Middelhoff’s napster coup

Lack of clarity about the business model, uncertainty among users

The news hit like a bomb: Yesterday, Bertelsmann announced that it would enter into a strategic alliance with Napster. Even on the day after, there is hardly any other topic in the Netaudio community. Many questions still remain unanswered, but with Bertelsmann the winner of the coup has already been determined.

So Thomas Middelhoff has done it. He has long talked about wanting to become the world market leader in music before his departure as Bertelsmann CEO. But then Universal merged with Vivendi and AOL with Time Warner. By a hair’s breadth, they had even acquired EMI. Bertelsmann’s cooperation with AOL was reduced piece by piece, and Middelhoff suddenly found himself in the third row. The only chance to keep up with the others seemed to be a spectacular acquisition.

At Popkomm, the ZEIT already speculated that Middelhoff wanted to buy Napster. But Middelhoff only faced the chronically depressed industry in a good mood, praised Napster for its potential market value, blamed the copyright infringements a bit like an indulgent uncle, and spoke somewhat vaguely about the need for a different business model for the file-sharing provider. He did not reveal what this might look like.

Thunderball: A Project with an Open End

Allegedly Bertelsmann has been working on a cooperation with Napster for several weeks under the project name Thunderball. The details, however, are still completely open even after yesterday’s decision. In doing so, Middelhoff knows that he can decide Napster’s future: If the two companies develop a legally watertight alternative to the current file-sharing model in the foreseeable future, this will also create an opportunity in the ongoing lawsuits against Napster.

If this does not succeed, Bertelsmann can still secure its name and user database by discontinuing its own lawsuit and investments, without itself coming under legal fire. Because this is also the advantage of the current binding: Napster CEO Hank Barry and his team have to bear the legal responsibility for everything that happened all by themselves. But if Bertelsmann really wants to win over a significant portion of Napster’s 38 million users, it shouldn’t rely solely on this kind of ghoulishness. In first declarations, therefore, both sides talk about "Integrity" of the service. But how could such a business model?

The multimedia book club

Hank Barry has already explained that Napster’s new business model still involves the exchange of data "Promotional content" will allow. Already today Napster has the permission of more than 20.000 musicians to legally distribute their music through Napster. It is now conceivable that Bertelsmann will combine this legal file sharing with download sales, CD trading or limited subscriptions. The company didn’t even have to rethink that much: Napster already allows not only the unsecured MP3 format but also the exchange of Windows Media files that can be connected to a digital rights management system.

For such a file, for example, it can be specified that it is only playable for 30 days. In order to make the system attractive to paying users, Bertelsmann was able to feed part of its catalog in Windows Media format free of charge and also allow the exchange of these files. The users were then asked to pay for the rest of the content. Napster would thus be a kind of Bertelsmann book club for music, with rich bonuses as a lure. The condition for success, however, would be that the other major labels also participate in the model. Moreover, this Napster model could lead some users to collect numerous free goodies, but then switch to real file-sharing services like Gnutella or Freenet to download the complete albums.

The music flat rate

Another model is the conversion of Napster to a real subscription service with "All you can eat"-Appeal. For a fixed price of, say, $10 per month, Napster users could then swap as much as they like. In the last months all major record companies have developed models for subscription services. Like Universals under the strange name of "Jimmy and Doug’s Farmclub" However, most of these are based on streaming audio offerings and are therefore ignored by the Napster-happy MP3 downloaders. With a genuine download offer, Bertelsmann was ahead of the game in one fell swoop, but had to radically overthrow all its previous online strategies to achieve this.

Even with this model, however, Bertelsmann is dependent on cooperation with the other record companies. Whether they are willing to license their titles to Bertelsmann for download remains questionable. And even if they decided to do so, the antitrust authorities could put a quick end to such a model. The failure of the merger of Time Warner and EMI has shown how closely the antitrust watchdogs are observing this market of the future.

The discomfort of the users

The day after, there is a great deal of uncertainty, especially among users. While some declare their willingness to pay subscription fees, others deplore the "Selling out the file-sharing principleĀ§. It is also critically questioned whether Bertelsmann can really bring itself to use the MP3 format. Should Napster switch to Windows Media instead, many are already announcing a switch to free alternatives such as Gnutella or Freenet. In the message boards of sites like Dimension Music, skepticism and cynicism clearly prevail at the moment. So notes one poster there:

"Secure file sharing on a subscription basis? Are they on crack?"

But such statements ignore the fact that file sharing has long ceased to be the hobby of a small community. According to a recent survey by PC Pitstop, Napster is installed on 30 percent of all Internet PCs. For comparison: Netspace Navigator, once the browser market leader, is installed by 36 percent of all surfers. Moreover, Hank Barry explained a few days ago that at peak times a million users access Napster at the same time. AOL, the world’s largest online service, is only marginally better off with 1.5 million simultaneous user dial-ins. Bertelsmann had to be damn stupid not to make a profitable business out of this – even if it won’t have much to do with the original Napster anymore.

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