The fate of AC/DC, Barenaked Ladies, and Faith Hill hang in the balance of an industry-transforming decision delivered by the Federal Trade Commission today. Hundreds of recording artists, along with media and technology superpowers, including CNN, HBO, CompuServe, and Netscape, joined in a $111 billion bear hug when the FTC approved the controversial AOL-Time Warner merger.
What will this merger mean for the embattled music industry? No one is more dubious than the record labels themselves.
The year 2000 was marked by legal wrangling, Napster battles, and momentous mergers and acquisitions. Now the power players are placing their bets for 2001, and one gutsy company is taking a calculated risk that threatens to incense its peers — and attract a lot of expensive enemies.
On Halloween, Bertelsmann AG, the world’s fifth-largest music company and owner of BMG Entertainment, shocked competitors and fellow members of the Recording Industry of America (RIAA) by announcing a strategic alliance with arch nemesis Napster, the Internet song-swapping service.
The deal, inconceivable one year ago, was touched off by industry turmoil, economic tumult, and the Bertelsmann eCommerce Group (BeCG). Led by former president and CEO of AOL Europe Andreas Schmidt, BeCG is a nimble task force of roughly 30 strategists and deal makers. It was assembled in June by Bertelsmann CEO Thomas Middlehoff and was promptly assigned this task: to lead the company into a more digital future.
While its competitors concentrate on big-name mergers (AOL-Time Warner) and big-money lawsuits (RIAA versus Napster), Bertelsmann is empowering BeCG to drastically change the way consumers access and purchase music.
“BeCG is capitalizing on a huge opportunity, but it’s also working to avoid a fate much worse than Napster,” says Oliver Jones, a 15-year veteran of the interactive entertainment industry and founder of the DotClick music service. “The RIAA blames Napster and MP3 for all of its problems, but if the RIAA is successful in its drive to shut down Napster, its problems will only get worse. Music will go underground. People will start using Gnutella and other file-sharing models that don’t use a central server. The record labels will lose the pulse of consumers entirely, and they will never be able to regain it. Bertelsmann is doing absolutely the right thing by teaming up with Napster.”
A Beleaguered Industry
The music industry has suffered its fair share of tumult, anarchy, and controversy this year. When America Online and Time Warner announced their proposed merger on January 10, Napster was an underground phenomenon barely out of beta testing and was facing a potentially crippling lawsuit filed by the RIAA. Today, Napster is an industry juggernaut with 38 million fervent users and some irresistible momentum. And until BeCG came along, Napster was also a grassroots phenomenon without a single ally in the recording industry.
BeCG’s skunk-works strategy and politically unpopular alliance with Napster are not proven winners. In fact, BeCG’s director of corporate communications, Alexander Adler, concedes that the Napster deal will succeed only if other major record labels join the new person-to-person file-sharing service devised and designed by BeCG and Napster.
Though details remain under wraps, the new file-sharing service will likely charge users a monthly fee to access high-quality music directories and downloads. BeCG has provided Napster a loan to develop this new service. When it’s completed and implemented, Bertelsmann will withdraw its name from the RIAA’s copyright-infringement lawsuit against Napster. Bertelsmann will also make BMG’s entire catalog available to Napster subscribers around the world.
“Users don’t care whether their music comes from BMG or Universal or Sony,” Adler says. “They want high-quality songs from their favorite artists, regardless of the label. And they want them fast. The more record labels that support and utilize this digital-rights-management service, the more value everyone will receive from it. We can only make this happen if we work together.”
But Will It Work?
In the days following BeCG’s alliance with Napster, president and CEO of BMG Entertainment Strauss Zelnick and BMG chairman Michael Dornemann resigned amid rumors of internal strife. Shortly thereafter, Jean-Marie Messier, chairman of Vivendi Universal’s Universal Music Group, promised to fight Napster to the death. And late last month, a music producer slapped Napster and Bertelsmann with a $10 million lawsuit claiming copyright infringement. In short, BeCG faces a rough road ahead — both externally and internally.
As Bertelsmann pursues a potential alliance with the world’s number-three music company, EMI, BeCG is wrapping up its own talks with the major record labels. BeCG hopes the major labels will join its file-sharing alliance. Oliver Jones doesn’t fault large record labels for approaching a Napster alliance with caution and suspicion. “Two years ago, record companies could reliably charge consumers for the privilege of possessing a piece of music,” Jones says. “They are no longer able to do that, and they are scrambling to regain their dominance and their money.”
Until recently, record labels could judge an artist’s popularity according to his record sales, and then adjust marketing budgets to reap the greatest benefit from the biggest sellers. Today, record sales do not accurately reflect the success or failure of any given artist. Jones says the labels are confused, overwhelmed, and angry. But cooler heads must prevail.
Jones commends BeCG for its forward-thinking strategies and maneuvers, which he says recognize and respect the new power of the consumer. He predicts that file sharing will proliferate and dominate the music industry, with or without labels’ consent and cooperation. He also predicts that companies built to last will embrace electronic distribution as a way to better serve their customers. It’s no surprise that Adler agrees.
“Our competitors called Napster an enemy of the music industry — end of discussion,” Adler says. “BeCG saw Napster’s file-sharing model as a meaningful breakthrough in technology, branding, and community. We acknowledged the gap between the interests of the music industry and the interests of Napster users, but we decided to bridge the gap rather than deepen the divide. We believe Napster can be a friend to the music industry, and we were willing to stick our neck out to prove it.”