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Napster’s Outlook is Bleak

If you’ve been following the Napster chronicles, you’ll know that Napster has just lost a good friend and the one person considered its biggest supporter at the parent company that’s been keeping it afloat.
Thomas Middelhoff just recently signed off from the post of chief executive of Bertelsmann AG and experts are saying that with this latest development the future looks even more bleak for the debt-riddled and lawsuit-plagued music file swapping company.

The shake-up has been described by one marketing professor at Wharton School, University of Pennsylvannia as a “dot-com backlash”. Professor Peter Fader speculates that Bertelsmann and other media companies got tired of throwing money at unprofitable Internet companies. Marketing experts are of the view however, that it is a shame to throw the baby out with the bath water and they contend that that’s exactly what might be happening in this case. Nonetheless, if, as the professor asserts, “people are either running scared or being pushed out”, then it could be the final nail in Napster’s coffin.

Middelhoff, Napster’s supporter, who was considered a maverick at the conservative media giant, was one of those who was reportedly forced out. The Gutersloh, German-based company cited differences of opinion on strategy.

Apparently, “Maverick” Middelhoff’s focus was the modernization of the company, which owns book publisher Random House, Pan-European broadcaster RTL Group SA, and BMG Entertainment, which includes RCA Records and Arista Records. Middelhoff was reportedly aiming to take the company public in 2005 and he oversaw the acquisitions of music retailer CDNow and MyPlay, an online music storage service.

Bertelsmann’s investment in Redwood City, California-based Napster was one of Middelhoff’s more controversial moves, and one that reportedly upset the status quo at BMG when Napster was acquired.

Napster irked the recording companies by providing a way for people to share songs with each other without buying the albums. BMG Entertainment, along with Vivendi Universal, Sony Corp., AOL Time Warner and EMI Group PLC sued Napster in 1999 for enabling copyright infringement with its service. (AOL Time Warner is the parent company of When a U.S. federal judge ordered Napster to shut down its service in July 2001 while the lawsuit proceeded, the file-swapping online company had about 60 million users worldwide.

In the meantime, Napster has been developing a subscription-based commercial service and trying to persuade music labels to license songs.

Bertelsmann invested in Napster in October 2000 and in May 2002 agreed to acquire Napster outright. As part of the deal, Napster filed for Chapter 11 bankruptcy protection.

Bertelsmann has reportedly spent about $80 million keeping Napster afloat. Yet there’s more money that must be spent if Napster is to survive. Napster will still have to pay damages and royalties to the record companies before it can relaunch. BMG also has invested in a fee-based online music service, MusicNet, with EMI, AOL Time Warner and RealNetworks Inc. that competes with a similar venture from Sony and Universal Music called Pressplay and rival Those services face tough competition from free services that cropped up in Napster’s wake, including KaZaA, Morpheus and Audio Galaxy. The difference here is that these services will be harder to shut down since they are without the centralized directory structure that was at the heart of Napster.

But Middlehoff is far from being the only casualty of this war. Experts say the future of fee-paying online music itself is in trouble and the number of big chief’s heads that have rolled may attest to this. Earlier last month AOL Time Warner Chief Operating Officer Robert Pittman and Vivendi Universal Chief Executive Jean-Marie Messier resigned under pressure. In July, Andy Schuon resigned as chief executive of Pressplay. At Bertelsmann, Andreas Schmidt, head of BMG’s electronic commerce group and the man who oversaw the Napster deal, left late last year.

In spite of Napster’s woes, these are tough times for the music industry. Record sales are down, and music sharing on the Internet is an uncomfortable reality that will be difficult to shut down, even through the courts. The longer the battle, the more likely the defeat.

Paul Hutton-Ashkenny is the president of Systems Resource Group Ltd. and Bahamas On-Line. Views and opinions expressed do not necessarily reflect those of SRG or BOL. Questions/comments to: P.O. Box N3920, Nassau, Bahamas or e-mailed to:

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