Napster Fallout

Apparently, 50 million people on the Internet can be wrong.

Napster fought the law, but the law won — big time. The federal appeals court ruling last week, which upheld the majority of a lower courts ruling that Napster violated copyright laws, has broad implications for anyone distributing copyrighted digital content over the Internet.

The decision by the U.S. Court of Appeals for the 9th Circuit addressed only the injunction sought by the music industry to immediately stop Napsters sharing of copyrighted songs. But it marks a turning point in the ongoing saga by affirming that the rules for how digital music, movies, books and other content can be lawfully distributed online favor content creators. Publishers of digital content hailed the decision as a major victory.

The clear consequence of the ruling is that the free ride is almost surely over for Napster, by turns the most loved and most hated music distribution system on the planet. "Napster, by its conduct, knowingly encourages and assists the infringement of plaintiffs copyrights," the three-judge panel wrote in its ruling.

Napster will likely have to pull the plug on its music sharing service as it exists today. Down the road, the service could also have to pay billions of dollars in damages to the record companies — as much as $150,000 per violation, analysts said — which would crush the company entirely unless it could finagle agreements with the labels.

The music industry jitterbugged joyously, as the ruling affirmed all of its core legal arguments. "It is time for Napster to stand down and build their business the old-fashioned way — by seeking permission first," said Hilary Rosen, president and chief executive of the Recording Industry Association of America.

Napsters defeat gives the RIAA a new legal machine gun to shoot down other file swapping services that allow copyrighted music to be shared. Of course, the free music revolution could simply go underground, as users adopt Gnutella-based programs or other peer-to-peer software that isnt commercially owned or operated.

Box Makers Are Angry

Napster, needless to say, disputed the courts findings, and executives said the company will pursue "every avenue" to keep its free file exchange humming. But the ruling was also angrily denounced by the consumer electronics industry. "If the content industry has its way, the play button will become the pay button," said Gary Shapiro, CEO of the Consumer Electronics Association.

Why are device makers unhappy? Because if Napster were judged legal, then control of content would shift to the end points — and thats where personal computer makers and consumer electronics companies would have scored, selling boxes tapping into global file sharing networks, not to mention scores of new mobile MP3 players.

"Obviously, if theres a vast array of free or virtually free musical content, there will be a lot of demand for consumer electronics devices to play that content," said Peter Schalestock, an attorney specializing in Internet copyright issues at Seattle law firm Perkins Coie.

To another group, though, the ruling represented The Day the Music Lived: Net music companies that have been working to obtain the expensive rights to distribute digital music online, such as EMusic.com and MP3.com, which itself was sued by the RIAA in a case that has been settled.

It was a sweet triumph for Gene Hoffman, CEO of the struggling EMusic and a Napster foe. "When we said, well give you 100 free MP3s, that wasnt attractive because people could download all they wanted from Napster," Hoffman said.

Now that Napster and other file sharing networks must play by the same rules every other online company has had to follow, analysts said, there will be a multitude of new products and services, and experiments with new business models. Without Napsters free, easy-to-use interface for accessing an unlimited trove of music, other Internet music providers and the music labels feel theyll realistically be able to offer subscription-based or ad-supported music download services.

Whither Bertelsmann?

Far from leaving Napster twisting in the wind, German media company Bertelsmann said it will "redouble" its efforts to work with Napster to create a secure file sharing subscription service. Bertelsmann continues to hedge its bets, though: It still has not dropped its lawsuit against Napster.

Analysts guessed that Bertelsmann, which is lending Napster $50 million as part of the partnership, is working with Napster primarily to try to tap into its enormous installed user base and the strong brand Napster has become. The hope is that whatever service results will enjoy the good will of Napsters 50 million-plus registered users.

But in order to build a legal Napster 2.0 that even comes close to matching what the "classic" version provides, Napster will need to strike deals with the rest of the music industry. Its questionable whether that will happen, because theres so much bad blood to overcome between the two camps, said Ric Dube, an analyst at Webnoize.

In the end, the content suppliers have stepped in to reassert their control. And for Napster, that could portend a final fade to silence.