News

In October 2000, during Napster's prolonged courtroom agony, Bertelsmann AG alienated fellow music industry plaintiffs by investing $50 million in a strategic partnership with the file-sharing upstart. At the time, Bertelsmann hoped to leverage Napster's technical expertise and fame to give Bertelsmann Music Group the inside track with Internet music distribution.

That strategy may now be backfiring in Bertelsmann's face. Napster is gone and forgotten, and the German media conglomerate is defending itself in a $17 billion copyright infringement suit brought by a group of songwriters and music publishers. On Wednesday, February 19, a class-action suit was filed in US District Court of New York on behalf of music publishers Peer International Corporation and others represented by the Harry Fox Agency. The suit charges that Bertelsmann's investment in Napster kept the file-sharing service alive through July 2001, enabling widespread copyright violations. Plaintiffs are seeking maximum damages.

The day after the suit was filed, Bertelsmann AG issued a statement from Berlin reiterating its commitment to its BMG music unit, in response to a piece in the newspaper Handelsblatt reporting that Bertelsmann would likely sell BMG after absorbing the impact of its $2.7 billion purchase of Zomba Records. The newspaper also reinforced rumors of a possible merger of the music unit with EMI Group PLC, a potentiality that has been discussed off and on for several years. The last attempt to merge the two companies was nixed by European Union regulators on the grounds that the combined entity would amount to a monopoly of the European recorded music market. Bertelsmann "remains committed to its music business," said a company spokesman.

Bertelsmann has had several top-management shakeups, including the departure of CEO Thomas Middelhoff, a forward-thinking executive who steered the company through the dot-com era. His resignation was widely seen as an indication of the company's return to its long-established business model.

In other Big Music news, Taska Manzaroli of Dow Jones Newswires reported on February 21 that Sony Music Entertainment will soon restructure its operations, cutting as many as 1000 jobs, combining some positions, and deleting under-performing artists from its roster. The move is the first of several by new chief executive Andrew Lack that may re-invigorate the label. Lack is a former head of NBC television and has no prior experience in the music industry. Sony Music has been the target of legal action by some of its artists—notably the Dixie Chicks, whose lawsuit last year won them unprecedented contract concessions, including increased profit participation in album sales and $20 million in development capital. The Chicks' recent album Home continues at the top of the sales charts. Southern California rock band Incubus is also embroiled in a contract battle with Sony, in which the band sued the company in Los Angeles and Sony promptly counter-sued in New York. Sony Music reportedly lost $142 million in fiscal 2002.