Napster to Charge Fee for Music Rights
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NAPSTER TO CHARGE FEE FOR MUSIC RIGHTS
By Matt Richtel and David D. Kirkpatrick
November 1, 2000
Napster a start-up that has terrified the recording industry by letting its
users copy music from each other free over the Internet, agreed yesterday to
a plan to change course and charge a fee for its service, distributing part
of the fee as royalties to record companies.
The plan would be financed partly by one of the companies that tried to shut
it down the German media giant Bertelsmann, which lent Napster an
undisclosed sum to help change the service and received an option to buy a
stake in the company in return.
BMG, a Bertelsmann subsidiary, along with the other four major record
companies, sued Napster in December, accusing the service of abetting
copyright infringement. The companies are still fighting Napster in court.
But Bertelsmann said it would drop its suit once the new service was in
place and was now seeking to persuade fellow record companies to follow its
The agreement promises to change Napster from a freewheeling Internet
phenomenon with 38 million users that has not generated a profit, into a
viable business. Napster, started in 1999 by an 18-year-old college student,
enables users to exchange music files stored on their computers, a practice
that some artists and the music labels have called wholesale copyright
infringement because they are not compensated.
But the deal announced yesterday signaled substantial compromise by each
party, with Napster announcing it would begin paying record companies. For
their part, Bertelsmann executives said they concluded it was unwise to
fight the underlying file-sharing technology of Napster and the clear
demand it has created on the Internet.
"This is a call for the industry to wake up," said Thomas Middelhoff,
chairman and chief executive of Bertelsmann. "It is not enough to fight file
sharing in the courtroom." He added that the industry should reassess its
objection to file sharing, given the business opportunity at stake and the
38 million users "They can't all be criminals."
At a press conference in New York announcing the deal, Mr. Middelhoff and
Shawn Fanning, the founder of Napster, embraced, a move seemingly
unthinkable a few months ago given the harsh rhetoric and hostilities
between the parties. Mr. Fanning then gave Mr. Middelhoff and Andreas
Schmidt, president and chief executive of the Bertelsmann eCommerce Group, a
Napster T- shirt.
Mr. Middelhoff, whose company is a major publisher of books and magazines as
well as music, said he expected to see business models based on file sharing
to expand to other media.
But exactly how the new Napster business model will work is unclear,
industry analysts said. Officials from Bertelsmann and Napster were vague on
details of the proposal, citing their negotiations with other music
companies. It remains unclear, for instance, when they would begin a
service, how revenue would be shared, whether users accustomed to exchanging
files freely would agree to pay for the experience, and what the exact price
would be. Other services like Gnutella and Freenet still offer file sharing
Hank Barry, chief executive of Napster, has suggested a monthly fee of about
$4.95 might be appropriate, but he stressed that fees had not been set.
He said Napster would maintain a free, promotional component, but he was
vague on how the free service might differ from the membership service.
But others at the companies said that one plan under discussion included
adding new technology that would impose a time limit on downloaded
recordings. Users who are not members might be able to download digitized
recordings with a feature that causes them to lose their utility after a
certain period. Members who pay a monthly fee would be able to download
files permanently. Members might also have access to other perquisites, like
exclusive recordings from some artists or a chance to pay for a higher
quality download suitable for storing on their own compact disks.
Also facing Napster is the fundamental question of whether it can build the
technology to track how many files and what songs people exchange. Under the
agreement, Napster said it would compensate Bertelsmann, and other record
labels based on the number of their songs exchanged on the service.
However, in the ongoing lawsuit, Napster has claimed to the court that it
does not have the technology to monitor the exchange of individual songs by
"The technology is under development," Mr. Barry said. "Good people have
turned their attention to it. Whether they'll succeed or not, we don't
In July, a federal judge granted the recording industry's request for a
preliminary injunction to shut down Napster, with the judge finding Napster
guilty of contributing to "wholesale copyright infringement." An appeals
court two days later stayed the injunction. Last month, an appeals panel
heard arguments about whether to reinstate the injunction pending trial and
is expected to issued a ruling within several weeks.
Hilary Rosen, president of the Recording Industry Association of America,
which is representing the major record labels in the lawsuit, said
Bertelsmann's deal should not be seen as the company breaking with its
fellow major record labels. Rather, she said the deal was consistent with
the industry's ongoing position that labels should be compensated for the
exchange of music for which they hold the copyrights.
Ms. Rosen said the deal indicated hypocrisy on the part of Napster for
arguing in court that it did not need to obtain licenses from copyright
holders, but then signing a deal to obtain those licenses.
"Napster's going to have to tell their users, `It's not free anymore. Guess
what? We're selling too,' " she said.
Napster said that agreeing to start compensating record companies was not an
admission that it was guilty of contributory copyright infringement. In
fact, Napster said the deal announced yesterday was evidence its technology
has legitimate uses, an argument it perceives as central to it winning the
lawsuit. "This is further confirmation of the things we're arguing," said
David Boies, lawyer for Napster.
Mr. Schmidt, the head of Bertelsmann's e-commerce arm, said the company,
along with Napster, had already started urging other companies to join in
"The industry has not embraced the usage of file sharing we, together with
Napster, are going to change all that," he said, asserting his company
should be crediting with taking the lead. "Somebody had to step up to the
plate and take the leadership position."
For Bertelsmann, the investment in Napster provides a missing piece in its
business strategy, an expanded online outlet for digital versions of its
books, music and magazines.
Bertelsmann, one of the biggest media companies in the world, owns the BMG
Entertainment music club and recording company as well as the book publisher
Random House, book clubs in the United States and Europe, the magazine
company Gruner & Jahr, the online retailers Bol.com and CDNow.com and a 40
percent stake in Barnesandnoble.com.
Bertelsmann became an early investor in America Online in 1994, but decided
to sell its stake after America Online agreed to acquire the rival media
giant Time Warner.
Mr. Middelhoff compared Napster's online community with America Online's.
"AOL was in the beginning e-mail, Napster is in the beginning file sharing,"
For now, the other major record companies involved in the lawsuit, Time
Warner, Sony, Universal Music Group and EMI, said they would pursue the
lawsuit. "We welcome any development which could lead to Napster creating a
legitimate service that respects artists' rights and copyright law," a
spokesman for Sony said in a statement. "However, this alliance does nothing
to address the millions of past acts of copyright infringement by Napster,
or those being committed by the company on an ongoing basis."
Michael B. Nathanson, a media analyst with Sanford Bernstein & Company, said
it seemed odd for Bertelsmann to make a deal with Napster while it still has
a chance to win a lawsuit that could effectively put Napster out of
business. But he said one possible explanation was that the media
conglomerate was trying to hedge its bet in the event that Napster won the
Eric Scheirer, an analyst with Forrester Research in Cambridge, Mass.,
concurred. "Either it wins the lawsuit and succeeds in shutting down
Napster, or Napster wins and Bertelsmann is the first out the door with a
deal," he said. He added that Bertelsmann had rightly come to embrace the
idea of file sharing.
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