Napster and Majors Play Chicken With the Future
Both sides could benefit if they just sat down and talked things out -- you know, rapped -- but arrogance and short-sightedness keep getting in the way.
by Warren Cohen

Wednesday, August 02 05:47 P.M.

In the 1955 teensploitation classic Rebel Without a Cause, James Dean, the quintessential outsider, engages in a deadly test of bravado with a leather-jacketed brood of hoodlums deeply mistrustful of the new tough on the block. Dean piles into his hot-rod, the punks' leader into his, and with a cliff's edge on the horizon, they both hurtle toward the abyss; in the game of chicken, whoever bails first loses. Dean flinches and rolls from his hot-rod; his foe -- the ''winner'' -- tries to do the same, but the sleeve of his leather jacket catches on the door handle, and he plunges to a fiery end.

A similar game of chicken is now the current state of play between the music industry and Napster, and who flinches first may determine not only the fate of the case before both Federal District Court Judge Marilyn Hall Patel and the U.S. Court of Appeals for the Ninth Circuit in San Francisco, but the future structure of the music industry itself. The stakes are high: For every day that Napster lives on, behavior patterns, especially among younger music fans, are hardening into unbreakable molds: the longer music is free for a generation of downloaders, the harder it'll be to loosen their wallets.

On Tuesday, EMI, Universal and Sony all announced their plans to launch subscription services before 2000 is through -- EMI by the end of September, Universal and Sony ''by the end of the year,'' according to vice chairman of Universal Bruce Hack. Whether these pledges are genuinely executable or a ploy to impress appellate court judges and company shareholders remains to be seen. Regardless, Napster's idiot-proof user-interface and seemingly bottomless song selection are now the industry standard -- fair or not -- and any major-label system must be as simple and deep (or deeper) as Napster's or risk driving users into the waiting arms of the Gnutellas of the world.

While the labels still hold a decisive upper hand before the law, and may be content to sweat it out for another couple of months, they're getting hammered in the court of public opinion. And if Napster is indeed holding a losing legal hand, as most experts believe, then a settlement is the only route the company can take to become anything more than a digital martyr.

And yet, after last week's off-again-on-again courtroom drama, neither side has blinked. There are no discussions going on at the moment -- a status quo that has existed for weeks -- and each side has accused the other of bad faith. Meanwhile, the pressure is mounting on both. The appeals court is expected to rule sometime between October and December on whether to permanently lift Napster's injunction, which is currently stayed. Every minute Napster remains in operation, another 14,000 songs are transferred between fans. By the end of the year, Napster officials believe the site's traffic will grow from 22 million users to 75 million. And if people are still swapping MP3s by the Christmas shopping season, when walkman-like digital devices will lure buyers with the promise of liberating music that's been trapped in PCs, the MP3 phenomenon may become indelibly ingrained in consumer culture. Young downloaders might remember CDs as the quaint device their parents once owned, much like fedoras and candelabras are perceived today.

For Napster, the worst-case scenario is that Judge Patel's injunction is reinstated. But even if it's not, the company's legal team still has to return to Patel's courtroom and convince her to reverse her antagonistic stance toward the company. If she doesn't, Napster could keep appealing, but for now, it has only $15 million in venture capital funding, and its principal patron, Hummer Winblad, may be reluctant to bankroll a losing trip to the Supreme Court.

But before the two companies approach a point of no return, there's much to be gained for each side in sitting down and attempting to work out their differences. Remove the back-to-the-cultural-dark-ages rhetoric and you'll find a recording industry desperate for a Napster-sized injection of passion from 22 million ardent downloaders that many believe will boost industry revenues. Much like AOL paved the way for an Internet industry by easing people into what once seemed a daunting technological experience, Napster could be providing a similar service for the music business. And ignoring the information-wants-to-be-free platitudes, Napster is a firm that, barring its slim chance of full legal exoneration, needs the cooperation of record companies and artists to turn its consumer goodwill into a sustainable business.

But right now, brokering lasting peace between Israel and the Palestinians seems more likely than settling the holy war between the music industry and Napster. At the end of last week, label executives kept repeating the industry's mantra of safe files in a legitimate environment. When asked about a prospective pact, one music industry executive said, ''Napster may pride itself on being a criminal and that philosophy makes it harder to settle. The Napster community might be the same. Alcatraz has a community but do you really want to be associated with it? So even if there is a way to settle with Napster, is that the devil you want to make pact with?''

Napster CEO Hank Barry seems annoyed by this industry stance. ''I don't know what a secure file means and I'm not sure what a legitimate environment is,'' he scoffs. Barry's frequent quote is that he wants to make sure artists get compensated (subtext: the company knows it's doing something wrong by not paying them now). But he hasn't said how record labels ought to be compensated. ''We do have a great commonality of interests because our Napster users are big music fans,'' he says. ''But between the constituencies of users, labels, music publishers, songwriters and artists... it's hard to find a good compromise.''

All this posturing raises the important question of what exactly are the barriers to a settlement? An obvious one is the current cost of downloading a track on Napster: zero. Using this unusual business model to build audience -- no admission fee, no advertisements, no data tracking, no revenues at all -- Napster has trespassed on artists' and labels' rights to control their own channels of distribution, and naturally the industry is leery to get in bed with it. Of course, some argue that if Napster and the industry teamed up and charged the service's 22 million users a $100 annual fee for file swapping, they could add at least $2 billion to a $15 billion-a-year record business. But the labels' attitude is: Why partner with a renegade like Napster when we're already working on our own secure online music systems?

Indeed, for an industry that has spent millions of dollars developing high-tech digital-rights-management gizmos, insecure MP3 music files -- at the heart of Napster's popularity -- are anathema. Says one label spokesperson, ''Secure files are a prerequisite'' to any sort of agreement. But does it have to be that way? One online music executive, adamant that ''client-side security will never, ever work,'' suggests a system using insecure files whereby Napster pays both damages to the labels and a flat fee to go forward, and the labels get paid every time someone either downloads a song or searches for an artist. After all, he says, digitally protected music is futile when millions of CDs can be ripped and traded. Says one attorney who represents artists, ''For true security, the labels would have to stop selling CDs.'' But it would take a large-scale consumer-relations disaster -- ''The music won't play! The computer ate my money!'' (not, by the way, out of the realm of possibility) -- before the labels would even consider releasing their music online without some protection.

But Napster seems as stubborn as the labels. Barry insists the firm's position is no mere bargaining stance, and that the company deeply believes in the righteousness of its legal strategy (though most analysts, not to mention Judge Patel, feel it's of the throw-it-against-the-wall-and-see-if-it-sticks variety). Either way, Napster isn't budging. Bill Bales, founder of a Napster-like startup called AppleSoup and an early investor in Napster, says that ever since the firm's inception, headstrong company honchos have said they'd rather fight than switch the Napster software. ''They'd love to take this to the Supreme Court,'' sighs Bales. ''People who worked hard there are not happy.''

The company has always been adamant about not altering its so-simple-a-stoned-college-student-could-use-it program. Says Barry, ''The user experience is simple and easy and I don't want to go too far away from that. If it's a difficult process, people won't do it.'' In a recent interview with Fortune magazine, John Hummer, principal of Napster's chief venture capital firm, said he'd rather lose the firm's $13 million investment than futz with the software.

Still, Napster has made a number of strategic maneuvers, possibly with a compromise in mind. Its architecture already supports file swapping in the Windows Media file format, which can incorporate basic security measures like limiting the number of times a file can be copied. And two weeks ago, Napster announced a research and development pact with Liquid Audio to experiment with its Genuine Music technology. That secure format allows content owners to track the origin and authenticity of files and even add ''superdistribution'' capabilities. For instance, a Liquid-enabled file passed to a friend could expire after a certain number of plays unless the user hits a buy button. ''Consumers are willing to put up with some level of security as long as it doesn't require too many clicks and too many fields to be filled in,'' says Dick Wingate, senior vice president of content development and label relations at Liquid Audio.

There are other, less obvious barriers than security issues, as well. Artists, for instance, have approval over what singles are released from their CDs, and therefore opening up the label coffers song by song to Napster would require the approval of each individual artist. Music publishers, who represent the songwriters, would also demand multiple license fees. And in a worldwide market, not every label owns the catalog rights in every country. ''Napster is a free-for-all where everything is too easy,'' says Hilary Rosen of the Recording Industry Association of America. ''There are so many issues in the legitimate market that a Napster doesn't have to deal with, not just security, but also issues of creative control.''

If anything, record companies prefer the television model where they get paid at least twice: once for the original broadcast and again for syndication rights. That's the reason the majors seem ready to accede to streaming subscription models where users, having already purchased the CD, are paying again (via license and subscription fees) for the privilege to access it anytime from anyplace. But providing the full panoply of music -- new releases and old -- to a service like Napster also seems to make label stomachs churn. ''It's likely that some songs from major music companies can be freely traded, but that does not mean unlimited access to everything,'' says Reciprocal Music president Larry Miller, who has worked with some of the labels on security issues. ''They'll be models of subscriptions, streaming, downloading and superdistribution, but I can't imagine the majors in lockstep exploiting their entire catalogs for a fixed price.''

The industry's final non-negotiable settlement term could be for Napster to voluntarily halt its service at once. Observers note that when quickly disabled its service, the good-faith gesture convinced the labels to deal with the company. ''They've got to stop the infringing activity,'' says a prominent industry player. ''You can't do whatever you want and then get rewarded with licenses.''

What about a streaming compromise, where the labels receive some measure of security and continue to make bank off the CD format? In the face of such competitors as, musicbank, and even Sony and Universal (with their locker schemes), it's not clear that Napster wants to be just another streaming service. Barry says streams aren't currently in the game plan. ''A stream would be extraordinarily difficult to do in the Napster environment,'' he says. ''And because surveys show that people keep files on a computer for a short period of time and then discard them... there is no difference between streaming and downloading as long as users have access.''

With the two sides unwilling to swallow their pride -- or drop their prejudices -- to reach some kind of mariage of convenience, industry stalwarts see no way out. ''I believe the record industry is ideologically committed to litigation,'' says Helene Freeman, an entertainment attorney at Dorsey & Whitney. ''It's an intractable problem.''