Napster, Industry Respond To Appeals Court Decision

LOS ANGELES -- Bent but not broken by a Feb. 12 appeals court ruling aimed at stopping the file-swapping service from trading copyright files, Napster and its partner, Bertelsmann, are moving forward with plans to provide the music industry with a legal, subscription-based file-swapping service.

But clearly, Bertelsmann and Napster are in a race against time. They are feeling the heat to launch a new, legitimate service that pays labels and artists before their competitors do -- and before the court shuts Napster down. Bertelsmann has turned the heat up on Napster by sticking to a summer launch, despite Napster's refusal to say when its new service will be available.

"The business model needs to be developed sooner rather than later, because other labels will have file-sharing applications ready by the summer," says Bertelsmann eCommerce Group senior VP and chief communications officer Frank Sarfeld. "The first mover in this technology is always going to be No. 1, and Napster has everything that it needs to be successful."

"This case has occupied a lot of our time," says Napster CEO Hank Barry, "but we're working on having the new service this year and are moving it forward."

Universal Music Group and Sony Music Entertainment are planning to launch a subscription service by the end of the summer that may incorporate a large-scale digital distribution network. AOL Time Warner is working on a similar service to be launched later this year.

On Feb. 12, the U.S. Court of Appeals for the 9th Circuit upheld U.S. District Judge Marilyn Patel's July 2000 ruling that Napster is liable for copyright infringement, stating that the service "fails to use its ability to patrol its system and preclude access to potentially infringing files." (The Recording Industry Assn. of America [RIAA], on behalf of its member labels and publishers, had filed a copyright infringement lawsuit against Napster in December 1999.)

But the circuit court ruled that a preliminary injunction put in place by Patel was "overbroad" and has returned the case to her court with instructions to narrow its scope. The circuit court's stay of the injunction remains in effect, leaving Napster to continue operating.

Since Patel's ruling, Napster's number of users has jumped from 30 million to more than 60 million, according to the company. Patel's court has not set a date for further hearings on the modified injunction.

Napster attorneys also plan to ask for a review of the circuit court's opinion by the entire 25 sitting judges of the court. The Feb. 12 opinion was rendered by three judges of the court.

The circuit court could refuse Napster's request, but cases like this often have an advantage, says San Francisco-based Morrison & Foerster copyright attorney Fred von Lohmann. "Judges like to get themselves involved in high-profile cases, and during the en banc [review by the entire court] you might end up with an amended decision," he says.

In its ruling, the circuit court has also ordered the RIAA member companies and publishers to provide Napster with a list of the copyright works that are being infringed upon. The RIAA hasn't delivered the list to Patel.

"We haven't taken any actions yet because we're still studying the [circuit court's] opinion," says RIAA senior counsel Cary Sherman. "But as of today we can get to work."

In addition, Napster must integrate a mechanism to remove the copyrighted material identified by the RIAA and publishers. During the course of the preliminary injunction hearings last year, Napster repeatedly said it cannot delete files because they are housed on individual computers. But it has since changed its tune and met with several companies that claim to have the solution to the problem.

Los Gatos, Calif.-based Audible Magic, for one, has developed a "crawler" technology that can be sent to individual computers and identify a song by matching its digital "fingerprint" against an internal database. The company has fingerprinted more than 500,000 songs, according to president Vance Ikezoye. "Our software could be integrated into the next generation of Napster software, but consumers would be forced to download a new player," he says.

Technology from Bellevue, Wash.-based Cantametrix monitors the transfer of a file by "sniffing" it for unauthorized songs. If the song can be legally transferred, the file swap is uninterrupted. The company has fingerprinted more than 1 million songs and is in "continued talks" with Napster, according to co-founder Max Wells. He says Cantametrix expects to announce deals with Napster's competitors shortly.

While the technologies exist, Barry says all are in test mode and haven't been proved to work on a large scale. "We have millions of people, and the server base architecture is very difficult," he says. "We haven't found one yet that can work at a usable rate. I don't think there's a solution yet."

However, Steve Canepa, a VP with IBM's global media and entertainment group, which includes the company's digital rights management technology EMMS, says, "There is no reason why a database architecture could not be created that secured content while in transmission in a peer-to-peer network.

"So, even though you have an MP3 file, when you move it to someone else, it could go though a process that secured the track and registered it, made sure it was identified, and placed it in some form of rights and royalty structure to ensure that, before it got passed on further, it could go through a clearing process," he adds.

Sarfeld says record companies shouldn't throw flowers on Napster's grave. "The other labels are celebrating a victory," says Sarfeld, "but Napster is not shut down. In the meantime, we're going to have a new business model that meets what the court has ordered."



Assistance in preparing this story was provided by Brian Garrity in New York.