Bertelsmann sued by EMI over Napster

EMI Group PLC on Wednesday joined Universal Music Group Inc. and a group of music publishers in suing Bertelsmann AG, alleging the German company cost them billions of dollars in revenue by funding Napster, the now-defunct file-swapping service.

EMI is seeking US$150,000 per pirated song, which is potentially hundreds of millions of dollars according to EMI. The suit was filed at the U.S. District Court in New York.

Universal filed its lawsuit against Bertelsmann in May. In February, some music publishers, including Jerry Leiber and Mike Stoller, filed another lawsuit and are seeking US$17 billion in damages. All three suits cite similar allegations.

"We find not one, but all three, meritless and weÂ’re going to fight them all with vigor," said Liz Young a spokesperson for Bertelsmann in New York.

In the suit, EMI says Bertelsmann invested a total of US$85 million in Napster, that not only perpetuated copyright infringements but also saved the company from bankruptcy in October 2000. EMI contends that if Bertelsmann had not come to the aid of Napster, the service would have shut down a year earlier.

"By investing both millions of dollars and management resources in Napster -- which was an illegal enterprise built on the unlawful distribution of copyrighted works -- Bertelsmann enabled and encouraged the wholesale theft of copyrighted music," EMI said in a statement.

Bertelsmann is the parent company of BMG Music Inc. that also participated in the 1999 copyright infringement lawsuit against Napster that eventually saw it shut down in July 2001.

A year earlier a U.S. District Court granted the record companies a preliminary injunction against Napster citing "a substantial likelihood of success", according to the suit. EMI alleges at this point Napster was almost out of money and nearly went bankrupt until Bertelsmann came to the rescue in October 2000 with US$50 million. By that time, Bertelsmann was in control of Napster’s management and could have halted the ongoing copyright infringements by shutting Napster down, withholding money, or blocking users engaged in piracy, it said in the suit.

"It’s interesting that people are going after Bertelsmann and alleging this investment continued to perpetuate Napster as if Napster still existed. Napster’s dead. Clearly the investment didn’t do much in the sense that it didn’t help it survive the lawsuit and it didn’t help it survive (the judge’s) decisions,” said Mike McGuire, research director at Gartner G2, the business strategy arm of Gartner Inc., in San Jose, Calif.

The suit also claims that Bertelsmann’s investments in Napster were attempts to capitalize on Napster's user base to position itself as a leader in the online distribution market for music. EMI further alleges Bertelsmann ignored the copyright infringements because it figured it could make more money by acquiring Napster than its BMG division would lose as result these infringements.

Yet McGuire believes this is just as much about the record companies protecting their "decades old business models", as it is about artists being paid for their work.

"Yes I understand the need to protect copyright (but) falling on that sword alone and ignoring the fact that at some point the business models have to change and move forward could wreak a lot of havoc with these labels over time," McGuire said.

McGuire thinks the record industry eventually will have to move towards a digital distribution model for its products. He said this would be an opportune time for a third-party to step up into the digital music distribution business while the major labels are embroiled in their lawsuits.

"If IÂ’m an outsider who has got resources and access to a brand name and distribution, I am looking at this and thinking, 'good, theyÂ’re all going to be distracted for a very long time,'" he explained.

He said Apple Computer Inc. which launched iTunes in April for Mac users, could be the first third-party to make significant money on the online music distribution market. Apple has pledged to ship a Windows version of iTunes by the end of the year, which could potentially increase its user base significantly.

As for Napster, Roxio Inc. purchased the remaining assets of the company in November 2002 and with its May acquisition of Pressplay, Sony Music Entertainment Inc. Universal’s online distribution service, Roxio eventually intends to give iTunes a run for its money. There is no news about when Roxio’s service will be launched.

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