In the summer of 1999, a website, www.napster.com, was launched in the US – and the global music industry was changed forever. Napster was a system which enabled musicians and music fans to locate music available in the MP3, and WMA music formats. The website made it possible for its users to freely share their music files through the Internet with other users all over the world. Napster maintained a database of music files held on the computer hard-drives of other registered Napster users. A user, looking for a particular song, sent his request to Napster. The software then checked the availability of that song with this database, and if available, sent it to the user who requested the song. The service became extremely popular within a short span of time. The website attracted 1.6 million simultaneous users during the height of its popularity in February 2000. Napster's offering of this 'peer-to-peer' technology was strongly condemned by the Recording Industry Association of America (RIAA), a trade group representing the world's biggest record labels, Universal Music, Sony Music, Warner Music, EMI Group and Bertelsmann AG. RIAA alleged that Napster was engaging in or assisting others in copying copyrighted music without payment or the express permission of the rights owners. RIAA also claimed that Napster would significantly harm the sales of the recording industry. In December 1999, the body sued Napster in the Federal District Court for copyright infringements and petitioned the court to shut down the website. The legal battle was covered extensively in the global media. In the beginning of July 2001, Napster had to stop offering its services due to certain technical problems. While the company was working towards setting the problems right and resuming operations, in mid July 2001, a District Court Judge order barred Napster from offering the file-sharing service. Even as Napster users strongly protested against the order, the company appealed the ruling before the US Court of Appeals in San Francisco. The Appeals Court granted Napster temporary reprieve against injunction until a further review of the injunction request. What followed was a highly publicized struggle between the recording industry and Napster and other websites offering such services. The controversy raised several questions regarding the impact of the emergence of newer technologies like Napster on the traditional modes of conducting business. Was the recording industry using its financial power to suppress technological innovations in the music business? Or was Napster wrong in allowing people across the globe to access music without paying for it and without the artistes? permission? The case eventually came to be seen as a struggle by the powerful entertainment industry against a new technology threatening it.

Napster was developed by two students of Northeastern University, (Boston), Shawn Fanning (Fanning) and Sean Parker (Parker). One of Fanning?s friends had been searching in vain for digital music on the Internet. Fanning, who had an interest in computer programming, decided to help him by writing an Internet-based file-sharing program. Once the program was developed, Fanning and Parker began collecting funds from their friends and families to set up Napster as a start-up. Napster was formally launched in May 1999. The popularity of the service took even the promoters by surprise. Students from school and college campuses across US soon emerged as the biggest subscribers of Napster. Officials at these campuses reported Internet usage to have gone up by as much as 75% because of Napster. They reported an explosion in network traffic, which eased dramatically when access to Napster was removed. Soon, over 200 universities banned all Napster-related traffic on their networks. Napster's growing user base soon caught the attention of the RIAA, which immediately initiated a high-profile media campaign against it. The December 1999 RIAA suit against Napster proved to be just the beginning of the latter?s troubles. This was followed by a host of lawsuits being filed against Napster by record companies, artistes and music distributors. In February 2000, Napster offered to pay RIAA a $ 1 billion compensation package to put an end to the legal problems. RIAA however declined the offer, in part because the payments were contingent on users paying to use the Napster system. If the users did not sign up for the proposed pay-service, the record companies would not receive any money. In October 2000, Napster entered into an agreement with the German media and publishing major Bertelsmann, by which the latter gave Napster a $ 60 million loan. The deal took everyone by surprise, as Bertelsmann was one of the RIAA companies suing Napster over the copyright issue. Though Napster claimed it had not 'sold out' to RIAA, reports of the company having succumbed to RIAA pressures kept surfacing. By November 2000, Napster and Bertelsmann revealed plans to launch a paid version of Napster's services in the near future. Napster faced another setback in March 2001, when a website EMusic.com filed a complaint against it for copyright infringement and unfair competition. Napster had for long claimed that filtering out music owned by Emusic.com from its database was not possible. After Napster stated in court that it would attempt to filter music files by artist name and song title in February, 2001, Emusic.com filed the complaint claiming that the former had the technical capability of filtering specific content all along, but was not willing to implement it. Though Napster was able to get an injunction against the court?s order to stop its operations in July 2001, the website had not resumed operations even by October 2001. Meanwhile, the legal battle between the RIAA and Napster continued. The Napster case was scheduled for its next hearing in October 2001.

Napster supporters claimed that the recording industry was over-pricing its products and that file sharing was the only legitimate way to get music cheaper. RIAA argued that if customers felt the merchandise was over-priced, they were free to decide against buying it. RIAA supporters cited the case of global diamond prices, which were being artificially inflated because they were controlled by an international cartel. They countered that by Napster?s logic, it would be ethically right for a person to steal diamonds. Analysts claimed that the real problem here was the fact that music, words, ideas – all intellectual property – were somehow not deemed worthy of protection as 'real' things such as diamonds were. According to a report, even the people who created the intellectual property might not really appreciate the ethical aspects of the issue because deep down they could be thrilled that someone else liked their work so much as to steal it. However, it can not be denied that all artists would prefer to be paid for their creations. Napster's main contention was that the file-sharing system was not illegal. Until this technology was formally declared illegal in a court, this logic seemed to be sound enough. The basic Napster mechanism involved copying a music file from some other person and allowing others to copy one's files. If these activities were illegal then even copying and e mailing the full text of a theoretically copyright-protected Internet-based article would be illegal. Napster claimed that the controversy seemed to have been blown out of proportion only because of the losses in copyright revenue foreseen by the recording industry. Napster was banking heavily on a 1984 US Supreme Court decision that not only legitimized Sony Corp.'s Betamax VCR, but also provided legal groundwork for future clashes between copyright law and a new technology. In this case, the high court had ruled that a technology that might be used for piracy and other copyright violations cannot be banned - as long as it was also capable of 'substantial noninfringing uses' that were legal. The context of the ruling was the complaint by the US movie industry in the late 1970s that the then-new videocassette recorder should be taken off the market, in part because it could be used to make pirated copies of movies. The RIAA reportedly enforced strict regulations on the distribution and production of music. An analyst commented, “They now see a loss of control, they don't understand the Net or technology, and so when someone is fearful or scared the thing to do is say, 'We are going to sue you.' Earlier, RIAA had successfully defeated the website MP3.com, which was involved in the online distribution of music. MP3.com had to pay fines totaling hundreds of millions of dollars. RIAA held that a person should have to pay for downloading a MP3 file. Thus, even if a customer who had bought a CD containing a particular song earlier, wanted to download its MP3 version, he would have to pay for it. This was criticized severely by many music lovers, stating that it was similar to 'asking a person buying a trouser to pay extra if he wanted to let his friends wear it.' However, while MP3.com, which stored music on its own servers, could be stopped, it was difficult to regulate the „peer-to-peer? websites, because they did not store music on their servers. Thus soon after Napster stopped offering its services, several new websites – Gnutella, iMesh, AudioGalaxy, OpenNap, BearShare, MusicCity, LimeWire, Grokster – started offering similar services. Napster supporters also said that if RIIA wanted to sue the real people who were behind copyright violations, it would have to sue its own customer base of millions of music-lovers and not these websites. Another argument put forward by Napster was that it supported and promoted new artistes, who did not have recording contracts with the RIAA companies. Only about 2% of all artistes had recording contracts with the big companies. The rest thus had to compete with these big companies, without the resources to promote themselves. Services like Napster gave such artistes a way4 to distribute and promote their music directly to a huge community of fans worldwide.

Towards the end of September 2001, Napster agreed to pay $ 26 million to music publishers to end the litigation. Napster also agreed to pay $10 million to the Harry Fox Agency, the licensing arm of the National Music Publishers Association for the future use of copyrighted material. In addition, Napster agreed to pay music publishers one-third of the revenues given to content owners. It was reported that Bertelsmann was providing Napster the money for these deals. Napster's much delayed relaunch was clouded by uncertainty regarding its services becoming fully or partly paid. Also, while earlier Napster had virtually any song imaginable on its service, the filters it now had to use made most songs hard to find. It was even reported that Napster was planning to drop the MP3 file format and launch its own format in the future. All these factors led to doubts about the success of the service in the future. While the Napster brand name remained strong, there were doubts whether users would be willing to sign for a paid service, while many other free websites were still operating. In October 2001, RIAA filed suits against FastTrack, MusicCity, and Grokster and was formulating plans to file a suit against AudioGalaxy as well. These moves intensified the debate over the role of RIAA in policing the distribution of music worldwide. In the future, improving bandwidth and faster Internet connectivity were expected to make electronic redistribution of video as easy as that of MP3 files. The media industry was worried over the prospect of customers utilizing the Internet to exchange movies and video files as well. Though the legal issues in the Napster case seemed to be heading towards a settlement, the ethical issues remained unanswered. Whatever be the outcome of the recording industry's battle against the new technology, it had undoubtedly left a great impact on the global music industry. According to one analyst, Napster now had "One shot to launch a new service that looks nothing like the old one. If they don't get it right, Napster will be dead in the water."

1. Analyze the arguments put forward by the RIAA and Napster and critically comment on the ethical issues involved. Do you think the Napster case is comparable to the entertainment industry's protest against VCRs in the 1980s? Why/Why not? 2. Do you think after launching the paid version of its services, Napster would continue to be as popular, as it was with the free version? Give reasons to support your answer. What steps can the company take in order to lure back subscribers?