips of tunes on the Net and to sell the entire tunes in MP3 format to its users. "We discovered that if you price the music right, allow people choice in what tunes they want, that they will pay for the music and not just steal it."

Those who charge that the music industry has been overcharging for CDs found a powerful supporter in the U.S. Department of Justice, which accused the record companies of colluding to inflate CD prices. On May 10 the Justice Department announced it had reached an agreement with the major labels, an agreement that they say should result in lower CD prices.

Even many recording artists and their managers agree that the recording industry must change. "I think the decisions against Napster and MP3 were correct. But I am not defending the way the recording industry does business," said Gary Falcon of the Falcon Management Agency. Falcon represents a number of successful recording artists. "The industry has to move to a less expensive product. People should be able to buy individual tracks online rather than an entire CD."

Falcon and others agree that once consumers are given an easy, seamless way to surf the Net and grab music files at a price that will discourage piracy and encourage consumption, the whole fight will end right there and then.

What about pirates? There will always be pirates. How many people continue to copy movies despite that big FBI warning message? But now that movies can be rented for as little as a dollar, it's hardly worth the effort. Consequently, the problem of privately pirated videos has all but disappeared.

So, while court battles will continue, the ball is in the court of the SDMI working group. If they can quickly agree on a set of technical standards that can be easily adopted by the online community and that don't further complicate matters, this whole brouhaha will fade into history. But some insiders worry that the recording industry may be too steeped in a brick-and-mortar mentality and will miss this opportunity.

"There are a lot of people in the major-label industry who view downloadable music as a huge threat to how they have done business over the last 40 years," said EMusic.com's Steve Curry. "The reason it is so popular is it is an easier and more efficient way to manage your music collection.

"But what the SDMI is likely to do is put a whole lot of rules and complexity on the music. You might only be able to listen to it three times, for example, before it times out, or you can only transfer it to one other computer. Once you add that kind complexity to the process, does it just become easier to just use a product like Napster and steal it?"

For the time being, the battle between the recording industry and small Internet companies like Napster leaves fans--like the 335,000 Napster users caught in the Metallica sting--caught in the crossfire. For those who want to download free music today, an appropriate choice might be "(I Can't Get No) Satisfaction" (copyright the Rolling Stones).


Not Waiting for Godot

NO ONE GOES INTO this business to tick off the recording industry unnecessarily," attorney Andrew Bridges told the Industry Standard magazine. He should know. Bridges had to defend (successfully) the maker of the Rio portable MP3 player against the Recording Industry Association of America. "On the other hand," Bridges continued, "the recording industry doesn't play fair, and no one can wait for the RIAA's consent or approval in order to develop a business plan."

And they are not waiting. While Napster licks its court-imposed wounds, Napster clones are proliferating.


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From the June 29-July 5, 2000 issue of Metro, Silicon Valley's Weekly Newspaper.

Copyright © 2000 Metro Publishing Inc. Metroactive is affiliated with the Boulevards Network.

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