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A Crushing Defeat For Napster
By Laura Rich - The Industry Standard

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 MP3-swapping 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.

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."

The RIAA's Rosen says the labels haven't worked together because of antitrust concerns: "While consumers don't care, the Justice Department frowns on too much collective action in those regards."

To avoid a similar predicament, other media businesses are paying close attention to the recording industry's struggle. Book publishers, for instance, have been trying to get ahead of the curve on encryption systems.

"Copyright infringement has always been an issue in the book business," says Steve Cohen, a senior VP at St. Martin's Press and its e-book guru. "The Napster thing heightened our awareness of the risks of not having protection. We were not going to make the same mistakes. If the music business had been able to encrypt a CD the way the publishing industry encrypts books, they wouldn't have this problem."

The movie industry similarly has sought to distance itself from the problems of the music business, pointing to its own efforts to link up with digital rights management companies. But in fact, it is following the labels' scattershot approach as each studio sets up a proprietary system for delivering films to consumers. The Motion Picture Association of America, meanwhile, is fighting its own legal battle against what it views as piracy.

The truth is that traditional media companies haven't felt Napster's bite: They're still raking in the dough. Music is a $40 billion industry, movies raked in $8 billion from the box office alone (with $8 billion more from video rentals and $2 billion on the fledgling DVD market) and books made $20 billion.

It's not surprising that established, highly profitable industries would be reluctant to alter their established businesses until they end up in dire straits.

But the RIAA's strategy is puzzling in that it's not at all clear that Napster poses a threat to sales of recorded music. The data so far is inconsistent. In May, a study from music-industry research firm SoundScan reported that sales of CDs were down in stores near colleges and blamed Napster for the dip. But Napster pointed the finger at chains like Wal-Mart for eating into those sales. Last month, Internet-industry research firm Jupiter Communications found that Napster users are 45 percent more likely to purchase music not because they are music aficionados, but because digital music-swapping itself is a catalyst for sales.

But the copyright-infringement issue remains and Napster can't ignore that. In a statement released after his court victory, RIAA senior VP and general counsel Cary Sherman said: "We hope [Napster] will work with the record companies to devise innovative ways to use their technology for legitimate purposes with permission."

Napster seems willing to try. At the Plug In conference in New York the day after the hearing last week, Napster CEO Hank Barry said the company thought artists should be compensated. Last week, Napster entered into a relationship with Liquid Audio, which like Napster has received an investment from Hummer Winblad, to research and develop technology that would allow Napster to track user activity. That would make the service somewhat more palatable to the recording industry, which could then chase down individual copyright infringers and demand payment.

Napster's moves highlight the emerging role of digital rights management firms, which say they offer the best solution to piracy. Demand for their services only climbs as the Napster battle heats up. So far, they're the only clear winners.




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