BUSINESSWEEK ONLINE : NOVEMBER 13, 2000 ISSUE
COVER STORY Commentary: Napster: Tune In, Turn On, Pay Up By forging an alliance with Napster, Bertelsmann CEO Thomas Middelhoff is boldly going where no record exec has gone before. His $50 million loan to Napster to build a new fee-based service gives peer-to-peer file sharing the media industry's Good Housekeeping seal of approval. But there are some catches. Many analysts have focused on Middelhoff's diplomatic challenge of persuading other record companies to develop an industry-supported file-sharing system. But Napster and Bertelsmann face at least two other high hurdles. The first is technological. Napster must create a new membership-based service that pays artists, music publishers, and record companies. That means building a system that blocks pirated content. In court, Napster said its technology can't distinguish between infringing and noninfringing use of files. Napster's lawyers wisely stuck to this argument because they knew that the courts would be reluctant to shut down an entire technology that had ''substantial noninfringing uses.'' OUT WITH THE PIRATES. But if Napster wants to get legit, it must crack this problem. In fact, computer programmers say Napster could filter out the great majority of infringing files from its music directory. ''If Napster wanted to clean up their service, we could help them with that,'' says Bruce Ward, chief technology officer of NetPD, a startup in Cambridge, England, whose software identifies pirated songs based on sound patterns. There's another way to toss pirates. Napster's servers currently record every music file's ''MD5 hash''--a sort of digital fingerprint that uniquely identifies an MP3 music file. These markers could be used to track recordings, spot illegal downloads, and remove pilfered files. There's one caveat, however. Due to differences in recording software and the degree of compression, different digital recordings of the same song could produce different fingerprints. While that makes tracking violators more difficult, the technology would detect most violations. Napster's other big challenge is to create a profitable business model. Not all of its 38 million users--especially the young info-radicals--will pay a cover charge to enter the Napster club. ''Shame on you Napster,'' wrote one Napster fan on its message board after the Bertelsmann deal. ''Everyone was behind you, but you sold out to cover your ass.'' But many people are willing to pay, especially if Napster maintains its all-you-can-eat menu and improves its reliability and searching features. Webnoize, an online-music research firm, said its October poll of Napster-using college students found that 68% were willing to pay a $15 monthly fee for the service, up from 59% in April. ''Napster is becoming as valuable to them as their ISP,'' says Webnoize senior analyst Matt Bailey. That percentage could grow if Napster charges the lower $4.95-a-month fee that Napster CEO Hank Barry recently suggested. Furthermore, Napster's user base is getting older and is therefore more likely to pay. These are knotty problems. But none is unsolvable. Bertelsmann and Napster must keep everyone focused on the benefits of peace: For consumers, greater choice and lower prices. And for the music industry, increased sales and a lower cost of doing business. Plenty of reason to call a truce. By Spencer Ante _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ BACK TO TOP					RELATED ITEMS Bertelsmann: A New Net Powerhouse? COVER IMAGE: A New Net Powerhouse? TABLE: The Deal TABLE: The Building Blocks of Bertelsmann TABLE: Dueling Net Strategies The Man behind Project Thunderball Commentary: Napster: Tune In, Turn On, Pay Up ONLINE EXTRA: Middelhoff: ``Somebody Has to Take the Lead'' INTERACT E-Mail to Business Week Online

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