Napster gains another powerful ally
Bertelsmann taps Joel Klein to head its U.S. operations, marking the second key figure from the Microsoft antitrust trial to step into the legally precarious world of peer-to-peer file swapping.
Joel Klein, the former antitrust chief for the Justice Department, on Wednesday was named chairman and chief executive of the U.S. division of German media giant Bertelsmann. In his new job, Klein will help Bertelsmann fulfill its plans for keeping Napster the leader of music sharing on the Internet as it prepares to unveil a subscription service.
The appointment reunites Klein with his former Microsoft antitrust teammate David Boies, who was tapped by Napster in June to defend the company against copyright infringement charges by the major record labels. Klein led the U.S. government's landmark antitrust case against Microsoft until he resigned from the Justice Department last September. Boies was the department's special counsel in the case.
Analysts say the move shows Bertelsmann is serious about growing its music services on the Internet, and wishes to head off any potential legal problems that could result, either in matters related to antitrust or copyright violations.
"I think part of it might be a defensive strategy to not trigger any red flags," said Aram Sinnreich, a media analyst with Jupiter Communications. "There's a lot of consolidation going on in the music industry, and I think they would like to have guys on board that can know how far they can push their luck without pushing them into a hole.
"I also think it's a signal to the rest of the world that they're ready to negotiate content deals and distribution deals, and that they take intellectual property seriously," he added.
Bertelsmann executives did not hesitate to admit that Klein's former experience was a major factor in hiring him.
"We look forward to drawing on his expertise in a wide range of legal and regulatory areas," Bertelsmann Chief Executive Thomas Middelhoff said in a statement. "Joel has also demonstrated a truly impressive wealth and breadth of knowledge about technology, and broad expertise in Internet and technology-driven businesses."
The division Klein is heading is the corporate-services arm of the German-based parent company, dealing primarily with U.S. taxes, government affairs, legal issues and corporate benefits.
Klein's appointment comes just a few months after Bertelsmann's surprising step to take a minority stake in Napster, the company whose software for swapping music files has created a legal firestorm over music distribution and copyright protection on the Internet.
Since then, Bertelsmann has actively sought to bring the other major record labels on board--a step seen as crucial to the success of Napster's expected subscription-based service. Bertelsmann has also brought already existing partners into its orbit, including CDNow, which has a link on the Napster interface.
Analysts said the partnerships could lead to antitrust concerns, making Klein a powerful ally.
"Bertelsmann likes to own every link in the distribution chain," said Sinnreich. "And not only are they always going to be riding the antitrust lines individually, but when the major labels act in tandem as well."
Such charges have already been raised. In his recent defense of Napster against the major labels--including Bertelsmann--Boies contended that the music companies had violated antitrust laws in their refusal to license music to new online music distribution channels.
A federal appeals court is still reviewing the decision of a trial court judge to block trades of most copyrighted music using Napster's software. A ruling on the matter could come any day. Bertelsmann remains a plaintiff but has said it will drop its lawsuit once the combined subscription service successfully launches.
Klein also joins Bertelsmann as the media giant faces off against AOL Time Warner, which is expected to create a rival Net subscription music service. Management choices are seen as key in this competition. AOL Time Warner recently hired BMG layoff Kevin Conroy to head its newly created AOL Music unit.
In his new position with Bertelsmann, Klein will oversee corporate functions in the United States. He will also advise the company on legal and governmental issues, working closely with executives heading the company's operations in the United States, and he will advise Middelhoff on acquisitions and e-commerce initiatives.