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Law and Ardor

Switching their strategy, Bertelsmann Music Group decided to lend a hand to rival Napster -- a deal that will benefit both companies.
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If You Ask Me

Mix First Amendment protection with entrepreneurial invention and zeal, and you've got a competitive edge

Some observers must have been shocked by the announcement late last year that seeming mortal enemies Bertelsmann, the German media giant, and Napster, the new-media upstart, had entered into a deal. (Bertelsmann also owns 74.9% of Gruner & Jahr, which bought Inc. in June 2000.) BMG, Bertelsmann's music division -- along with other music-industry moguls (Warner Music Group, Sony, Universal, and EMI among them) -- was in the middle of a bitter copyright-infringement lawsuit with Napster when the terms of the deal were negotiated. As part of the agreement, Bertelsmann's chairman and CEO, Thomas Middelhoff, agreed to invest in his company's ostensible nemesis and to extend to it a $50-million line of credit.

The money would finance R&D to tame the music-file-sharing technology developed by Napster's founder, 20-year-old Shawn Fanning. As part of that effort, Napster would begin charging for the previously free service that allowed online music enthusiasts to share music (at no profit to the copyright owners). Plus, the company would try to figure out how digital-music files could be made available online without sacrificing copyright protection and the paying of royalties. In other words, it would attempt to establish a new, profitable paradigm -- peer to peer rather than wholesaler to retailer to buyer -- for the distribution of music. (See " There Oughta Be a Law" in Inc. Technology 2000, No. 3, for a discussion of the legal imbroglio between the music industry and Napster rival MP3.com. That suit resulted in a series of negotiated licenses with the plaintiff record companies and music publishers, whereby MP3 would charge its customers and then pay royalties to the copyright holders.)

Bertelsmann's chairman obviously recognized that the 38 million online music swappers who used Fanning's innovative program (the number has since risen to 51 million) should be looked at not as threats to BMG but as members of a huge music-listening community. Those potential customers simply had to be persuaded to pay a modest fee for the privilege of downloading the music that they'd previously enjoyed free of charge. (The fee could be very small because BMG's new customer base would be so large.)

Middelhoff was smart to make a deal while BMG was winning; he alone among the music-industry moguls appears to have been prescient enough to know that the company's good fortune couldn't last -- that the real victory lay only in switching rather than fighting, to paraphrase an old cigarette ad. Even though BMG had Napster on the ropes before Bertelsmann inked the deal, the smart money was betting that businesses that were introducing new technologies were inevitably going to prevail over copyright holders. And if technology alone didn't accomplish such a victory, then it was likely that future legislation and court rulings would make it increasingly difficult for giants like BMG to inflict fatal penalties under the copyright laws. After all, the long history of litigation over the terms of copyright protection indicated that if copyright holders didn't show flexibility, ultimately legal doctrine would move in the direction of facilitating the dissemination of intellectual property.

There's been longstanding tension between the right of copyright holders to limit, control, and profit from the dissemination of their intellectual property and the right of members of the public to benefit to some degree from that property. Copyright (and patent) protection is found in the Constitution itself -- in Article I, Section 8 -- where Congress is given the power "to promote the Progress of Science and useful Arts, by securing for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries."

Thus the government's power to give the creators of intellectual property control over their creations hinges not only on the Constitution's solicitude for the right to private property but also on its desire to give authors and inventors an incentive to create. Furthermore, another part of the Constitution -- the First Amendment's guarantee of free speech -- protects the right to receive, evaluate, disseminate, use, and criticize ideas and the products of intellectual activity.

The tension between protecting the rights of copyright holders and allowing people to benefit from the holders' intellectual property has generally been resolved by the courts through accommodation and compromise. For example, although copyright holders generally may insist on being paid for the use of their property, courts have allowed members of the public to have limited use -- called "fair use" -- of such property for a variety of purposes. Under certain circumstances, writers may quote small portions of a copyright-protected work in a book review or an essay without paying royalties. Likewise, snippets of a song may be used free of charge for certain purposes. Moreover, although a user may not copy wholesale the actual copyrighted work, it is permissible to use summaries of the work or to disseminate the idea but not the precise means of expressing the idea.

The courts -- and at times Congress -- have developed such legal precedents and doctrines in order to tone down the harshness of copyright laws -- laws that would punish even the slightest deviation from a strict, pay-for-every-conceivable-use approach. Such an approach would tilt the constitutional balance too much in favor of protection of intellectual-property rights and against the dissemination of knowledge and the First Amendment's goal of the creation of what one Supreme Court justice has termed a "free marketplace of ideas."

Together, these two realities -- the competitive edge provided by innovation (both in technology and business practices) and the inability or unwillingness of the law to limit too strictly the dissemination of intellectual property -- give the small-niche player tremendous opportunities. Having a better idea, rather than an enormous market share or assets, can mean huge success. So even though today's business behemoths may appear to have the deck stacked in their favor, their positions of preeminence are vulnerable to the upstart. Thanks to the soft edges of intellectual-property law, a small player who can run with the big guy's idea and improve on it will find a place at the table, too.

We're likely to see many more deals like the one between Bertelsmann and Napster in the future -- and they'll hardly be limited to the music industry. After all, seeing reality for what it is has always been a big part of the American entrepreneurial spirit.

Harvey A. Silverglate, a partner in the Boston law firm of Silverglate & Good, writes about civil liberties. His latest book (with Alan Charles Kors) is The Shadow University: The Betrayal of Liberty on America's Campuses . He is chairman of the Independent Privacy Board of Predictive Networks Inc. and codirector of the Foundation for Individual Rights in Education.


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