The ruling could shutter Napster within weeks and turn 62 million online-music fans into digital refugees. While the Redwood City, Calif., startup still hopes to strike deals with the record labels, maybe by exhanging equity in the company for licenses to broker the labels’ music, the odds of negotiating a path out of its legal quagmire appear long. Six months ago district court Judge Marilyn Hall Patel ruled that the service blatantly violated copyright laws by allowing users to download songs for free off each other’s hard drives. When the appellate court finally agreed with her last week, it returned the injunction to Patel for final wording–and the result could be a ruling that’s impossible for Napster to comply with. The company could also owe billions of dollars in damages to the record labels. Although CEO Hank Barry doesn’t sound optimistic–“There’s a good possibility the service will not survive,” he says–there are several scenarios in which Napster gets an eleventh-hour reprieve. NEWSWEEK has learned, for instance, that Patel has appointed a mediator in an attempt to get the two sides to reach a settlement, which may be Napster’s best chance for survival.
Though not necessarily in a form that Napster diehards, particularly the college students who have developed healthy appetites for free downloads, will appreciate. The demise of Napster’s free service has been inevitable at least since October, when Bertelsmann CEO Thomas Middelhoff loaned the company $50 million to develop technology and a business model that would support a “new Napster” palatable to the music labels. Ever since, Barry and Bertelsmann e-Commerce Group CEO Andreas Schmidt have been talking to execs at the fellow media conglomerates that own record companies, proposing a subscription plan that would charge users monthly fees for the right to download as much music as they want. But there have been no major deals yet, and publicly, at least, the recording industry continues to wage war against Napster. The company is “not ready with the technology that would actually implement a legitimate, authorized system,” says Hilary Rosen, CEO of the Recording Industry Association of America.
Barry and Schmidt express mounting frustration at such public barbs. As a result, they have begun to make public details of the new service. Late last week they announced that the new Napster will work with a Bertelsmann subsidiary, Digital World Services, to attach so-called digital-rights management technology to Napster software and each MP3 file on the network. Each time a file changes hands, Schmidt explains, the software encrypts it and keeps track of it for billing purposes. Napster will then invisibly query users’ PCs every week or month to see how many songs they’ve traded. Details are still being worked out, but the idea is that users pay different monthly fees for different levels of access, like the privilege to burn songs onto CDs.
For Napster to get the chance to implement such a plan, the record labels will have to change their minds about pressing ahead on the legal front. The music companies are expected to hang tough, but several factors could still persuade them to come around. Last week Utah Sen. Orrin Hatch, chairman of the Judiciary Committee, said, “The major record companies have been unable to satisfy” the demand Napster is meeting, and pledged to hold hearings on the dispute. He and Sen. Patrick Leahy of Vermont have long wanted the labels to license their music more aggressively to innovative dot-coms. The subtext of these comments: start talking to Napster and companies like it, or we’ll start talking about unpopular legislation like “compulsory licenses,” which would force record companies into selling the rights to any music dot-com that wants to broker their tunes, from file-swapping services to streaming sites like Launch.com. Napster is fanning these flames by urging its users to write Congress; 115,000 did so last week, the service says.
There’s also a chance the labels will come around by themselves. If Napster dies, users will migrate to more decentralized, rogue services like Gnutella and Freenet, which are essentially just software protocols with no corporate parents running them–and thus no one to sue. And new pirate sites pop up on the Net every day. Swaptor.com, for instance, based in the West Indies, not only lets users trade music. It also helpfully features links to offshore-gambling Web sites.
The final hope for Napster is that the music companies want to avoid the public-relations debacle that would result if they closed the service for good and thus alienated 62 million users, many of them their CD-buying customers. Eric Scheirer, an analyst at Forrester Research, says, “Shutting down Napster and blowing up its audience would be a huge mistake.” Judge Patel may also believe that the parties would do themselves more good in the boardroom than the courtroom. She has appointed a mediator, former federal judge Eugene Lynch, 69, to try to bridge the sides’ differences. The feuding parties have met once with him and have another meeting scheduled. “I think they should all work out something,” Patel said publicly last week before an unrelated case. “There’s no such thing as a free lunch, but sometimes lunch is more expensive than it should be.” It’s a Zen riddle–but also evidence that there are more folks than just 62 million free-music fans rooting for a safe landing for Napster.
