Judge Nixes Napster Sale

A bankruptcy judge has nixed the sale of Napster to Bertelsmann AG, virtually ensuring that the online music service will not reopen its doors anytime soon.

In the music industry's long war against Napster and other free online file-sharing services, Bertelsmann has been a strong ally and savior, investing US$85 million in Napster while it was operational and then offering to resuscitate the company by purchasing its assets for an additional $8 million.

But in a Wilmington, Delaware, bankruptcy court, Judge Peter J. Walsh questioned whether Napster CEO Konrad Hilbers acted in the best interest of Napster, rather than his former employer, Bertelsmann, when he pursued buyout plans.

Ruling Disappointing

Hilbers, once an executive at Bertelsmann, was appointed to head Napster after Bertelsmann expressed its desire to helm the online music service. He wrote in an e-mail made available to the court that he always had Bertelsmann's best interest at heart when making deals concerning Napster.

In a statement, Hilbers expressed disappointment with the court's decision. For its part, Bertelsmann issued a statement saying it accepts "the court's decision that the sale of Napster's assets to Bertelsmann has been denied and that the purchase process will not proceed."

Facing Big Guns

Napster developed a loyal following almost from its inception. In its heyday, by some estimates the service had as many as 60 million users. But it quickly became a target of record labels, which claimed the service was little more than a vehicle for piracy.

The labels attacked Napster and similar services, such as Morpheus and Kazaa, hitting them with one legal proceeding after another. The aggressive campaign proved too much for Napster and eventually forced the service to shut down a little more than a year ago. But Hilbers and other Napster proponents vowed the service would return, legitimate and more powerful than ever.

Falling Short

Music labels have tried to recreate the Napster experience by developing their own subscription-based online music services, but most have fallen short with the general public.

Yankee Group analyst Mike Goodman told the E-Commerce Times that the music industry has been casting about to find a model that works, but he noted it "may be some time before that happens."

Napster sought approval for the Bertelsmann purchase last week, but the company's request was challenged by the National Music Publishers' Association and the Recording Industry Association of America. Those groups noted in a statement that Bertelsmann's prior funding of Napster was given "without any procedures put in place to ensure that it would not be used to run Napster's illegal copyright infringement business."

Dead for Good?

Hilbers said the opposition has ensured that "Napster's creditors will be denied substantial repayment, and the company will likely be forced into Chapter 7 liquidation." Supporting this contention, the Napster home page reads, "Napster Was Here," and a click-through shows a tombstone with the image of a cat and the words "Ded Kitty" scrawled across the screen.

Despite the efforts of the music industry to thwart free file-sharing services, music lovers are still finding ways to trade tunes online.

Legislative Act

Earlier in the summer, lawmakers jumped into the piracy debate in a serious way. Claiming to be "a big fan of [peer-to-peer] networks and the technology behind them," Representative Howard Berman (D-California), along with Lamar Smith (R-Texas), Howard Coble (R-North Carolina) and Robert Wexler (D-Florida), introduced a bill to protect copyright owners from "the mass piracy of their works."

"Billions of [peer-to-peer] downloads every month constitute copyright infringements for which these creators and owners receive no compensation," Berman said. "There is no excuse or justification for this piracy. Theft is theft, whether it is shoplifting a CD in a record store or illegally downloading a song from Morpheus."

Goodman said he believes the bill, if approved, will be challenged and thrown out in court.

In other news, Bertelsmann announced plans to shed its online retail interests in Europe, including Bol.com, which competes with Amazon.com (Nasdaq: AMZN).