"I am fully convinced that we are doing the right thing."
—Thomas Middlehoff, Bertelsmann Chairman


Bertelsmann’s Pact With Napster Fires Broadside Across Digital Space

by Simon Glickman and Marc Pollack

You know it's going to be historic when the Germans roll in and take over, praising their own "courageous and visionary" action and—get this—"boundless will."

Amid such self-congratulation, Bertelsmann's BeCG e-commerce division pacted on Tuesday (10/31) with Napster, swearing to help the legally imperiled but massively popular MP3-sharing service go legit. And, in doing so, Bertelsmann has drawn new battle lines in the ongoing conflict surrounding music and the Internet.

In a blitzkrieg move—revealed in large part in last week's HITS—Bertelsmann sent shockwaves through the online and music industries with the announcement of its "strategic alliance" with Napster.

Pledging to drop its part of the record-biz lawsuit against the netco, Bertelsmann has also put forth a loan to aid Napster in its current legal predicament and will take a very tasty chunk of equity in return. An announcement proclaims the two companies' intentions to develop, in conjunction with the swappery—which allegedly boasts more than 38 million devotees, with some 200,000 new users added daily—"a new business model for a secure, membership-based service" that compensates rights holders.

Once this new service debuts, BMG will withdraw its lawsuit and make its music available via Napster.

In doing so, Bertie—which, as parent of BMG, controls some of the music world's hottest material—has also thrown down the gauntlet to other record companies. While the other majors have, in varying combinations, begun to offer music online in subscription form (after a protracted and unprofitable adventure in selling discrete downloads), they will have an uphill battle branding any service online the way Napster has—without benefit of advertising or marketing expenditures.

However, Bertelsmann's deal with Napster may provoke such animosity among BMG's competitors that an alliance between UMG, Sony and WMG/AOL could arise.

But given that the industry status quo depends on inter-label cooperation for licensing and other agreements, some sort of peace agreement would seem imperative before a full-scale war erupts.

Meanwhile, Bertelsmann has issued a challenge to its media rivals, and Chairman Thomas Middelhoff's description of the deal as "courageous and visionary" (as part of his letter to employees) may, in hindsight, be hard to dispute. "Bertelsmann will no doubt be commended" for the deal, Middelhoff wrote, "but also criticized, and we have to be prepared for that. I am fully convinced that we are doing the right thing."

While Middelhoff rallied his troops, however, the rest of the industry was retreating, for the time being, to the bunker.

A statement by RIAA chieftain Hilary Rosen called Tuesday's news "a welcome development," but confirmed that until the new, compensation-based system was in place, the RIAA's lawsuit against Napster would proceed.

Furthermore, comments by insiders at rival music groups indicated that, if anything, Bertelsmann's move was perceived as a betrayal of the united front the majors had maintained against Napster. Indeed, these insiders were perceptibly furious at the news and stated that their companies' litigious stance would not be altered.

Some who have glimpsed the offer ultimately accepted by Bertelsmann have expressed doubt as to the viability of Napster's business model.

But the netco and its new partner remain upbeat. During a teleconference, Napster chief Hank Barry called Tuesday "a very exciting day" and—in response to queries about the likelihood of similar pacts with other majors—noted, "We think everyone will be involved, and we're making and answering as many phone calls as we can." Barry confirmed that other majors cutting similar deals would also receive equity in Napster.

While no dollar figure has yet been made public, observers agree it must be a sum capable of covering Napster's potentially gargantuan legal obligations, as well as the value of any equity offered and future licensing deals.

Barry, who acknowledged HITS "got pretty close" in its previous coverage of discussions with Bertelsmann, pointed to what he considered the fundamental issue: "People say they're willing to pay, they want artists to be compensated and that's what drives us…to have this agreement today." Though he's maintained in his court testimony that Napster breaks no laws, Barry focused on reaching common ground with rights holders over legalities.

Barry, joined in the conference by Bertelsmann eCommerce Group (BeCG) CEO Andreas Schmidt, offered a slightly different take on the planned alliance than that presented in the official release. Largely resisting attempts by journalists to get hard details—on the grounds that deals with other companies couldn't be "negotiated in public"—the two nonetheless confirmed that the compensation-based version would be largely the same one users know now. "The Napster service is going to be the Napster service," Barry insisted, adding, "We're not talking about some big server in the sky."

While downplaying the issue of security, which Barry acknowledged is a thorny one, the Napster and Hummer Winblad CEO deferred to future "technology development" that will presumably allow tracking of song use as a means to properly compensate artists, publishers and other rights-holders.

What the two lacked in specifics, they more than made up for in sheer optimism.

"I'm extremely positive" about the prospects for further alliances, Schmidt maintained. Barry underscored that the proposed new version would not be just a Bertelsmann service. "We're gonna go out there and involve everyone," he repeated.

Bertelsmann operatives maintained a united front. "We believe that the agreement between BeCG and Napster will lead to the opportunity for BMG to reach a vast number of music fans and build new audiences for our music," said BMG President/CEO Strauss Zelnick. "We are confident that Bertelsmann's forward-thinking approach will enable the new Napster membership-based file-sharing service to become an important community for artists, record companies and consumers."

Kevin Conroy, Chief Marketing Officer and President, New Technology, BMG Entertainment, who not long ago attacked Napster for not offering a viable business model (hitsdailydouble.com, 10/3), struck a quite different note Tuesday. "Napster's unique community of users represents a tremendous opportunity for BMG to bring our artists closer to their fans as well as to reach new audiences," Conroy declared in an official release. "As a result of this agreement, Napster and BMG will work together in an effort to hopefully gain the support of other companies for a new membership-based business model that properly compensates our artists."

Of course, participants in the deal weren't the only ones who shot out mountains of paper.

In a terse statement, the EMI Group said, "EMI is supportive of initiatives that allow legal file-sharing which respects the rights of artists, record companies and other rights owners."

Sony, on the other hand, took a somewhat more contentious position. "We welcome any development, which could lead to Napster creating a legitimate service which respects artists' rights and copyright law," read its 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."

Artists Against Piracy's statement took a kindred tone. "It is a very encouraging sign that Napster is actively pursuing a business model that will seek to provide payment to rights holders," reads a comment attributed to Executive Director Noah Stone. "However, Artists Against Piracy will actively continue its efforts to work directly with the record labels and digital media companies to ensure fair and appropriate compensation for artists and songwriters."

Other players in the digital space expressed a bit more hope. "My take is it's a fantastic development for MP3.com," mused that company's chieftain, Michael Robertson, "because it shows the value of technology and infrastructure to the music industry. While it's not entirely clear what the end product will be from this partnership, it sounds like they intend to build a centralized music subscription system—which is something that took us more than two years to build and deploy."

"Right now, we're a little light on specifics," averred DreamWorks New Media guy Jed Simon, "but the notion of legitimate file-sharing via label-endorsed exploitation of Napster's user base is a positive one. I guess the current question is, How much will they have to give up to the other labels and publishers in the form of equity, royalties and advances in order to offer the level of choice that Napster users are accustomed to?"
Speaking of Napster users, a few of the netco's millions were openly hostile on the site's bulletin board. "You have finally sold your soul to the devil," reads one note to founder Shawn Fanning. "A pox on you, boy!" Fulminated another: "I am willing to pay a subscription fee, but if Napster asks me to pay per download, I will delete it from my hard drive and go back to trading mix tapes with my friends. I know how expensive paying per download could get--even if the fee is really low. And the subscription fee better be low."

Still others found themselves puzzled by the announced pact. "I don't know what to make of it," confessed music attorney Whitney Broussard. "No one said what will change and what will stay the same. I can imagine really great results and really boring results, but there isn't enough information to tell which way it's headed. When they discuss the creation of a ‘legitimate' service, is that Napster's definition of legitimate, BeCG's or the Court of Appeals'? To me, the announcement raised many more questions than it answered."

But what questions! Will this alliance launch a lengthy and bitter war over online distribution? Or is it a blueprint for a lasting peace? Will the pending decision from the Court of Appeals in the Napster trial alter the contours of the arrangement? Will consumers face a bewildering array of competing digital services, or will the majors find a way to get all their content in one online location?

Meanwhile, the deal received a glowing endorsement from Senator Orrin Hatch (R-UT), chairman of the Senate Judiciary Committee: "Far from causing irreparable harm to the music industry, the technology unleashed by Shawn Fanning is revolutionizing the industry. I commend Bertelsmann for its vision and encourage others in the music industry to welcome and engage this alliance."

No matter how this one shakes down, keep checking hitsdailydouble.com for up-to-the-minute details.

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