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When megapublisher Bertelsmann AG and the music-swapping service Napster Inc., announced in late October that they were joining forces, both the music industry and the pundits quickly cast the move as a concession by Napster. “Today’s announcement of a strategic alliance between Napster and Bertelsmann AG makes clear that Napster has come to the same conclusion we have been urging from the start: that it is better to work with the creative community than against it,” said Recording Industry Association of America chief Hilary Rosen in a news release. But the real concession, it seems, rests with the music industry, which recognized that it needs Napster — and services like it. Seen in this light, the litigation against Napster looks like an effort to buy a share of the future that Napster represents — a future that includes massive consumer copying of copyrighted works, the very thing the record labels say that they want to prevent. First, the details of the Bertelsmann/Napster deal. The German media giant, whose music subsidiary BMG is a plaintiff in the suit in California federal court against Napster, has announced it will be partnering with Napster. They will develop a secure, fee-based file-sharing service distributing Bertelsmann’s music catalog. Napster is receiving a $50 million loan, convertible into stock, from Bertelsmann’s eCommerce Group to develop this service. The service will be built around “peer-to-peer” technology: the sharing of files directly between one Internet user’s computer and another’s, without storing those files on an intermediate server. The only things that reside on Napster’s servers are directories of song files. As part of the deal, Bertelsmann will drop out of the Napster suit as soon as the new business venture is a go. The goal of the joint venture is highly ambitious. Bertelsmann and Napster aim to maintain the music-enthusiast, file-swapping character of Napster while paying copyright holders for the files that listeners are swapping and playing. A fee-based version of Napster may not work. No one seriously disputes that Napster has grown so quickly precisely because the service is free to users. (One copyright law professor notes acerbically that the number of Napster users is already approaching the number of voters who chose George W. Bush for president — close to 50 million.) Will Napster be able to maintain that membership once the service starts charging a fee — even a low fee, like the $4.95-per-month figure that Napster chief executive Hank Barry has floated? Probably not. But even if the Bertelsmann incarnation of Napster loses 90 percent of its user base, the company’s audience will still exceed those of all but a few Internet content startups. But maybe Bertelsmann is after something more than a piece of Napster’s user base. And maybe Napster was looking for something like the Bertelsmann alliance all along, as Barry has always maintained. Bertelsmann chief executive Thomas Middelhoff’s media road show after the joint announcement seemed designed less to proclaim victory than to map out the future. “There is no question that file-sharing will exist in the future as a part of the media and entertainment industries,” Middelhoff said at the press conference. Coming from the chief executive of one of the world’s largest media companies, that is a mind-blowing admission. He’s saying that users are going to be giving copies of movies, music, and books to other users directly, and that these industries need to restructure themselves in acknowledgment of this fact. This notion flies in the face of copyright law trends in the modern era. From the passage of the Digital Millennium Copyright Act to the Napster litigation to the suits over decrypting DVDs, the trend has been for copyright interests to seek greater (if not total) control over the creation of copies, and to classify all unauthorized copying — even that done noncommercially by individuals — as “piracy.” Middelhoff is articulating a different philosophy altogether. He’s acknowledging that making copies is just one of those things that people do on their computers. Rather than classify such people as pirates, it is better to acknowledge this behavior and try to profit from it. The Bertelsmann suit is a means toward that end. As Gordon & Glickson associate Laura Hodes writes recently in The New Republic Online, “It’s not especially novel that a label that has a suit against Napster should be the very same label offering Napster a way out.” Hodes goes on to explain that content companies are increasingly using copyright infringement suits as a way of boarding the new-technology train. In addition to the Bertelsmann announcement, Hodes cites the recent announcement by Listen.com, an Internet-based music company backed by the five major record labels, that it plans to acquire the assets of Scour.com, a peer-to-peer file-exchange service. Scour.com had also been targeted by those same record labels, and, in the face of those suits, had recently declared bankruptcy. Hodes goes on to note that the music industry lawsuits against another music-sharing service, MP3.com, were settled in terms that forced the Internet start-up to obtain licenses from four of the plaintiffs. A fifth, Universal Music Group, went to court and won a judgment and a court-approved $53.4 million settlement. (At the same time, Universal agreed to buy warrants in MP3.com.) Writes Hodes: “The labels were not suing MP3.com merely to thwart a threat to their traditional way of doing business, but to boost their own Internet investments.” Without disputing Hodes’s take on the music industry’s litigation strategies, I think the general direction of the content industries’ recent moves can be characterized more positively — the content kings recognize that they can either pit themselves against what the Internet makes possible, or they can find a way to build new revenue models in the new world that file-sharing creates. Industry leaders are starting to recognize that it will do them little good to have won all their lawsuits if the new technology ultimately passes them by. The industry leaders seem to have recognized the lesson of King Canute: You may have all the legal authority in the world, but you can’t order the tides not to come in. The lesson of Bertelsmann’s recent dealmaking seems to be: If you can’t stop the tides, maybe it’s time to learn how to surf.

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