The Limits of Internet Freedom

BERKELEY — Late last month, Bertelsmann AG, one of the world’s leading media conglomerates, surprised the music industry by embracing Napster, a free file-sharing service that Bertelsmann’s music subsidiary, BMG, had been trying to shut down, along with other major record companies. The new relationship seeks to produce a global “membership-based service” to distribute music. But the effects of the alliance could reach far beyond the music business. Specifically, the Bertelsmann-Napster union could lead to the development of a new business model in which profits would come from creating and controlling digital-content networks rather than from individual CDs, films or books. Such a model would fundamentally affect the people who supply entertainment content--the musicians, artists and writers. More fundamentally, it may influence whether the Internet becomes a truly free and open public space or a segmented world of closed, mostly private networks.

Bertelsmann CEO Thomas Middelhoff signaled the need for the music industry to consider a new approach to the Internet in a little-noticed speech last August. He praised Shawn Fanning, founder of Napster, as a “pioneering entrepreneur” and confessed his admiration for Fanning’s file-sharing software. He then sharply criticized music companies for “grossly” underestimating the effects of the Internet. While warning that “if there were only Napster, there would soon be no more new songs to be downloaded,” he declared that music is “predestined” to be distributed via the Internet and called on the industry to turn file-sharing into “a legal business.”

Middelhoff seemed to be acknowledging that the technological underpinnings of the traditional business model used by music, film and publishing industries have largely collapsed. In the old analog world, media companies dominated the production, packaging, promotion and distribution of music, films and books. To control this process, these companies depended heavily on their ability to enforce copyright protections and prevent products from being easily duplicated and distributed.

The advent of audio tapes, photo copying machines and video cassette recorders constituted the first serious threat to the old order. Record companies, film studios and book publishers initially responded with the same kinds of legal threats that they are now using against new-media technologies such as digital file-sharing.

But the first wave of duplication technologies proved to be far less of a threat to old-media companies than first feared. One reason was the poor quality of the copies these technologies produced. More important, reproducing analog copies on a large scale required production facilities beyond the reach of the law--for example, in countries such as China--and selling the copies required the creation of alternatives to the retail-distribution channels used by established media companies.

The digital revolution changed this equation dramatically. Using formats such as MP3 and Windows Media, it is now easy for individuals to turn audio, video and print into files of “bits” that can be easily stored on a variety of different media, transferred via the Internet and read (played) by computers, cell phones and other personal digital devices.

One avenue the music industry is pursuing to reestablish its ability to control music files is the Secure Digital Music Initiative (SDMI), which aims to create a digital “watermark” that could be used to distinguish legal copies from pirated ones. However, given the pace of technological change and the ingenuity of software programmers, many experts doubt that this initiative will succeed in eliminating the ability of users to copy and transfer files.

So far, the music industry has used traditional copyright laws to attack Internet sites that allow users to copy music files for free. They have succeeded in bankrupting MP3.com and scour.com, both of which have been acquired by an industry-supported site, listen.com. Even though Bertelsmann says it will financially help Napster become a paid service, the industry may still succeed in shutting down Napster. But these are Pyrrhic victories.

Internet users upset with Napster for “selling out” are already turning to alternative file-sharing programs such as gnutella and freeshare, which do not use central servers and thus are much more difficult to shut down.

Moreover, the threat posed by the Internet will multiply with increases in the bandwidth of the digital “pipes” that carry digital content into homes. Right now, the vast majority of users around the world are still connecting to the Internet via phone lines that make it very time-consuming to download large music files and nearly impossible to download large video files. But these limits will eventually disappear as more users have access to broadband connections using cable, DSL or wireless.

The bandwidth revolution has put the media industry in a double bind: It needs larger bandwidth to realize its own plans to use the Internet to distribute entertainment content and promote electronic commerce, but that same bandwidth will make it easier for individuals to share music and videos.

Over the long run, the best hope for the music industry may be to create a network-based business model. That is what Bertelsmann apparently has in mind by backing Napster. In this model, subscribers would pay for access to a network of music rather than to individual songs. This is not a new model. For example, newspapers, magazines and cable television all earn revenues by giving subscribers unlimited access to all the content they produce, rather than individual stories and programs. It is also the model that has long been preferred by America Online.

Moving to such a model may come at a price. Media companies may try to prevent the Internet from evolving into a truly free and open communications space. Instead, they may seek to turn the World Wide Web into a world of closed networks, then charge the cyber equivalent of border fees for the right to travel from one network to another.

This would dramatically affect the working lives of musicians and other digital-content producers. It might even lead to the development of a new version of the old Hollywood studio system. In that system, instead of being hired on a film-by-film basis, actors, directors and writers were contract employees who worked on production-lot assembly lines churning out a continuous stream of films for studio-owned theaters across the country. This system collapsed in the early 1950s after the federal government used antitrust laws to force the studios to sell their theaters. If Bertelsmann succeeds in turning the Napster network of 32 million file-sharers into a secure and profitable distribution outlet for its content, it will have created an online equivalent of the old studio theaters.

Such a model would also give Bertelsmann and other media companies an interest in turning much of the Internet into a system of closed proprietary networks. Only by creating the equivalent of virtual borders around file-sharing networks would the companies be able to get consumers to pay fees to be part of the network. Short of that, the ability of artists to earn a living from their music might diminish, as would the supply of music available to consumers.

Both musicians and consumers may soon be forced to choose between paying a high price for exercising the new freedoms that the Internet offers or accepting limits created by a corporate-dominated system whose principles they abhor. By placing this dilemma in high relief, the alliance between Bertelsmann and Napster has underlined the difficulty of resolving the battles to control the Internet.