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Courts set rhythm for online music

Many of the defining moments in the past year's online music world came not in corporate boardrooms or on the byways of the Net, but in the tense confines of the courtroom.

In a crowded San Francisco courtroom last July, Napster chief executive Hank Barry listened in dismay as a judge pronounced sentence on his vision of digital music's future.

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Year in Review: Digital music on trial
It was Napster's trial, but the whole of the online music world was watching. The company had become a guinea pig for just how far the new breed of music start-ups could stretch copyright law and carve a role in distributing music outside the umbrella of the major record labels.

Barry, along with much of the rest of that world, was shocked to hear federal judge Marilyn Hall Patel deliberate for just minutes before pronouncing that Napster had "created a monster" and ordering the company to shut down much of its hugely popular online song-trading service. Even though the decision was quickly put on hold by an appeals court, her words had already served as a turning point in the history of online music.

Many of the defining moments in the past year's online music world came not in corporate boardrooms or on the byways of the Net, but in the tense confines of the courtroom. Almost uniformly, judges ruled against the ambitions of the digital music companies in favor of the powerful record labels.

The series of cases--by no means over--has served to tip the balance of power back to the side of the established record industry, helping to contain some of the digital forces that had threatened to undermine the big labels' fledgling Net efforts. The mere existence of the cases even slowed the pace of innovation and technical progress inside the digital world, some critics say.

But if the industry experienced almost uniform success in the courts, its own online strategy produced far less clarity. The labels' Net forays remained minimal, coming in fits and starts that prompted more confusion and speculation than listener adoption.

Napster "has galvanized those companies into knowing that they have to come up with an Internet strategy," said Jim Penhune, director of media and entertainment strategies at The Yankee Group. "But there's still a lot of uncertainty out there. They know they have to go online, but how they're going to get there is another thing."

Gaining the upper hand
It was just a year ago that the Napster freight train began to pick up speed. The MP3 squabbles of the past, in which the labels fought earlier online companies or relatively low-volume music pirates, suddenly seemed almost petty in contrast.

Meta Group says that although Napster popularized peer-to-peer technology, businesses need to get to know the technology better before they apply it to company networks.

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Napster's peer-to-peer technology, followed quickly by Scour, Gnutella and others, put control of The P2P myth the distribution process into the hands of consumers for the first time. By opening their hard drives to one another, hundreds of thousands of people at a time could create a collective library of music orders larger than anything that had ever appeared online. Even more significantly, access to that library of downloads was free.

The Recording Industry Association of America did recognize the explosive potential of the technology early on, suing Napster last December. But the attention the lawsuit drew, as well as later developments such as hard-rock band Metallica's campaign against Napster members, attracted many more thousands to a registered user list the company now says exceeds 46 million names.

Patel's July decision radically changed the dynamics, however. Her decision was preliminary, in force for only two days, and still could be overturned by an appeals court. But it made clear what the legal stakes were for Napster. The start-up's executives say the ruling made them "more flexible" in striking their landmark deal with industry giant Bertelsmann, which owns label BMG Entertainment.

High notes

January 21

The record industry sues MP3.com, alleging copyright violations.

March 14

America Online's Nullsoft releases a file-swapping program dubbed Gnutella.

April 4

Scour announces the beta launch of Scour Exchange--file-sharing technology that lets people search for and trade video, picture, music and text files.

April 10

AOL shuts down the Gnutella project.

May 1

Rock band Metallica names more than 300,000 Napster members trading its songs. Napster soon begins to ban fans.

June 6

MP3Board.com asks a federal judge to find it did not violate copyright laws, as the record industry contends.

June 13

The RIAA seeks a preliminary injunction against Napster, raising the possibility that the service will be halted.

June 16

David Boies, the Justice Department's special counsel in the Microsoft antitrust case, joins Napster's legal team.

July 20

The RIAA and MPAA sue Scour, alleging copyright infringement.

Bertelsmann agrees to buy online retailer CDNow for $117 million.

July 26

A federal judge orders Napster to halt the trading of copyrighted material.

July 28

A federal appeals court stays the order against Napster pending an appeal of the decision.

CuteMX unplugs its Napster-like service.

September 6

A federal judge finds MP3.com willfully infringed the copyrights of Universal Music Group.

September 18

Pseudo Programs ceases operations and lays off all of its 180 employees.

October 2

An appellate court adjourns without a decision in the Napster case.

October 31

Bertelsmann forms an alliance with Napster to develop a subscription service.

November 15

MP3.com agrees to pay $53.4 million to end its copyright infringement suit with Universal Music Group.

November 16

Scour shuts down its file-swapping service.

November 29

CMGI shuts down iCast.

December 5

MP3.com relaunches My.MP3.com in two forms: paid and free.

December 8

Would-be online label Riffage.com pulls the plug on its services.
"I was really surprised," Barry said. "What happened to all of us was we said we have to take a deep breath and really redouble our efforts to find some compromise."

That near-$50 million deal, in which Bertelsmann won initial rights to a majority ownership interest in Napster, remains one of the industry's biggest wild cards. The two companies are struggling to persuade the rest of the major labels to join their vision of a subscription-based song-swapping service, though details remain hazy. Nonetheless, Bertelsmann's interest in Napster appears to have clipped the fangs of the industry's biggest threat.

Court: Shut down Napster A series of other lawsuits have enclosed the online music industry in further legal straitjackets. MP3.com's ambitions to create a convenient online music-storage system brought it into the industry's crosshairs in January. In that case, a judge ruled that MP3.com was in the wrong and put the online stalwart on the hook for tens of millions of dollars in damages and settlement fees.

The RIAA also took the lead in suing the now-defunct Scour, another popular file-trading service that allowed access to movies and images, and MP3Board.com, a Web music search and download site.

RIAA chief executive Hilary Rosen said it was "unfortunate" that so much of the group's work was focused in the courts this year, adding that the drive has been productive.

"I believe we've made some important progress this past year in raising awareness of intellectual property issues," Rosen said an email interview, reiterating her contention that it was business models, not technology, that prompted the action. "It's important to understand that the threat is not from technology, but rather from those who take advantage of it to circumvent the law."

But the anarchic spirit that has continually improved ways to find and trade music freely online hasn't disappeared, even if Napster has made common cause with the industry and Scour has gone out of business. Gnutella, Aimster, Freenet and other file-swapping services remain and appear unlikely to disappear soon.

"It's clear (there is) a very strong demand by consumers to access music in the way that Napster and Scour allowed," said Rob Reid, chief executive of music directory Listen.com. "This genie is out of the bottle. There will be ways for consumers to access music in non-legitimate ways."

Spinning wheels, not records
Although the lawsuits have helped lay a legal foundation for the online music industry--one that lacks a few critical building blocks--many say the court battles have slowed technical and business progress on the Net.

"The lawsuits have had a profoundly chilling effect on the online music space," said a discouraged John Parres, once the digital music adviser to Hollywood power broker Michael Ovitz and most recently an executive at AudioTrack, a watermarking and song-identification venture. "There is no innovation going on at all."

At least some of the slowdown, however, must be attributed to a still relatively small market. Online music downloads and even streaming services are difficult to use unless a consumer has a high-speed Net connection. Although such connections did become more common this year, there are still only a few million homes in the United States with cable modem or high-speed digital subscriber line (DSL) Net service.

Other complementary hardware, however, such as MP3 players and rewritable CD drives--perfect for storing massive quantities of music files--started to make significant dents in the market. Hewlett-Packard and EMusic ran what may be the first of many such promotions midsummer, offering two months of unlimited access to the music company's files for anyone purchasing a CD-R (compact disc recordable) drive.

A host of new companies sprang into being during the past year, offering music lockers, Net radio see story: Gnutella: From file-swapping to Web searching services, or new ways of finding and categorizing music online. A cottage industry has sprung up to create ways of protecting digital music against unauthorized copying, even while the industry-supported Secure Digital Music Initiative (SDMI) proceeds slowly, marred by infighting and external skepticism.

None of the year's crop of digital companies has risen to the level of public consciousness as a Napster, Scour or MP3.com, however. A first wave of them is now going out of business as funding dries up across the technology industry.

The major labels have begun partnering selectively with some of these companies. Each of the Big Five labels has agreed to allow Musicbank to provide authorized music locker services, in which the start-up will provide online storage space for consumers' CD collections.

Several of the labels have announced their own tentative digital download and sales programs. Pricing for these remains high and inconsistent, however, with an extremely limited selection of tracks available.

Universal Music Group has gone the furthest in creating a trial subscription service, making a Napster wildfire wide range of songs available to consumers though its subsidiary Jimmy and Doug's Farmclub.com. But the label was promptly sued by a group of music publishers, who charged that it was taking the same liberties with copyright law that MP3.com and Napster allegedly had.

The sum total of these tentative forays online is still small. The Bertelsmann deal with Napster looms over the industry as a vaguely defined potential powerhouse, and few of the others have proven to be successful.

Even companies that are willing to work with the major labels attribute some of this to continuing intransigence on the labels' part. Faced with declining funding, a difficult market and stiff competition, online companies are increasingly willing to compromise. But the labels have to bend a little more as well, critics say.

"If a legitimate model doesn't develop here, it is going to be partly because the labels have been almost as aggressive with the legitimate firms as with those in the gray area--even almost as hostile," Listen.com's Reid said. "For these deals to be viable, there has to be a way for both companies to make money."