Monday's legal ruling against Napster has once again raised the specter of a court-ordered shutdown, adding new momentum to a direction the music-swapping service was already headed--away from an unpaid and largely unsupervised network to a paid version offering licensed content. It's a risky strategy that could prove just as fatal as a well-placed lawsuit.
"The best-case scenario for Napster is to find mutually agreeable terms to settle with the labels as soon as possible," said Aram Sinnreich, an analyst at Jupiter Research. "There's no question that a legal version of Napster is possible; the problem is, the devil's in the details."
Since Napster signed up its first few million members, the idea of creating a paid version of the service has bewitched, bothered and bewildered nearly everyone in the online music business. Record companies, online music companies and media goliaths alike are drooling at the idea of creating a network that offers the same access to music downloads--and charging for it.
Most analysts say creating a subscription service is the most plausible scenario for Napster, although it poses significant problems, such as gaining the cooperation of hostile record labels, convincing members to shell out for the service, establishing royalty tracking and payment schemes, and ensuring that content purchased via subscription doesn't leak out onto the wider Web.
"There's no model I can think of that's an all-you-can-eat model for downloads," said one record industry executive who spoke under the condition of anonymity. "The numbers don't work in a download model."
On Monday, Napster's problems worsened. The 9th U.S. Circuit Court of Appeals in San Francisco ruled that a previous injunction by a district court, temporarily stayed, needed to be reworked. The appellate court essentially agreed that Napster had to block the swapping of music files but not in the broader sense sought by the district court.
If the district court sticks with its original decision that Napster has willfully infringed the record industry's copyrights, creating a subscription service will be a difficult--if not impossible--task.
Up to the challenge?
Napster has promised the music industry that it will adjust its service to charge people a fee that will eventually become shared revenue with the record labels. Its promises were set in stone last October when German media giant Bertelsmann struck a deal to acquire a controlling stake in the file-swapping company; that deal hinges on the creation of a paid subscription service.
Bertelsmann executives declared they would seek industry cooperation to create a version of Napster that satisfies copyright concerns--a goal that has yet to be fulfilled. Nonetheless, Bertelsmann Chief Executive Thomas Middelhoff has said Napster will launch a subscription version by June or July. So far, other recording leaders say they have not seen a proposal that meets their needs.
Record labels, online music companies and Internet powerhouses such as AOL Time Warner agree that creating a subscription service where people can listen to any song ever recorded is a potentially lucrative opportunity. This mythical "celestial jukebox" looks easy on paper. In reality, it has become so complex--involving copyright entanglements and technology headaches--that many efforts are still at square one.
Smaller-scale offerings have materialized, such as EMusic, which has more than 150,000 songs from independent labels available for download for a monthly fee. That's not to say it was easy. EMusic Chairman Robert Kohn said that convincing the independents to agree involved nearly two years of negotiations with small labels and accompanying publishers to secure the rights for distribution. So far, the major record labels have not budged in offering others licenses to download songs from their coveted catalogs.
"I don't think Napster has begun thinking about these issues," Kohn said.
Some online music companies have thought about such complications, but free services such as Napster dashed any hopes of attracting Web surfers.
"We believe that the future of music distribution on the Internet will have a subscription fee attached to it," Craig Hamilton, CEO of peer-to-peer streamed music service iNoize, wrote in an e-mail interview. "The presence of Napster made it impossible to roll out such services."
Looking ahead, the legal limitations that Napster could face could bump it from the top of the online music charts.
According to Kohn, if the company is found guilty of copyright infringement, it will have a difficult time securing publishing rights. Kohn cited a section of the U.S. copyright law known as the compulsory license statute. The statute says that music publishers have the right to refuse licenses of their works if the music seller has infringed its copyrights.
"I think this decision was a train wreck (for Napster), and I don't think there's any putting it back together again," said Kohn, whose own for-fee service has struggled to make inroads in the market against the Napster juggernaut.
From a technology standpoint, getting past the legal issues is a hurdle, but coming up with the right technical structure could be just as daunting. Napster and Bertelsmann have kept quiet about the progress of a paid Napster. Questions persist about how song files would be secured to prevent unwanted distribution and especially how Napster will create a system that can pay artists, record labels and publishers.
"You don't just walk into your garage in one weekend and make one of these things," said Chris Gladwin, CEO of FullAudio, which has developed its own subscription service. "We've been working on this for two years."
All of these issues involve a lot of technical reworking. Napster lets its members swap songs with each other, requiring them to allow others to search their hard drives for songs. Creating a system to secure these downloads is inherently difficult because no single server controls who can access the songs.
Although the major record companies universally hailed the appellate ruling, shutting down Napster may not solve the problem. Bertelsmann's investment in Napster was firmly an attempt to maintain the swapping service by bringing in the labels to participate. Already, Napster remains head and shoulders the most popular music service on the Web.
Killing it could be a step back for many record companies hungry to figure out how to place their songs legally on the Internet.
"It's somewhat unfortunate that once (U.S. District Judge Marilyn Hall Patel) retools her injunction, Napster will likely be shut down before it has an opportunity to migrate millions of users from the free, illegal service to the paid, legitimate one," Larry Miller, president of Reciprocal Entertainment, which creates secure download technology, said in a statement. Consumers are then likely to turn to other illegal services, which might set the industry back further.