Bertelsmann Breaks Ranks, Climbs in Bed with Napster

At least one media conglomerate has seen the light. In a surprise move, German giant Bertelsmann AG broke ranks with the music industry and settled its copyright-infringement lawsuit with embattled Napster, in effect becoming the startup's tentative partner. The deal, reached on October 31, could mark the real beginning of the music industry's move into the Internet age. Bertelsmann is the parent organization of Bertelsmann Music Group (BMG), one of the world's major music labels, as well as online music retailer CDnow.

Although other major labels (Sony Music Entertainment, Universal Music Group, Warner and EMI) will continue their crusade against Napster, Bertelsmann will drop its suit against the Redwood City, CA based music file-sharing service and instead loan Napster money to develop a subscription service that will insure payments for artists. Bertelsmann will make its huge catalog available to the service and may invest directly in Napster. The former adversaries will cooperate to develop copyright-secure music downloading technologies, spokesmen for both sides stated.

Attaching a monetary value to music downloaded via Napster is at best a guessing game, because no one seems to be certain how many people have actually used the service. The free publicity Napster garnered during the past year's legal wrangles helped boost the site's traffic from only about one million users last February to approximately eight million users as of August, according to a chart published in the November 1 issue of the Wall Street Journal. According to Web research firm Media Metrix, Napster has more than 6.7 million regular users. Napster officials claim an audience of 38 million, according to Brian Steinberg of Dow Jones Newswires.

Bertelsmann's decision appears to be the result of two realizations by top management: 1) that Internet distribution of music is inevitable, and 2) that it will be cheaper and easier to buy into an existing Internet music service than to develop one from the ground up. "Napster has pointed the way for a new direction for music distribution, and we believe it will form the basis of important and exciting new business models for the future of the music industry," said Bertlesmann chairman Thomas Middelhoff.

Bertelsmann's move to embrace the Internet's most controversial music service won't have any immediate effect on Gnutella, Freenet, or any other free online music sharing systems. Although Napster is a "peer-to-peer" file-sharing system, it relies on central server computers to tie the system together. Gnutella and Freenet have no such requirement, making them much more difficult for the music industry to fight. What effect the settlement may have on the outcome of other lawsuits in progress wasn't clear a few days after the settlement was announced. Bertelsmann and Napster did issue a joint statement seeking "support from others in the music industry to establish Napster as a widely accepted membership-based service and inviting them to participate actively in this process." Bertelsmann has urged other music labels to call off the litigation and to join its alliance with Napster.