Napster - Record Industry Opposes The Controversial Service, 1999-2001

RECORD INDUSTRY OPPOSES THE CONTROVERSIAL SERVICE (1999-2001)

In December 1999 the major record labels—including Universal (a subsidiary of Vivendi), Sony Music, Warner Music, EMI Group, and BMG Entertainment (the music division of Bertelsmann AG)—together with the RIAA, brought a lawsuit against Napster claiming copyright infringement. The RIAA listed among its concerns the non-payment of royalties and the loss of revenue through lost sales of CDs. The RIAA claimed that the loss of financial incentives would prevent musicians from creating new songs.

Napster's position was that it only provided the software for people to share music files. No copyrighted material ever appeared on Napster's computers. Rather, the MP3 files were swapped directly from one user's computer to another. Napster also argued that the added exposure of certain songs would actually increase CD sales for some artists.

While the lawsuit worked its way through the courts, Napster was the fastest-growing home application for the first half of 2000, according to Media Metrix (now Jupiter Media Metrix). The number of Napster users grew from just over 1 million users daily in January 2000 to 6.7 million in August 2000.

In April 2000 heavy metal rock group Metallica and rap artist Dr. Dre filed separate lawsuits against Napster for copyright infringement. In May federal Judge Marilyn Hall Patel ruled that Napster was not entitled to "safe harbor" under the Digital Millennium Copyright Act. In July Judge Patel granted the RIAA's request for a preliminary injunction against Napster and ordered Napster to shut down. Two days later, the 9th Circuit Court of Appeals stayed Judge Patel's injunction, allowing Napster to stay in business. After hearing oral arguments in October, the appeals court would not issue a ruling until February 2001.

Meanwhile, Napster gained support from an unexpected quarter. Breaking ranks with the other major record labels, Bertelsmann AG formed an alliance with Napster in Octboer 2000 and became its chief financial backer. Under the alliance Bertelsmann agreed to help Napster develop a legitimate version of its service, such as a subscription or fee-based service. Once a new version of Napster was developed, BMG Entertainment would drop its copyright infringement suit against Napster and make its recording catalog available to the service. At the time Napster had about 38 million users. Commenting on the alliance, Bertelsmann chairman and CEO Thomas Middelhoff said, "Napster has pointed the way for a new direction for music distribution. We believe it will form the basis of important and exciting new business models for the future of the music industry." Some analysts believed the alliance would accelerate the recording industry's acceptance of legitimate file-sharing services.

In January 2001 Napster added a link to CDNow, which was owned by Bertelsmann, in part to blunt criticism that MP3 downloading was hurting CD sales. Napster also added instant messaging and message boards to promote the use of Napster as a community to discuss music as well as to share files.

According to a report from PC Pitstop, Napster's integrated browser and communication tool was installed on 38 percent of all personal computers worldwide in March 2001. That marked a decline from February, when it was to be found on 40.5 percent of all PCs, the highest level of penetration achieved by Napster. A year previously, in April 2000, Napster software was to be found on nearly 15 percent of all PCs worldwide. The study found that the leading alternatives to Napster in 2001 were AudioGalaxy and BearShare.

On February 12, 2001, the appeals court ruled that Napster must halt the trading of copyrighted songs. A week later Napster announced it was willing to pay $1 billion to license the content of copyrighted songs, an offer that was dismissed by the RIAA. The appeals court sent the injunction for revision back to Judge Patel, who had ruled that Napster might be liable for knowingly encouraging and assisting large-scale copyright infringement by its users. The appeals court also asked the record labels to provide Napster with a list of songs that must be removed from its directory.

In March Judge Patel issued a preliminary injunction against Napster that required it to block copyrighted song files. Napster complied with the order by barring the trading of copyrighted songs on its service. Over the next several months the service experienced a sharp drop in usage, from an estimated 2.79 billion songs downloaded in February 2001 to 360 million in May. Later, on July 2, Napster voluntarily suspended file-sharing and shut down to fix technical problems related to its latest filter upgrade. At the time it shut down, Napster's usage had declined from an average of 220 songs shared per user in February 2001 to an average of 1.5 songs per user. Former Napster users were simply going to other song-swapping services.

At first Napster attempted to filter copyrighted songs by blocking them based on song titles. However, misspellings and other errors meant that many copyrighted songs were not being blocked. Following criticism of the blocking system by the recording industry, Napster upgraded its efforts to screen copyrighted songs by using digital fingerprints. Each downloadable song was given a unique fingerprint when it was added to Napster's database. If Napster's software did not find the fingerprint, the song could not be downloaded. Napster claimed that its new filtering system was "99 percent" effective in blocking the downloading of copyrighted songs for which it did not have permission to use, but technical problems with the filtering upgrade caused the service to shut down on July 2, 2001.

Meanwhile, there were other developments in the online distribution of music. In April 2001 the music industry announced a new music subscription venture called MusicNet. Participating companies included RealNetworks Inc., AOL Time Warner Music, EMI Group PLC, and Bertelsmann AG's BMG division. MusicNet was created as an intermediary to license the music of AOL Time Warner Music, EMI, and BMG, using RealNetworks' secure technology. America Online and RealNetworks were MusicNet's first two licensing affiliates. Duet, formed by Vivendi Universal and Sony Music, was another recording industry service that was created as an alternative to Napster.

In June, Napster became the third distribution partner for MusicNet. The three participating major labels agreed to permit their content to be carried on Napster, once the music-swapping service found a way not to infringe on copyrighted material. Napster said that MusicNet would be one of several options offered by Napster once it launched its new fee-based service. At the time Napster had more than 70 million users.

Also in June, Napster signed a worldwide licensing agreement with the United Kingdom's Association of Independent Music (AIM) and the Independent Music Companies Association (IMPALA). The agreement authorized Napster's use of hundreds of thousands of songs belonging to more than 150 independent record labels in the United Kingdom and Europe. Prior to Napster's July 2 shutdown, it had permission to share more than 800,000 titles with its users.

In mid-July Napster settled the suits brought against it by rock group Metallica and rap artist Dr. Dre. The settlement gave the artists final say over which song files could be traded over the Napster system. However, the RIAA vowed to continue its legal battle with Napster until it fully complied with copyright laws.