Napster could be singing the blues soon.
A federal court ruling handed down today all but shuts down the online music swap shop, where millions of users trade small music files called MP3s. Service is still up and running for the moment, but it could be forced to stop soon.
For the past six months, Napster has been operating under a stay from the 9th U.S. Circuit Court of Appeals that stalled a district court's temporary injunction that would have halted Napster's operations pending the outcome of a landmark lawsuit by the Recording Industry Association of America.
But today, the federal appeals court ended that stay. In their ruling, the justices said that while the initial injunction was overbroad, "Napster has knowledge, both actual and constructive, of direct infringement."
The appeals court sent the injunction back to the lower court, but with instructions that all copyrighted material should cease being traded, said Nicholas Economides, a New York University professor and a specialist on the Internet and public policy.
Essentially, the court said Napster must stop the bulk of what it is doing — facilitating the trading of copyrighted music.
For many in the recording industry, the appeals court's ruling was music to their ears. Heavy metal band Metallica, which has publicly expressed its distaste for Napster and has brought its own lawsuit against the company, applauded the ruling, seeing it as a victory for artists.
"The 9th Circuit Court has confirmed that musicians, songwriters, filmmakers, authors, visual artists and other members of the creative community are entitled to the same copyright protections online that they traditionally been afforded offline," said Metallica in a statement.
Napster could appeal today's ruling all the way to the U.S. Supreme Court. But there's no guarantee the high court will agree to take it up. And that process could take months.
Lawyers for Napster argued in October in front of the appeals panel that the many legal uses of the company should preclude it from being shut down. Attorneys for the RIAA argued Napster allows users to violate copyrights and should be stopped.
"[Today's ruling] appears on the surface to be a death sentence to Napster," said ABCNEWS legal analyst Jeffrey Toobin. "But I think the situation is more complicated than that because music companies want to tap into the tremendous surge of interest that Napster has tapped into."
Getting a Piece of the Action
The 9th Circuit announced on Friday that it would hand down its decision today, launching a last-minute scramble by Napster users to download as much music as possible.
Webnoize, a Massachusetts-based company that tracks digital entertainment, noted a definite spike in Napster usage over the weekend.
"We estimate there were 250 million downloads," said Webnoize analyst Matt Bailey, who has been conducting a study on the popular online music destination since September.
Webnoize, which has calculated that Napster runs 170 servers, arrives at its download numbers by monitoring the Napster network and keeping track of how many users and how many files are logged onto each server.
From the pattern of the average number of files a user has, says Bailey, we can get an idea of the number of downloads.
The number of users over this weekend average about 1 1/2 million at any given time, compared to 1 1/4 million in January, said Bailey.
Recognizing the wild popularity of his company, Napster founder and creator Shawn Fanning expressed his disappointment with today's ruling in a news conference: "Napster works because people who love music share and participate. Along the way, many have said we wouldn't survive. … Today we have more than 50 million members and we'll find a way to keep this community growing."
It's this huge, potential revenue pool that focused music companies' attention on Napster. But whereas the labels' first reaction was to take the matter to the courts, a more long-term look prompted a big deal — almost in a "if you can't beat 'em, join 'em" spirit.
German-owned Bertelsmann AG was the first to step up to the Napster plate, joining forces with the Internet service to start a for-pay service. Under the roughly sketched deal with the media giant, which owns the BMG label, BMG would drop its part of the lawsuit against Napster and the online company would gain the BMG catalog, which includes work from artists such as Christina Aguilera and Carlos Santana. Bertelsmann says these terms are contingent on Napster's putting in place a viable membership service.
But many business and technical details of the proposed service have yet to be disclosed, and so far none of the other labels has shown real interest in joining BMG.
So the lawsuit of the four other big music labels — Sony, EMI, Warner Bros. and Universal — will continue, as will Napster, for the moment, at least. But things will be different for Napster users as early as this summer, when the fledgling online company is slated to launch its new service. And there is the possibility that other labels will follow Bertelsmann's lead.
The content companies are not trying to defeat Napster as much as contain the company, says Toobin.
"I think they're savvy enough to recognize distribution of music over the Net is here to stay [and] they just want to make sure they have a piece of the action," said Toobin. "The great challenge for everyone involved is figuring out a way to continue this distribution over the Net while providing revenue to the creators of the music."
RIAA, a powerful trade group representing the major music labels, sued Napster in December 1999 for copyright infringement, alleging the popular music trading service helped facilitate massive piracy among its tens of millions of users.
But Napster says its service — which exposes emerging musicians to the online community and allows owners of copyrighted music to listen to that music from a variety of locations over the Net — constitutes legal, “fair use” by consumers of music recordings through file sharing.
In October, lawyers for the company argued in front of the appeals court that the battle over Napster is analogous to the wars waged over the Betamax video cassette recorder in the 1980s. Several Hollywood studios took Sony to court over the home-recording technology, which they alleged would illegally cut into their profits. The electronics giant successfully argued the VCR had significant non-infringement uses, which basically saved the VCR from extinction.
Napster also argued that it is protected under the 1992 Audio Home Recording Act, which resulted from the perceived threat of digital audio tapes, or DATs, to the music industry. The legislation allows consumers to make digital recordings for their personal use but mandates manufacturers of devices such as the DAT machine and the mini-disc recorder to pay a royalty to the copyright owners.
Napster reasoned that since individual users are protected from copyright infringements under the act, the company cannot be doing anything illegal by helping facilitate this on a larger scale.
Lawyers for the music industry argued that Napster should be prevented from infringing on copyrighted material.
The controversial Napster program was developed by former Northeastern University student Fanning when he was 18. The software debuted in September 1999 and quickly gained notoriety and popularity as more and more of the online community turned to it to tune into MP3s. (For a full history of the company, click here.)
It became such a big hit on college campuses that their high-speed connections were slowing down because of too many Napster downloads clogging the pipes. Anyone can download Napster onto his or her computer, search for titles or artists and then download for free whatever songs are found by simply clicking on them.
The MP3 files can be played on any computer with a sound card and speakers, and can even be recopied on a blank CD. MP3 music files have been around for several years, but they were difficult to find. With Napster, they’re easy to find and they’re free.
The RIAA estimates that song-swapping via Napster by millions of people worldwide has cost the music industry more than $300 million in lost sales.
But data has been mixed, showing in certain areas that music buying is not necessarily on a decline while in other areas there might be.
In the end, today’s ruling might be moot for the future of online music swapping because Napster is not the only option. Similar peer-to-peer programs like Gnutella and Freenet allow music trading but without having to go through a centralized database. So though they haven’t yet caught on as much as Napster, when they do, industry experts argue, they’ll be a lot harder to shut down.
"The technolgy is changing so fast Napster is not the worst problem the music companies face because at least Napster is a centrally controlled switching point for this music," said Toobin.
ABCNEWS.com’s Beth McCorry contributed to this report.