In Search Of Napster II

By ADAM COHEN

In an age of boosterish corporate leaders--every earnings report is upbeat, all bad news is only temporary--Napster CEO Hank Barry is refreshingly morose. The legal system is poised to squash Napster, making it impossible to continue operating, he says grimly. To stay alive, Napster will need the cooperation of the big record labels--the very labels it has tormented until now. And, oh, by the way, Napster also needs a major technological overhaul so it can sort through the millions of files shared on its site every day and filter out the illegal ones. "Welcome to my world," Barry says with a sigh.

Barry's world was until recently a happy place. With its impressively easy-to-use format for sharing free music files, and with more than 50 million enthusiastic users, Napster was clearly one of the most important things to happen on the Internet. When it joined forces with German media giant Bertelsmann last year, Napster seemed to be headed toward respectability--and profits. But there has always been a catch: the music industry, and many performers, insist that what Napster calls music "sharing" is in fact nothing more than music stealing.

In a major setback to Napster, last week the Ninth Circuit Court of Appeals in San Francisco sided with the industry on just that point. It ruled that Napster must stop helping its users exchange unauthorized, copyrighted material. The court did throw Napster a bone: it put the burden for identifying particular copyrighted material on the music labels and other aggrieved copyright owners.

The ruling undermines the Napster way of life. As much as 87% of the music being shared on the site today may be unauthorized. And it presents the company with a stark practical problem. Napster, which was cobbled together just two years ago by college student Shawn Fanning, then 18, has never included a mechanism for identifying unauthorized files.

But if Napster hopes to survive, it is going to have to develop some new screening technology fast. Late last week the company and Bertelsmann announced that they have begun to do just that. They have devised a new form of digital-rights management architecture that will, for the first time, let Napster keep track of--and impose restrictions on--music shared over its system.

The new architecture is the key to an ongoing transformation. The two companies have been working for several months to develop a new Napster--some are calling it Napster II--that will operate as a pay-subscription service. The idea is to take the company legit by charging subscription fees of, say, $15 a month, part of which will then be passed on to performers and record labels. The new technology could give Napster the control over its system that it needs to make Napster II a reality. Andreas Schmidt, president and CEO of Bertelsmann's eCommerce Group, calls it "the most important building block for the new business."

This building block, which may be in place as early as this summer, would change the Napster experience markedly. When a user sends out a music file over the system, it will be "wrapped" in a protective layer. The layer will be a digital lock, similar to the encryption that keeps credit card numbers secure on the Internet. To open the file and get at the music, another user will need a digital key provided by Napster.

Bertelsmann insists the process will be "transparent"--that is, users won't know it is happening. But it would quickly rewrite the regulations of Napster, imposing rules on the relative anarchy that now exists. Napster would probably hand out different keys for different fees. Pay one fee, and you get to listen to some music. Pay more, and you get to keep the music by burning it onto a CD.

Will this solve all of Napster's problems? Not by a long shot. There is still a major technology issue. The appeals court wanted Napster to develop a way of sorting through the music files and identifying the ones that are copyright-protected. It's in the works, says Barry. This traffic cop, he says, will most likely examine file names and check them against the titles of protected songs. The court, however, recognized the limits to Napster's ability to police its site.

That may not be enough. Looking at file names alone is a glitchy method of recognizing a song. If Napster's system pulls down every file named La Vida Loca but leaves ones that users labeled, say, La Vida Loco containing the same song, the labels may well go back to court and demand more. "The question isn't what's going to be sufficient in the eyes of Napster," says Vance Ikezoye, CEO of Audible Magic, which makes software that identifies music files based on the actual music. "The question is going to be what kind of technology is acceptable to the content owners."

Getting those content owners--particularly the major music labels--to play ball at all will be another challenge for Napster, which has fought the labels aggressively in court. Now it needs to make nice, and get the companies to agree to license their songs. "The content partners are everything--they're the dealmakers or the deal breakers," says Ric Dube, an analyst with Webnoize. "Without them, all the technology in the world won't make a difference."

Napster has been meeting with the big labels steadily, but except for the deal with Bertelsmann, it has not yet got to yes. Richard Parsons, co-chief operating officer of AOL Time Warner, a major music distributor (and parent company of TIME), told reporters earlier this month that he had yet to see an acceptable business model from Napster.

The music companies may have their own plans. Vivendi Universal and Sony Music are jointly planning to launch a subscription-based online music service by year-end. And there is the problem of getting consumers to pay. Many companies have tried to convert websites from free to fee; consumers generally respond by going from free to flee.

For now, the embattled Barry's biggest headache is still Napster's legal woes. The appeals court sent the case back to Federal District Judge Marilyn Hall Patel to issue a new order telling Napster exactly what it needs to do to clean up its act--and by when. If Patel's order forces Napster to start policing its site immediately, Barry says, it is possible that "we'll have no choice but to shut the system down."

This may explain the timing of last week's announcement of new architecture, which probably won't be ready for months. There is a long tradition in the software industry of releasing "vaporware"--illusory software announced just to throw off the competition. Napster's architecture may be a variation on the theme. Call it litigationware, real software designed to convince a court you're sincere about going legit. We should know any day now whether it worked.

--With reporting by Jennifer L. Schenker/New York

With reporting by Jennifer L. Schenker/New York