Will Big Money Spoil Napster?

The battle between Napster and the recording industry is still a David versus Goliath proposition. But with a steady diet of venture capital flowing into Napster and its cousins, David is laying on some serious muscle — and getting harder to cheer for every day.

This week, the Wall Street Journal reported that venture capital (VC) firms are beginning to take a closer look at so-called “P-to-P,” or peer-to-peer technology, encouraging speculation that the maverick industry may become the next darling of the financiers.

First content sites came and went. Then business-to-consumer and business-to-business sites flitted in and out of fashion. Now the “can’t-lose” luster of Internet services firms is beginning to crack and peel.

So P-to-P is in ascendancy, at least among some of the more cutting edge funding firms ensconced in startup havens like Silicon Valley. That means the debate over whether Napster survives is now about much, much more than shipping digitized music between dorm room computers. It is about an entire sub-market of the online economy.

High Stakes, Big Lawyer

The latest sign that Napster is shedding its raw underdog image came when it hooked up with attorney David Boies, a lawyer who achieved notoriety in some recent antitrust cases. Boies represented IBM in its antitrust battle, and then switched to the other side to lead the government’s successful action against Microsoft. To say Boies is a heavy hitter is a huge understatement.

Even before recent developments, the stakes in the Napster battle were high. Most estimates put the annual worldwide revenue generated by music sales at around $39 billion (US$) and the Recording Industry Association of America argues that free music swapping puts a damper on CD sales.

But music downloads are just the tip of the iceberg. Now techies and venture capitalists alike are wondering what else can be quickly and efficiently swapped over networks like Napster. DVDs? Software?

A California startup, GoneSilent.com, recently landed $2 million in venture capital to search out peer-to-peer opportunities for users. The money came from heavy-hitters such as Angel Investors LP and former Netscape head Marc Andreesen — a further indication of the likelihood that the P-to-P segment of the Internet is on the rise.

Roadblocks Ahead

Boies quickly put Napster on the offensive, a brilliant strategy that was necessary to keep the Napster network going. There is, however, one potentially deadly roadblock in the way: The thorny question of whether digital file swapping constitutes piracy. That is the question that Boies must put to rest. If Napster succeeds, expect the floodgates to open for sites that will apply the Napster model to other forms of entertainment.

On the legal front, Boies’ argument is a sound one: People should have a right to share music with one another as long as there is no commercial benefit. Music labels, movie studios and others traditionally leave this fact out of their warnings about piracy, but it is a key legal point in the Napster debate.

And that key point is the linchpin that could hold together any future peer-to-peer network. Naspter has opened the door technologically and ethically on a brave new world where the vast computer network we have built can be used for bartering and swapping activities that fall just outside the bull’s eye of the e-commerce dream that the entertainment world sees in its sleep.

But with financiers on board, the debate shifts. No longer is it simply a matter of two computer users being free to share digital information. Now it is a question of whether someone — be it Napster or a future permutation — can make a lot of money by enabling that sharing.

In the case of Napster versus the recording world, the roles have begun to shift. The once-underground network is living in the bright glare of full daylight now and it suddenly finds itself carrying a heavy burden as it goes forward.

Underdog No More

The problem, as I see it, is that Napster itself is already being changed by the debate and the attention it is receiving. The swapping network got its legs under it wearing a cloak of secrecy and anonymity. Users learned about it through word of mouth and told only those people they thought they could trust.

Now, Napster is well on its way to becoming a household name. And its potential descendants are likely to be unrecognizable mutations of the original, based more on the commercial potential in the underlying technology than the technology itself.

After all, if Napster had been backed from the very start by a group of nervous, meddling investors, its actions and reactions regarding the piracy issue may have been much different. Published reports now say that even the music industry will likely tip-toe into the arena, including advertisements in downloadable music in future marketing campaigns.

Napster: Hard to Find

By being low key and — until recently at least — low rent, Napster bullet-proofed itself to the constant machine-gun barrages launched by the RIAA and others. The network cut a sleek, low profile — one that was not significantly dented until Metallica’s lawyers popped up with a list of users the band claimed had violated its copyrights.

But as Napster grows and begins to stand for an entire new wave of technology, it suddenly becomes a much bigger target. The $15 million that Hummer Winbald Venture Partners said it would pony up for Napster back in May is just the beginning.

The Napster debate has been irrevocably altered by the infusion of money, and the commercialization of the peer-to-peer marketplace is something that will offend many Napster fans.

In order to get around the copyright infringement arguments, Napster will have to find creative ways to charge for its services. The freedom of the network — which was born out of a repudiation of traditional commercial ties — is in jeopardy.

It is still relatively easy to root for Napster against the big bullies in the recording world who have kept CD prices high for so long. But I cannot help wondering whether the taste of victory may tempt Napster to give up the Internet freedom the company fought so hard for back in the day.

What do you think? Let’s talk about it.