Industrial Evolution

The record industry crippled Napster with litigation. But has it made things worse for itself?

First, there was Napster, which made it easy for anyone with an Internet connection to get thousands of songs for free. It was one of the Net's true mass-market hits, landing its 19-year-old creator on the cover of Time while 30 million users traded nearly 3 billion songs a month.

Then the company ended up in court, hammered with huge copyright-violation lawsuits by angry record labels. By this summer, the once-booming online community was a ghost town, and its file-sharing capabilities remain on hold while the reeling company tries to get legal.

But for all the success the record industry had bludgeoning Napster into compliance, it may have created more problems than it solved. That's because even as Napster has faded into Internet history, a phalanx of successors has marched on the scene. And already, they're garnering the same popularity Napster once enjoyed, using technologies that made Napster so attractive while avoiding features that made it legally so vulnerable.

Mark Poutenis

"There's a very good analogy that someone gave me that it's an evolutionary process," says Eric Scheirer, an analyst who follows online music for Forrester Research in Cambridge, Massachusetts. "Napster had a particular kind of weakness in its architecture. By killing off the nets like those which are vulnerable to lawsuits, it allows the other networks that aren't as vulnerable a chance to succeed and grow. It's almost an explicitly Darwinian process."

All these programs use peer-to-peer networks, essentially ad hoc collections of Internet users who interact through small programs that let them search for and trade files stored on each other's computer hard drives. These days, those files tend to be songs--of every conceivable genre and in staggering amounts.

Napster could be sued so easily because its central "server" computers kept track of all the files traded on its network. Because Napster knew what songs were being traded, the courts ruled, it had an obligation to block the pirated ones and a legal liability to the record industry for the billions of songs it already had helped users pirate. Napster's peer-to-peer successors don't have that centralized listing of songs, and their creators say that if their systems are being used for piracy, they have no way of knowing or stopping it--and thus aren't legally vulnerable.

"The Gnutella network is not policeable," says Jonathan Levinson, chairman of Petapeer Holdings, the Las Vegas company behind Gnutella, an increasingly popular program that lets people swap files on the Gnutella network. "It's like running Bill Gates' Internet Explorer. You can do whatever you want with it."

Gnutella and most other Napster successors can trade more than just music, whether it's sharing pictures of Granny, home movies of the kids or reports from work. Because they can be used for more than just ripping off the record industry, they have what lawyers call "substantial non-infringing uses." Again, their creators say, that makes them less vulnerable legally.

And with Napster neutered, these networks are booming. A recent report from digital entertainment news site Webnoize says about 3 billion songs were traded through the new networks in August, exceeding Napster's February peak of 2.79 billion.

"We are part of one of the biggest networks in history," says Gnutella's Levinson. "The world has voted already with Napster. People want to stay at home and get their content. Sooner or later, the rights holders will get the idea. This is the future, and this is inevitable."

More than a billion of those songs traded in August were on the FastTrack network, which Forrester says is growing at a staggering 60 percent per month, with as many as 600,000 simultaneous users. FastTrack's creator, the Dutch company Consumer Empowerment BV, released the KaZaA program so users can access its network, and licensed the technology to Music City Networks, whose Morpheus program also taps into FastTrack.

"By the end of the year, [FastTrack] certainly could be at the same size as Napster was at its peak," says Webnoize analyst Matt Bailey. Another network, Audio Galaxy, is nearly as busy as FastTrack, while the older Gnutella network--which can be accessed through Gnutella, Limewire and BearShare, among others--is close behind.

Many of these programs are easier to use than Napster, too, with such capabilities as "auto-resume," which restarts a download if the person on the other end temporarily logs off, and the ability to download parts of a song from several sites at once, to speed the laborious process.

"That opportunity [for the record companies] to kick our ass will keep getting smaller and smaller as the clients [front-end programs] keep improving," says Levinson.

The record companies aren't exactly rolling over on all this, though. The Recording Industry Association of America (RIAA), the lobbying and anti-piracy arm of the Big Five labels, is suing Aimster, which can piggyback on AOL Instant Messenger as well as Consumer Empowerment and Music City.

"At the end of the day, they look like Napster, they smell like Napster, and, from a user's perspective, they taste like Napster," says Matt Oppenheim, the RIAA's senior vice president for business and legal affairs. "Are they architected differently? Sure. Does that mean they don't know what's going on? C'mon. Everyone knows."

Oppenheim says that just because the companies built their programs so that they can't easily detect and stop piracy, they and their users don't get a free ride.

"Sure they get more sophisticated," Oppenheim says. "Does that mean it's theft to any lesser extent? No. Theft is theft. The issue is not whether they're responsible for what they're doing. The issue is whether we're going to be able to figure out what they're doing and pursue them."

Webnoize director of research Lee Black says the new companies face "a sort of double-edged sword" by building their technology the way they have. "Because of the architecture they've set up, they're proving themselves guilty of trying to circumvent the law," Black says. "I think it comes down to the legal interpretation of knowledge and control. There is knowledge that [piracy] can be done. But whether they have control of it is another thing. [The programs do] have legitimate uses, and they can't control how people use it. You need a judge to do a ruling."

That will take awhile. The suits against Aimster are still in procedural mode and months from anything substantive. The Los Angeles federal court case against Music City and Consumer Empowerment was just filed a month ago and is even further from a decision.

Is the record business worried about these networks? Certainly it should be. The RIAA's own figures show that CD sales dropped in 2000, only the second decline in a decade. And sales in the first half of 2001 dropped again, particularly among the under-30s who have long been music's biggest buyers. The presumption, of course, is that those tech-savvy fans are busily downloading all the music they want from Napster and its successors on high-speed networks at colleges and workplaces, which make swapping music much easier than actually going out and buying it.

But that's not all the story, of course. A rotten economy has hurt the entertainment business across the board, and as the baby boomers who make up such an outsized proportion of the population age, they aren't buying as much music as they once did. And analysts point out that selling CDs is now a mature, 20-year-old business. Most people have largely bought the CD versions of old favorites they once had on vinyl, flattening what has been a huge revenue source for the labels.

The Big Five are rolling out their own online music services, though analysts give them little chance of early success, given their limitations. MusicNet users can download songs but can't transfer the files to other devices like handheld MP3 players and even other computers, while pressplay, a streaming service, won't even give subscribers a file to keep. Neither will have music from all five of the big record companies. And neither will be free.

"I wrote when the Napster decision came down that the labels had a very narrow window of opportunity, that consumers could have been retargeted by a legitimate service if it was launched in a timely fashion, even as a placeholder," says Forrester's Scheirer. "But what we have seen is that the window has largely elapsed."

Even record business executives acknowledge they're feeling their way through the challenges of the online business in haphazard fashion. And some, when they're feeling candid, acknowledge there's only so much the industry can do to stop the free competition, especially when their for-pay alternatives are so weak.

"Napster is dead, but consumers will always be able to get music online for free," says Dave Goldberg, the blunt-spoken CEO of Launch, the Santa Monica music site recently bought by Yahoo!. "Overwhelmingly, they listen to music and things they can't get elsewhere. Subscription services will only succeed when they do what customers want, not what record companies want."

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