Fool.com: Napster Unplugged [News] July 27, 2000

Napster Unplugged

In the end, this story isn't just about music and copyrights and fair use. It's about how technology runs ahead of the law and business practices. Near term, the Recording Industry Association of American (RIAA) can hope to make Napster a discouraging example for others not to follow. But there's no chance of that and they're better off dealing with Napster, which not only embodies that technology, but does so full blown, brilliantly branded, and ready for prime time.

By Nico Detourn
July 27, 2000

The song is over for Napster, at least temporarily. Saying the company had "created a monster," a federal judge in San Francisco on Wednesday ordered the plug pulled on the popular and controversial music-swapping service by midnight Friday, pending an appeal later this year.

The injunction is intended to prevent Napster from "copying or assisting or enabling or contributing to the copy or duplication of all copyrighted songs and musical compositions of which the plaintiffs hold rights." Those plaintiffs are the members of the Recording Industry Association of America (RIAA to its friends), representing companies such as Seagram's (NYSE: VO) Universal Music, Bertelsmann's BMG, Sony's (NYSE: SNE) Sony Music, Time Warner's (NYSE: TWX) Warner Music Group, and EMI, which Time Warner is in the process of acquiring.

The RIAA filed suit against Napster earlier this year, accusing the company of facilitating large-scale music piracy. Yesterday's hearing leading to the shutdown order was part of that suit. The judge also ordered the RIAA to post a $5 million bond to cover any financial loss Napster suffers should its appeal be successful.

The Pied Napster
According to the judge, Napster "lures" users by encouraging the "wholesale infringing" of copyrights controlled by the music industry. Indeed. Napster, or rather the Napster application (available by free download at the company's website), is said to have lured 20 million registered users since being let loose on the Web late last year. A stunning success on a user basis. Year-end estimates of 70 million users were cited at yesterday's hearing.

The RIAA estimates that Napster has cost its member companies more than $300 million in lost sales. At the same time, a study by Jupiter Communications shows Napster users are more likely to increase their music purchases than non-users. But use of such programs already indicates a greater interest in and involvement with music, and the RIAA concedes that Napster users are among its greatest customers. So as difficult as estimating Napster's impact on the record industry to date, or in the near term, its longer-term implications are even less clear.

Napster's defense is based on the 1992 Audio Home Recording Act (AHRA), which allows noncommercial copying and sharing under the principle of "fair use." The RIAA counters that "fair use" was not meant to allow the wholesale commercial copying and distribution of copyrighted works. And although Napster has yet to develop a business model, much less generate revenue, it is clearly a commercial entity.

The aggregation of "fair use"
Complicating the issue, however, is that while Napster facilitates file-swapping among its users, it never comes into contact with or directly controls the files. Instead, when Napster users sign on to the service, it reads the names of the files they have chosen to share; those names are added to a realtime index that all other users can search, and removed as users sign off. Once a file is found, though, it is transferred directly between individual users through a so-called "peer-to-peer connection," never passing through Napster itself.

Napster creates a virtual space in which its users can easily and precisely exchange information about the music they already own and would like to share. In effect, Napster functions as an aggregator of the legal, fair-use intentions of its users, who are invariably, and not by accident, referred to as "the Napster community."

The scale Napster operates on clearly goes beyond what fair use provisions anticipated. Yet the swap remains one-to-one. Our exchange of music through Napster differs from your handing me a cassette tape about as much as instant messaging differs from your handing me a note on paper. The difference is in the technology used to make the copy and effect the transfer.

In the end, this story isn't just about music and copyrights and fair use. It's about how technology runs ahead of the law and business practices, and how Napster isn't just a program currently hot with the kiddies, but an idea and a technical capability that will be implemented by others no matter what the RIAA manages to do to this uppity firm.

Near term, the RIAA can hope to make Napster a discouraging example for others not to follow. But there's no chance of that. They'll eventually need to deal with the technology. In that case, they might as well deal with Napster, which not only embodies that technology -- but does so full-blown, brilliantly branded, and ready for prime time.

Your Turn:
Whose side are you on -- the music industry's or Napster's? Take this poll and let us know.

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