Napster's Swan Song
by Curtis Lee Fulton (G2 News)
June 10, 2002
Like Garbo in "Camille", music swapping service Napster Inc is reclining on its deathbed waiting for its inevitable, yet tragic, demise after the company filed for bankruptcy on Monday. The company was crushed in a two-year war of attrition that not only shut it down, but more importantly ended what could have been one of the most significant investigations into the record labels' business practices to ever enter a court.
Although Napster agreed in late May to sell its assets to German media conglomerate Bertelsmann for $8 million, Napster will remain a separate company while the bankruptcy court decides how to split the $8 million among a throng of creditors owed over $100 million.
Most of Napster's debt results from $90 million in loans from Bertelsmann. The rest, so-called "trade debt," comes from at least 20 companies for services for which Napster couldn't afford to pay. The trade debt includes $1.2 million to Bertelsmann's DRM subsidiary Digital World Services (DWS) and $2.1 million to hotshot legal firm Boies, Schiller & Flexner LLP.
Since late 1999 Napster has been embroiled in a copyright infringement suit brought on by the recording industry. Napster's bankruptcy filing triggered an automatic stay of all litigations, including an investigation into the labels themselves.
In March district Judge Marilyn Patel of the Northern District of California surprisingly ruled that the labels had to prove they own thousands of copyrights and that they didn't use the copyrights to crush competitors for digital media distribution. The ruling allowed Napster to begin an investigation into whether the labels actually own the music they say they do and to investigate whether the labels abused their copyrights to keep Napster from competing with the label-backed online services MusicNet and Pressplay.
Patel's ruling against the Recording Industry Association of America (RIAA) and its members came in response to Napster's claim that the recording industry abused its copyrights. "Even a naïf," she said, "must realize that in forming and operating a joint venture, plaintiffs' representatives must necessarily meet and discuss pricing and licensing, raising the specter of possible antitrust violations.