5. Why Is Hollywood Making A Sequel To The Napster Wars?

(Originally published in InformationWeek, August 14, 2007)

Hollywood loves sequels -- they're generally a safe bet, provided that you're continuing an already successful franchise. But you'd have to be nuts to shoot a sequel to a disastrous flop -- say, The Adventures of Pluto Nash or Town and Country.

As disastrous as Pluto Nash was, it was practically painless when compared to the Napster debacle. That shipwreck took place six years ago, when the record industry succeeded in shutting down the pioneering file-sharing service, and they show no signs of recovery.

The disastrous thing about Napster wasn't that it it existed, but rather that the record industry managed to kill it.

Napster had an industry-friendly business-model: raise venture capital, start charging for access to the service, and then pay billions of dollars to the record companies in exchange for licenses to their works. Yes, they kicked this plan off without getting permission from the record companies, but that's not so unusual. The record companies followed the same business plan a hundred years ago, when they started recording sheet music without permission, raising capital and garnering profits, and then working out a deal to pay the composers for the works they'd built their fortunes on.

Napster's plan was plausible. They had the fastest-adopted technology in the history of the world, garnering 52,000,000 users in 18 months -- more than had voted for either candidate in the preceding US election! -- and discovering, via surveys, that a sizable portion would happily pay between $10 and $15 a month for the service. What's more, Napster's architecture included a gatekeeper that could be used to lock-out non-paying users.

The record industry refused to deal. Instead, they sued, bringing Napster to its knees. Bertelsmann bought Napster out of the ensuing bankruptcy, a pattern that was followed by other music giants, like Universal, who slayed MP3.com in the courts, then brought home the corpse on the cheap, running it as an internal project.

After that, the record companies had a field day: practically every venture-funded P2P company went down, and millions of dollars were funneled from the tech venture capital firms to Sand Hill Road to the RIAA's members, using P2P companies and the courts as conduits.

But the record companies weren't ready to replace these services with equally compelling alternatives. Instead, they fielded inferior replacements like PressPlay, with limited catalog, high prices, and anti-copying technology (digital rights management, or DRM) that alienated users by the millions by treating them like crooks instead of customers. These half-baked ventures did untold damage to the record companies and their parent firms.

Just look at Sony: they should have been at the top of the heap. They produce some of the world's finest, best-designed electronics. They own one of the largest record labels in the world. The synergy should have been incredible. Electronics would design the walkmen, music would take care of catalog, and marketing would sell it all.

You know the joke about European hell? The English do the cooking, the Germans are the lovers, the Italians are the police and the French run the government. With Sony, it seemed like music was designing the walkmen, marketing was doing the catalog, and electronic was in charge of selling. Sony's portable players -- the MusicClip and others -- were so crippled by anti-copying technology that they couldn't even play MP3s, and the music selection at Sony services like PressPlay was anemic, expensive, and equally hobbled. Sony isn't even a name in the portable audio market anymore -- today's walkman is an iPod.

Of course, Sony still has a record-label -- for now. But sales are falling, and the company is reeling from the 2005 “rootkit” debacle, where in deliberately infected eight million music CDs with a hacker tool called a rootkit, compromising over 500,000 US computer networks, including military and government networks, all in a (failed) bid to stop copying of its CDs.

The public wasn't willing to wait for Sony and the rest to wake up and offer a service that was as compelling, exciting and versatile as Napster. Instead, they flocked to a new generation of services like Kazaa and the various Gnutella networks. Kazaa's business model was to set up offshore, on the tiny Polynesian island of Vanuatu, and bundle spyware with its software, making its profits off of fees from spyware crooks. Kazaa didn't want to pay billions for record industry licenses -- they used the international legal and finance system to hopelessly snarl the RIAA's members through half a decade of wild profitability. The company was eventually brought to ground, but the founders walked away and started Skype and then Joost.

Meantime, dozens of other services had sprung up to fill Kazaa's niche -- AllofMP3, the notorious Russian site, was eventually killed through intervention of the US Trade Representative and the WTO, and was reborn practically the next day under a new name.

It's been eight years since Sean Fanning created Napster in his college dorm-room. Eight years later, there isn't a single authorized music service that can compete with the original Napster. Record sales are down every year, and digital music sales aren't filling in the crater. The record industry has contracted to four companies, and it may soon be three if EMI can get regulatory permission to put itself on the block.

The sue-em-all-and-let-God-sort-em-out plan was a flop in the box office, a flop in home video, and a flop overseas. So why is Hollywood shooting a remake?

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YouTube, 2007, bears some passing similarity to Napster, 2001. Founded by a couple guys in a garage, rocketed to popular success, heavily capitalized by a deep-pocketed giant. Its business model? Turn popularity into dollars and offer a share to the rightsholders whose works they're using. This is an historically sound plan: cable operators got rich by retransmitting broadcasts without permission, and once they were commercial successes, they sat down to negotiate to pay for those copyrights (just as the record companies negotiated with composers after they'd gotten rich selling records bearing those compositions).

YouTube 07 has another similarity to Napster 01: it is being sued by entertainment companies.

Only this time, it's not (just) the record industry. Broadcasters, movie studios, anyone who makes video or audio is getting in on the act. I recently met an NBC employee who told me that he thought that a severe, punishing legal judgment would send a message to the tech industry not to field this kind of service anymore.

Let's hope he's wrong. Google -- YouTube's owners -- is a grown-up of a company, unusual in a tech industry populated by corporate adolescents. They have lots of money and a sober interest in keeping it. They want to sit down with A/V rightsholders and do a deal. Six years after the Napster verdict, that kind of willingness is in short supply.

Most of the tech “companies” with an interest in commercializing Internet AV have no interest in sitting down with the studios. They're either nebulous open source projects (like mythtv, a free hyper-TiVo that skips commercials, downloads and shares videos and is wide open to anyone who wants to modify and improve it), politically motivated anarchists (like ThePirateBay, a Swedish BitTorrent tracker site that has mirrors in three countries with non-interoperable legal systems, where they respond to legal notices by writing sarcastic and profane letters and putting them online), or out-and-out crooks like the bootleggers who use P2P to seed their DVD counterfeiting operations.

It's not just YouTube. TiVo, who pioneered the personal video recorder, is feeling the squeeze, being systematically locked out of the digital cable and satellite market. Their efforts to add a managed TiVoToGo service were attacked by the rightsholders who fought at the FCC to block them. Cable/satellite operators and the studios would much prefer the public to transition to “bundled” PVRs that come with your TV service.

These boxes are owned by the cable/satellite companies, who have absolute control over them. Time-Warner has been known to remotely delete stored episodes of shows just before the DVD ships, and many operators have started using “flags” that tell recorders not to allow fast-forwarding, or to prevent recording altogether.

The reason that YouTube and TiVo are more popular than ThePirateBay and mythtv is that they're the easiest way for the public to get what it wants -- the video we want, the way we want it. We use these services because they're like the original Napster: easy, well-designed, functional.

But if the entertainment industry squeezes these players out, ThePirateBay and mythtv are right there, waiting to welcome us in with open arms. ThePirateBay has already announced that it is launching a YouTube competitor with no-plugin, in-browser viewing. Plenty of entrepreneurs are looking at easing the pain and cast of setting up your own mythtv box. The only reason that the barriers to BitTorrent and mythtv exist is that it hasn't been worth anyone's while to capitalize projects to bring them down. But once the legit competitors of these services are killed, look out.

The thing is, the public doesn't want managed services with limited rights. We don't want to be stuck using approved devices in approved ways. We never have -- we are the spiritual descendants of the customers for “illegal” record albums and “illegal” cable TV. The demand signal won't go away.

There's no good excuse for going into production on a sequel to The Napster Wars. We saw that movie. We know how it turns out. Every Christmas, we get articles about how this was the worst Christmas ever for CDs. You know what? CD sales are never going to improve. CDs have been rendered obsolete by Internet distribution -- and the record industry has locked itself out of the only profitable, popular music distribution systems yet invented.

Companies like Google/YouTube and TiVo are rarities: tech companies that want to do deals. They need to be cherished by entertainment companies, not sued.

(Thanks to Bruce Nash and The-Numbers.com for research assistance with this article)

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