Bertelsmann AG dropped a bombshell
in the record industry’s lap when the media giant unveiled an eleventh hour
deal with Napster to reshuffle the
peer-to-peer newcomer into a pay-for-play service. The German conglomerate,
for its part, dissented from the deep-pocketed group of record labels suing
the wildly popular MP3 file swapping start-up, instantly taking on the
swagger of a swashbuckling gambler strutting up to a craps table.
Recognizing that such a bold move would undoubtedly send shockwaves through
the staid record industry, Bertelsmann Chairman Thomas Middelhoff wrote an
internal memo to his employees, telling the troops that its deal with
Napster would be popular with some, poison to others. But in the end,
Middelhoff was adamant that he believed the joint venture with Napster
simply showed good forward-looking business acumen.
New revelations shed some light on Bertelsmann’s long-term plans for
Napster after an unidentified Bertelsmann executive was quoted in The
Financial Times as saying, “Under the best-case scenario, Napster will
be a publicly quoted company.” That likely serves as insult to injury for
record labels still scrapping in an appeals court to bring about the
ultimate demise of Napster. While Bertelsmann once joined rivals
EMI, Universal, Sony, and Warner Music as a
collective voice of opposition to Napster, the remaining plaintiffs have
been caught flatfooted by Bertelsmann’s dramatic about-face.
As if the revelation that Bertelsmann intends to float Napster in the new
issues market weren’t enough to digest, it’s also been revealed that while
Bertelsmann retains a minority stake in Napster, the privately-held
Deutsche bellwether has an option to purchase a majority interest.
Bertelsmann has also made clear that should its record label rivals prove
successful in a bid to unplug Napster in a federal appeals court, it would
simply retool the service and bring it back online in short order.
This entire move by Bertelsmann is likely a carefully crafted preemptive
strike to wrestle future digital mind-share from the hands of eight hundred
pound gorillas, America Online and Time
Warner , friends/foes which Bertelsmann knows
intimately. Bertelsmann and America Online have undertaken international
joint ventures in the past with the likes of AOL Europe and AOL Australia.
In the nascent days of AOL’s rise to prominence, Bertelsmann even had the
opportunity, and some say inclination, to buy the ISP outright. But with
the announcement of AOL’s acquisition of Time Warner, the landscape has
shifted.
Time Warner’s Warner Music Group is one of the staunchest holdouts in the
suit to shut down Napster; and, aside from the obvious reasons, Warner is
quietly looking ahead to its mega-merger with AOL. Under AOL-Time Warner,
consumers can expect to see the combined entity aggressively selling
digital music to more than 150 million users of AOL’s seemingly benign AIM
and ICQ instant messaging services. The next closest competing killer app
that could effectively hawk digital media is Napster, with its nearly 40
million strong homegrown user-base.
AOL-Time Warner has a lucrative financial incentive to see Napster stumble
under the weight of ongoing legal proceedings. Bertelsmann, on the other
hand, with its own vast collection of media holdings, has a vested interest
in pulling Napster’s fat from the fire. However, for all the contentious
chess matches that are being played out by these rivals, the outcome really
rests on if media giants can convince fickle consumers to ditch
their newfound love for free music. And that’s a big if.
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