As Bertlesmann came to Napster’s rescue, BMG’s CEO, the head of Bertlesmanns record company, demonstratively resigned right away, followed by the chairman of the board, but Bertlesmann stood by its man - Shawn Fanning, and his Napster. But why? The head of Bertelsmann, Thomas Middlehoff, apparently saw a value and a potential in Napster’s, by now, almost 30 million registered users. Bertlesmann was a publishing conglomerate. It figured it could sell and promote their publications though it. It had a major record label. It could sell and promote its recordings though it. It could charge for marketing through it, analyze customers’ preferences, measure their activities, and so on. They saw a major stake in something like that, as worth at least a 60-million dollars loan they extended to Napster. But then, in early 2001, the appeals court decision came, and the judges ruled against Napster after all, and ordered all the copyrighted material taken down from the service. Well that would be the majority of the files. So that was it. Game over. Well, not yet. Napster’s lawyers went to Congress and found a receptive advocate for their cause in the Chairman of the Senate Judiciary Committee, a republican senator at the time. It looked good. Something really might come out of this, as last minute as it was. The Chairman of the Senate Judiciary Committee has considerable influence and power, after all. And he was actively pushing their cause at the highest level. OK. So lets pause here for a second. No don’t pause the video. Let’s just reflect for a second, is what I mean. Do you realize that we are talking about the United States Congress now. I mean, we went from a 19-year old kid in a chat room, with a nickname Napster, talking to his pals, to tens of millions of users around the world, international conglomerates, a cover of Time magazine, and now to the very epicenter of the political power, the United States Congress. Not in a lifetime. Though, even that would be an exceptional and rare story. No. In two years. In just two years, Napster went from the talk of a chat room, to the talk of Congress. Just thought I point that out to you, in case you were still playing it cool about the whole thing, pretending you are not moved, because you are just that suave. OK. So the Chairman of the Senate Judiciary Committee saves the day, right? Well, as every good soap opera, this one has the last little twist to it. Just at the time that the Republican Chairman of the Senate Judiciary Committee was trying to aid Napster on the Hill, one of the Republican Senators leaves the Republican Party, and the Senate majority changes from the Republicans to the Democrats. The Republican Chairman of the Senate Judiciary Committee loses his position on the Committee, and Napster loses the support on the Hill. You can’t make this stuff up. But Napster still hung on, even after all the drama in Washington, hoping that perhaps some new business model might save the company. Bertlesmann spends another 30 million dollars on it, in an attempt to switch Napster’s business model. Everyone works feverishly to change tracks. And then, in the summer of 2001, Thomas Middlehoff, the head of Bertlesmann, got fired by the Bertlesmann’s owners; and the lifeline was cut. The money eventually ran out, and Napster filed for bankruptcy in May of 2002. At its peak, it had over 55 million users. And all those millions of Napster users around the globe, and countless millions of others, who by now got used to sharing MP3s, and got used to the sheer convenience of the format, and the ease of exchanging it over the Internet, they were still around. They didn’t stop exchanging MP3s just because Napster was gone. Its not like they all of a sudden saw the light in the wisdom of the courts’ decision, and got copyright religion. As a matter of fact their number grew, and new services took Napster’s place – Gnutella, Morpheus, Kazaa, AudioGalaxy, LimeWire, Grokster… First Barndemburg, with his MP3 file format, and then Shawn Fanning, with his Napster, got a genie out of the bottle, and the things will never be the same in the music industry because of it. Bringing down Napster didn’t change anything, Bringing down Kazaa, Grokster, Morpheus, didn’t change anything. Suing thousands of consumers for illegal music downloading didn’t change anything. Running around the media and the courts, screaming, “the barbarians are at the gates”, didn’t change anything. What did change things, or I should say what started to change things, was the major players in the industry joining the online revolution, instead of trying to fight it. And I don’t mean joining in on the mindless “music wants to be free” chorus, of course, because regardless of the deep conviction of many, that music grows on some magical, self-sustaining, music tree out there, so it should be free for all, it doesn’t. But what started to change things in the industry is embracing methodical and intentional utilization of the new technologies, and the power of the Internet, in adjusting their business models and methods of participation in the market. And I kept repeating that “started to change things” phrase here, so you don’t mistake it for “increased CD sales, higher profits, more money for the labels”, and so on. No “change things” as in modifying the business model, revising financial equations, adjusting operations, adapting to consumers needs, embracing the new digital ecosystem as the new reality and new marketplace. What started to change things is Apple’s iTunes. The music industry was slow to see the online market as the inevitable future and to embrace it as such. The solution for the problem of illegal online downloading, as the major labels saw it for a long time after the online revolution has started, was simply to fight it, and keep the old business model; not to offer any appropriate alternatives. And then, when they finally acknowledged that maybe they should join the online marketplace, their plans and designs were dismal. Not because they lacked brain thrust, but because those with appropriate technological savvy and a sense of the new online mentality, were lower on the corporate ladder than those making decisions. Plus there was five major labels at the time, five sets of corporate cultures and egos that had to give and take, five sets of deeply ingrained strategies and visions that had to be synchronized. And as much as they tried, that proved impossible. In 1998 the major labels set on what they envisioned to be a great new journey into the online future for them – the Secure Digital Music Initiative. They would gather the greatest minds they could find in their world, devise the music files’ encryption system, so all their digital music would be secure from the online pirates, would create and set up online shops to sell those files, and would design a portable player that everyone would want, on which those files could be played. One-two-three punch by the labels, singlehandedly transforming their online nightmare, to their online Shangri-La. Nothing wrong with that, nor with their intentions. But, as we know, the gap between the “want” and “can”, between the “will do” and “done”, is sometimes a chasm so vast that just can not be bridged. The way that the labels went about conquering their new objective would turn the gap into that chasm. They held meetings, and held meeting, and held meetings. Of course in lush hotels and resorts around the world. For years. And each major label had its own thing that it wanted this new thing to do. And each had it in for another. And egos got all mixed up in it, and opinions informed and uninformed, and court intrigues, and gossip, and posturing. And, of course, it all came down to nothing. Four years, and millions of dollars later, in 2002, the SDMI was disbanded. OK, so that didn’t work out. Let’s do it again. No exotic locations or resorts this time, and reduce the group. And get to something concrete, please. And give the initiative some cool CIA type of operation name, OK? Ten four, Baba. We’ll call it DMX. Digital Music X, as in extreme. With the name like that, it has to work out. So a small group, eventually consisting of Warner, Universal, Sony, Philips, and Apple representatives started to meet to come up with something. Most agreed that the secure file format encoding called Advanced Audio Coding, or AAC, would do the job. Except Sony, which had its own type of encoding in mind, for which it could get royalties, called ATRAC. And so hardly did they commence the “operation DMX”, the talks stalled. Sony and Philips also proposed a new secure audio CD format, which would have two data layers, one for playing in regular CD players, and another for the controlled digital copying. Glassy eyes, lost looks, around the room. That’s very good, but how is that going to bring us to online commerce and the new internet-based marketplace? And then egos started to trickle in again, and predispositions, and another set of posturing and positioning. And so a year later, mighty DMX was dead too. Sorry, Baba. We tried.
