BREAKING NEWS

Bertelsmann & Napster Settle

Companies to Form Joint Venture with Bertelsmann to Fund Development

Bertelsmann chief executive Thomas Middelhoff is a Visionary

Fanning then spun around and hugged a startled Thomas Middelhoff, chief executive of Bertelsmann AG, the German media giant, parent of BMG Music.

It was an entirely appropriate gesture during the Tuesday, October 31, 2000 Napster & Bertelsmann joint press conference that many industry observers believe marks the beginning of an entirely new era in music sales and marketing.

The press conference was thin on specifics and thick with hyperbole. Bertelsmann announced that it would form an alliance with online music-swapping service Napster. The announcement signaled a significant shift in the courtroom battle between the major record labels and the up-start company that only days before had been considered the digital equivilent of the bubonic plague.

The partnership signifies a giant leap of faith by a traditional record company in embracing one of the most popular, but controversial, services on the Internet. The Big Five labels, Bertelsmann's BMG Entertainment, Warner Music Group, Universal Music Group, Sony Music Entertainment and EMI Recorded Music are embroiled in a high-profile lawsuit against Napster. The labels allege that Napster promotes the infringement of their copyrighted works, and they are trying to shut down the service.

The two companies announced they would develop a new subscription service to let Net users swap songs copyrighted by the recording giant. Members of the proposed service would be able to search and download songs legally from Bertelsmann's entire catalog of artists, including the Dave Matthews Band, Christina Aguilera, Whitney Houston, and Santana.

Bertelsmann said it will drop its lawsuit against San Mateo, California based Napster once the service successfully launches. For now, the company will offer a loan to Napster to create the subscription service. In return Napster will let Bertelsmann purchase warrants that will give it a minority interest in the start-up.

Thomas Middelhoff explained the company's about face during the Tuesday press conference by saying, "File-sharing will exist in the future as part of the media and entertainment industry. There's no way to deal with this fact (other) than to develop a business model for file-sharing."

Recording Industry Association of America President and CEO Hilary Rosen called the deal promising but emphasized that the lawsuit is aimed at asserting the preeminence of copyright holders in setting the terms of any resolution.

“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. This is a welcome development," Ms. Rosen said in a prepared statement.

But then Rosen added a very strange and cryptic comment, "It has never been about peer-to-peer technology itself, which can be implemented legitimately."

The WIZARD wonders if this is the real Hilary Rosen, or some sort of science fiction "Stepford Rosen."

Changes in attitude will come hard after a battle that has had this much emotion and bitterness. Twenty four hours after the announcement the BMG Website had no mention of the settlement, but was still flying the bold banner of the Artists Against Piracy, a thinly veiled, industry supported, anti-napster action committee.

Napster chief executive Hank Barry promised that the service won't greatly be changed as a result of the deal. They said Napster will continue to offer free promotions but will include a secure membership area where people will have access to a library of music from Bertelsmann and future partners.

It's likely that the other record companies are paying close attention to this development. First, it greatly weakens their case in court. Second, a stake in Napster could be worth a fortune when and if the start-up goes public.

But the WIZARD believes the real motive behind the surprisingly warm reception the RIAA is giving the announcement is that all the executives are beginning to realize the wisdom of Middelhoff's words: "File-sharing will exist in the future." It's better to control the sharing and profit from it, rather than let is seep further underground.

The WIZARD congratulates Thomas Middlehoff. He is a true leader in an industry that has been in dire need of leadership.