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.