$1 Billion Isn’t Nothing, but It May as Well Be for Napster

The recording industry doesn’t need Napster (and it doesn’t need its settlement offer, either).

Napster’s $1-billion settlement offer to avoid what could have amounted to a shutdown of its most frequently downloaded music files is nothing but a final, desperate move in a long copyright suit. The U.S. 9th Circuit Court of Appeals last week found that Napster infringed the copyright held by recording companies when it provided for the locating and downloading of MP3 music files. If Napster knows about specific infringing of files posted on its site--and the recording industry will make sure it does receive notice--then Napster must shut them down.

In many ways this was a garden variety copyright case: Napster enables others to copy without paying royalties; it involves the very core of copyright--true artistic expression; it does nothing to transform the music in any way and, therefore, cannot a raise copyright fair use defense.

Recording companies and artists have good reason to fear that the availability of free music on Napster might put an end to the purchase of music in more expensive formats like CDs. In the Napster case, the recording industry presented compelling evidence that this is precisely what is happening.

But Napster’s seemingly generous offer of a guaranteed total of $200 million per year for five years for licensing really provides little in return. If Napster can turn itself into a fee-based service and establish technology to enforce its proprietary rights over downloaded music, then the recording industry could do so itself--and pocket the profit. If Napster cannot keep others from swapping music for free, and the burden of policing rests with the recording industry, then there is no reason to deal with Napster since Napster may ultimately be unable to pay down the road.

The settlement offer is a plea, in the words of Napster CEO Hank Barry, “that this community ought to be allowed to stay together.” But there is no real community. Instead, there are only individual consumers bristling at the high cost of CDs and wanting a more convenient way of acquiring, storing and retrieving music. Last week’s court decision reflects the power of consumers to demand that the recording industry create new Internet-based technologies for purchasing music, and the court’s willingness to hand negotiating power to the recording industry as they enter this new market.

What makes the Napster case different from the average copyright case is the sweep of the infringement. From the filing of the lawsuit by the recording industry at the end of 1999 until last week’s court ruling, Napster had swelled to more than 50 million users. It was these numbers that gave Napster hope for a repeat of the 1984 Supreme Court case known as the Betamax case. Before the Betamax case reached the high court, the federal 9th Circuit had decided that the videocassette recorder contributed to the infringement of copyright. In Betamax, as in Napster, there was a terrible outcry. In order for the videocassette recorder manufacturers to be liable for contributing to infringement, ordinary users of the device in homes were identified as infringers in the 9th Circuit’s decision. Although the film industry did not wish to risk their goodwill, these everyday users of the devices theoretically might have been prosecuted.

In a stunning reversal, the Supreme Court overturned the 9th Circuit Betamax decision and permitted the home use of videocassette recorders. The VCR, it found, had significant noninfringing uses, such as allowing a viewer to watch a show at a later date. With this decision, the high court protected videocassette recorder manufacturers. Now it was the film industry that was predicting its own imminent demise. But, as we know, the film industry was wrong. Studios negotiated deals with newly established video-rental companies and forged a new, highly lucrative home-video market.

But the Napster case is not another Betamax. In Betamax, the makers of the copying device received a boost in their bargaining power from the courts. In the Napster case, the pressure comes not from the courts but from 50 million consumers who are clamoring for the recording industry to permit some form of online downloading of music. We are witnessing the beginning of the negotiating process--one that promises to be long and hard-fought. The recording industry has not only to contend with Napster but also other MP3 sites, like Gnutella or FreeNet, where there is file-sharing without a centralized company-owned intermediary and which are more difficult to police.

The recording industry will not jump at the chance to take Napster’s offer. Consumers will ratchet up the pressure on the recording industry to enter the market, but how that will occur remains to be seen. The real question is how to police the copyrights that the court has reaffirmed. Options abound: The recording industry has the traditional mechanism of copyright suits; someone might invent new, clever technological ways to prevent free music swapping; Congress might establish compulsory licensing schemes.

But Napster offers nothing. It lacks the power to police property rights, and that--the recording industry believes--is what the broader Internet community needs most of all.