By DAVID D. KIRKPATRICK
Thomas
Middelhoff, chairman and chief executive of the media giant Bertelsmann,
kicked off his
crusade to save Napster on the afternoon of Oct. 31 last
year in the ballroom of the Essex House hotel
on Central Park South. Before a crowd of journalists and camera crews,
Middelhoff mounted a dais with
Shawn Fanning, Napster's 19-year-old founder. Everyone knew Fanning:
the bashful cult hero who had
brought free music to the masses, the embodiment of the libertarian
ethos of the Internet.
Not many recognized Middelhoff. Forty-seven years old, 6- foot-4, slender
and broad-shouldered, he was
dressed the part of a buttoned-down media baron -- thick knot in his
cream-colored tie, starched collar
and dark double-breasted suit. From Bertelsmann's headquarters in Gutersloh,
Germany, Middelhoff
presides over a media empire that includes the book publishing behemoth
Random House; the record
labels RCA, Arista and Windham Hill; an international portfolio of
newspapers and magazines, including
YM and Family Circle; and Europe's largest television studio, radio
and television broadcaster, Internet
portal and online store.
Speaking in an unmistakably German syntax, Middelhoff announced that
Bertelsmann was coming to the
rescue of Napster, the music industry's nemesis. The plan was that
Bertelsmann would pay Napster $60
million to help convert its free music-sharing network into a fee-collecting
subscription service that
would pay copyright holders for permission to circulate their songs.
Fanning, glancing down shyly and
biting his lip, thanked Middelhoff with a Napster T-shirt.
"It looks very good," Middelhoff said, making the most of the unlikely
scene. "I have five kids. They
would die to get it." Getting a laugh, he hammed it up. "It is XXL."
Then he turned to Fanning and opened
his arms for a bear hug. To the befuddled audience, it was J.P. Morgan
cuddling up to Pretty Boy Floyd,
and for a moment even Fanning looked surprised.
Middelhoff met me at the hotel that morning and tipped me off to his
bombshell. He clearly got a kick out
of my momentary confusion. "Bertelsmann and Napster -- are you surprised?"
he asked, leaning back in
his chair and letting his long arms dangle to the sides. "Let's be
honest," he said with a grin. "Napster is
pretty cool."
The essence of Napster is file-sharing, a technology designed to let
fans feed off one another's enthusiasm
for music. Its users transfer their favorite songs from compact discs
to files on their computers, and
Napster's software allows other users to scan these collections from
afar and copy the music they want
directly onto their own hard drives. After a year and a half in business,
its vast network of registered
users -- more than 37 million at the time the deal was announced --
had digitized an estimated three billion
recordings. Fanning and company even added chat rooms and instant messaging
to facilitate user bonding.
Middelhoff was almost rhapsodic about the potential for building communities.
"When a Napster user is
sitting at his PC and he's connected with somebody in Europe or in
Latin America or in Asia, then they
don't share only the file," Middelhoff said. "They are saying, 'Hey,
can you remember when this band
performed, and what did you do, did you have your first kiss? And by
the way, where do you live?' This
was Shawn Fanning's genius."
Even before the ink on his Napster deal was dry, Middelhoff was predicting
that Bertelsmann would find
a way to apply the file-sharing model to every form of media imaginable,
from family photos to video
games, digital films and television, even electronic books. Consumers
would share anything that could be
browsed or disseminated, probably paying a monthly subscription fee
to participate.
Plenty of people had tossed around similar ideas for video games or
films, but few could figure out how
to make money and respect copyright. And none of them were heads of
major media companies. But here
was Middelhoff, saying that file-sharing would eventually constitute
a change in the consumption of
popular culture as revolutionary as radio or cable television.
It would also constitute a major strategic coup for Bertelsmann. In
exchange for a loan, Bertelsmann
received the right to buy a majority stake in Napster later. This would
secure a foothold on every user's
hard drive. Napster isn't just a Web site that users choose to visit
or skip. It is a piece of software users
download to their own machines -- the Napster "client" that acts as
a gateway to its network the way the
Netscape browser is a gateway to the Internet. It provides a direct
line to the consumer, through which a
company could observe habits and pitch products. That intimate connection
is the Holy Grail of the media
business, driving Time Warner's merger with AOL, Universal's sale to
the French company Vivendi and
Rupert Murdoch's pursuit of the digital satellite television company
DirecTV.
Of course, domesticating Napster into a legitimate business would require
settling its lawsuit and winning
the cooperation of Bertelsmann's rivals, including AOL Time Warner
and Vivendi Universal. Most people
at the record labels were convinced that Napster's principal attraction
was giving away their music free.
But Middelhoff promised that Napster would allay those fears by limiting
its sound quality, ensuring that
users would still buy compact discs. He was confident that through
his personal connections, he would be
able to persuade his competitors to let Napster use their music once
he explained its advantages as a new
source of revenue and form of promotion. "I had dinner recently with
the heads of the other media and
entertainment companies," he told me the morning of the news conference.
"They see that file-sharing is
going to be a fact."
His powers of persuasion are formidable. I nodded along as he spoke
in a torrent of enthusiasm about
Napster's power. "Thirty-seven million users can't all be criminals,"
he said, leaning forward in his seat
and staring intently into my eyes. Only after I left did I realize
that he had told me next to nothing specific
about making this fabulous vision a reality. Wouldn't charging fees
alienate Napster's fans? Could he
really convince his rivals to settle their suit? How many people actually
wanted conversation along with
their music?
Since then, the obstacles have only mounted. Neither of the top two
executives at Bertelsmann's music
division -- BMG Entertainment, which supports the suit against Napster
-- attended the show at the Essex
House, and over the next few weeks half a dozen BMG executives quietly
resigned. (Bertelsmann says
they left for other reasons.) Middelhoff's competitors have not settled
their suit; instead, they won a court
injunction, forcing Napster to pull copyrighted songs from its service.
When the other companies
announced plans for competing online jukeboxes, newspapers began preparing
Napster's obituaries.
But you would never know it from talking to Middelhoff. Sounding more
triumphant than ever, he now
vows that Napster's new law-abiding, fee-collecting service will open
for business this summer, in time
to hold on to its franchise.
Middelhoff climbed to the top of one of the most careful and close-mouthed
companies in the world
through a combination of energetic showmanship, trust in his hunches
and appetite for risk. His gambles
have not always worked, but his instinct once paid off in a gigantic
way -- seven years ago, when he
staked his career at Bertelsmann on a partnership with a little-known
entrepreneur named Steve Case and
his beleaguered start-up America Online. Today, Middelhoff credits
that venture with his position at
Bertelsmann, and he believes his instincts about Napster are just as
good. "When I saw file-sharing, I
knew, Wow, this is now a phase of the Internet," he says. "I was convinced
that Napster would be a big
business just like I was convinced that AOL would be a big business
-- because I knew it."
Middelhoff
cultivates the image of a kind of goofy Superman. The first thing anyone
notices about him
is his remarkable pace, partly because he brings
it up. He spends more than half his time jetting
around the world, and he often talks of his frenetic travels as a kind
of competitive athletic achievement.
Sitting down at a meeting this winter in San Francisco, just moments
after an all-night flight from
Gutersloh, Middelhoff passed a note of mock concern to a colleague:
"You look tired."
A few years ago, he made an agreement with his wife and five children
to spend at least one day a
weekend with them on their farm outside Gutersloh, but he has not been
able to keep it. Wherever he is, he
rises every morning at 5:45 to swim and work out, then begins returning
e-mail by 7:15 and stops working
around 10:30 p.m.
When he checks into a hotel, he carries his own bags, talking all the
while on a hands-free cell phone. His
long strides carry him so fast that his aides skip steps to keep up.
In his suite of offices overlooking Times
Square, he races from room to room, checking e-mail messages in one
and dropping into meetings in
another. In between, he raises his hand and calls out "Espresso!" which
one of his secretaries instantly
fetches. He is an avid skier and tackles the slopes the same way he
handles the rest of his business:
plunging straight down, immediately on his cell phone again for the
trip up the lift.
Middelhoff's most memorable trait, however, is not his speed but his
laugh -- a toothy guffaw that is a
striking contrast to his otherwise courtly demeanor. He uncorks it
even in formal settings, giving the
disarming impression that you are old friends the first time you meet.
He has an earnest faith in his own
charisma and its power to motivate others. Last summer, he rented out
Radio City Music Hall to introduce
himself to Bertelsmann's 4,500 U.S. employees. He strode onto the stage
before two video images of
himself and threw his sport coat into the audience like a pop star.
"Do you have passion?" he implored. "I
love Bertelsmann. I would die for this company."
But the effect is leavened by a constant shtick, a penchant for laughing
at his own grandiosity. Before the
crowd at Radio City, he played a video starring some of his top executives.
Strauss Zelnick, then head of
Bertelsmann's music division, appeared on-screen, seemingly responding
to Middelhoff's idea for
Whitney Houston's next single to be a duet. "You singing with Whitney,
Thomas?" Zelnick said, snapping
a pencil in mock exasperation. Dan Brewster, head of Bertelsmann's
magazine division, held up a
prototype of YM's cover, with Middelhoff's head affixed to the body
of Britney Spears in a bathtub of
diamonds. To dramatize Bertelsmann's new thinking about the Internet,
Middelhoff has begun appearing in
German television commercials in a "Star Trek" uniform, with the slogan
"We Pursue Big Ideas -- No
Matter Where They Lead Us."
Middelhoff traces that new thinking back to Nov. 2, 1994, the day he
first met Steve Case. It was probably
the most formative event in his adult life. At the time, AOL was desperate
for cash, but Case showed no
sign of weakness. Instead, he boldly promised that one day AOL would
dominate the market for consumer
online services, and he eventually offered an apparently lopsided deal:
for Bertelsmann to put up all $150
million for a joint European venture but give AOL a 50 percent stake
for its expertise. He also insisted
that Bertelsmann buy a stake in AOL.
Middelhoff saw the "stickiness" in AOL's consumer-friendly features,
and it was the businessman's
equivalent of love at first sight. "We had dinner, and after the dinner
it was clear for me, I have to do it
with this company," Middelhoff recalled. "I trusted him immediately."
Middelhoff agreed to finance AOL
Europe and to buy a 20 percent stake in AOL for $200 million. Bertelsmann's
board, however, was
outraged at the expense, and he reluctantly scaled back the deal to
a 5 percent stake for $50 million.
Middelhoff describes his personal debt to Case with a remarkable ingenuousness,
and he waxes nostalgic
about his time spent on AOL's board. "I changed tremendously over these
six years," he said. "I learned a
lot about the Internet and so on, but also it changed my personal style,
the way I am seeing the world.
Before then, I was much more of a typical German business executive,
but now I believe myself to be a
real mixture: first American and then European."
For his part, Case, who is actually five years younger than Middelhoff,
describes his development the way
an older brother might. "I think what he takes away from the AOL experience
is that a company took some
bold bets at a point when basically everybody was criticizing them,
stuck with those bets through a lot of
ups and downs and created a significant new franchise."
As AOL's business exploded, the many naysayers on Bertelsmann's board
began to rue the decision to
limit their investment to 5 percent instead of 20 percent, and Middelhoff's
stock at the company began to
rise. Mark Wossner, his predecessor as Bertelsmann's chairman, insists
that Middelhoff was picked to
succeed him before the AOL partnership bore fruit. But it is a measure
of Middelhoff's admiration for
Case that he openly credits him with his own success. "It's not only
a joke when I say, 'Thanks to the
success of AOL and thanks to Steve, I got my chairman's position at
Bertelsmann."'
As chairman, Middelhoff began to implement some of his lessons from
America Online. For one thing, he
began throwing open-collared shirts into his rotation of dark suits.
He did away with the longstanding
custom of addressing Bertelsmann executives as "Herr Doctor" in deference
to their business degrees. He
lectured executives on the importance of "low hierarchies, direct communication,
direct access" and
bought each of Bertelsmann's 74,000 employees a personal computer.
He changed the official language for
internal business from German to English. ("We are not a German company
-- we are an international
company," Middelhoff often repeats.) Again and again, executives at
the company say, he admonishes
them, "Yes, this is just like what Steve Case did at AOL. . . . "
"I am sure everybody at Bertelsmann hates me because of all of Thomas's
stories," Case said. "But that is
O.K. My sense is that I am used there as a kind of device to create
change."
Middelhoff likes to say that he is importing American political values
as well. After the European press
unearthed evidence that Bertelsmann printed Nazi propaganda during
World War II and then lied about it
for decades, Middelhoff persuaded Reinhard Mohn, patriarch of the family
that has controlled
Bertelsmann for 166 years, to create an independent commission of historians
to expose the truth.
His outspokenness about Bertelsmann's past has sparked its own controversies.
Last month, Middelhoff
became the first German ever honored by the Jewish U.J.A.-Foundation,
which gave him its Steven J.
Ross humanitarian award. His selection drew angry complaints from many
Holocaust survivors, and he
apologized for not anticipating the problem.
Perhaps the most significant lesson Middelhoff took away from AOL was
that the Internet was
fundamentally altering the media world, faster even than anyone predicted,
and that now was the time for
empire building. As AOL's stock soared, Middelhoff began to bet again
on the next big idea. He tried
unsuccessfully to buy Amazon.com, then poured money into a host of
online stores, including
CDNow.com, the joint venture BarnesandNoble.com and Web sites for Bertelsmann's
book and music
clubs. Like most online retailers, Bertelsmann's have yet to make profits.
The company sank more than
$300 million into Bol.com, which Middelhoff acknowledges was a big
disappointment. Bol.com was
recently folded into Bertelsmann's book and music clubs, and a third
of its staff was laid off.
In 1999, however, when Middelhoff decided to sell Bertelsmann's stakes
in AOL and AOL Europe, his
timing was impeccable. It was the peak of the tech-stock boom, and
Bertelsmann's $50 million investment
in AOL had increased some 28 times in value, to $1.4 billion. AOL bought
back Bertelsmann's stake in
AOL Europe for about $8 billion. With the partial disposition of its
other Internet investments,
Bertelsmann was left with a war chest exceeding $16 billion. In four
years, Middelhoff had more than
doubled the size of one of the biggest media companies in the world.
Case elected to take advantage of his soaring stock price as well, by
acquiring Time Warner,
Bertelsmann's main rival, which meant that Case and Middelhoff were
now officially competitors. "It is a
little strange," Case admitted. "But you have to remember, the competition
is about business. It isn't
personal."
Middelhoff maintains that the companies compete only in isolated arenas,
like music or magazines in the
United States. "If we are in some sense competitors, O.K., then we
compete, but fair," Middelhoff said. "I
believe that today we are best friends."
On
Feb. 12, Middelhoff's bold vision for Napster became a fight for its survival.
A United States
appellate court approved the record industry's request
for a preliminary injunction, restricting
Napster's use of copyrighted songs. Middelhoff had just arrived home
in Gutersloh at 10:45 p.m. when
Hank Barry, Napster's interim C.E.O., called with the news. Over the
next two hours, Middelhoff decided
on a response: Napster would take its case to the public in a news
conference in San Francisco, the day
before the Grammys, and he would fly over to lend the force of his
personality to the cause.
The morning of the event, Hilary Rosen, president and C.E.O. of the
Recording Industry Association of
America, screamed at Barry over the phone, demanding that he call it
off. But Middelhoff was already in
the air. As the news conference began, he sat chewing candy and genially
reached over to fix Shawn
Fanning's collar. First, Barry laid out a proposal: if the industry
would settle its lawsuit, Napster would
promise to pay the music companies a total of at least $200 million
a year as a kind of deposit on income
from Napster's planned subscription revenue.
Then Middelhoff took the microphone, beginning his remarks with an account
of his overnight flight. "We
all together are having a huge and historical chance," he said, smiling
cheerfully. "At least, Napster should
be kept alive for an effective transition to a legal, paid service."
He promised that Joel Klein, the former
head of the U.S. Department of Justice's antitrust division, whom Middelhoff
recently hired, was
contacting the rest of the industry players.
After the meeting, Middelhoff ran out of the room, pausing just long
enough to grab another handful of
Gummi Bears. "I love Gummi Bears," he murmured, as his press secretary
scrambled to catch up.
The offer was an obvious publicity stunt -- there was no guarantee Napster
would be able to pay those
bills, and $200 million was a tiny fraction of what the record companies
claimed they stood to lose in
sales. But the proposal was also a first salvo on a different front:
Washington.
At Barry's suggestion, and after a few calls from Middelhoff, Senator
Orrin G. Hatch urged Congress to
hold a new round of hearings on digital music. "I was pleased when
Bertelsmann took the initiative in
harnessing the consumer demand evidenced by Napster," Hatch said on
the Senate floor. "I again urge the
other major music-industry players to take significant steps toward
this end." Suggesting that the other
labels were standing in the way of progress, Hatch intimated that Congress
might mandate cooperation
with Napster.
The other record companies, however, thought little of the proposal.
"They need to shut down -- then we
can talk," Richard Parsons, co-chief operating officer of AOL Time
Warner, told reporters.
The next night, Middelhoff attended the Grammy Awards, where he sat
near Parsons and Gerald Levin of
AOL Time Warner. "Hey, Dick, great statement," Middelhoff teased. He
kept up a resolutely cheerful
front at BMG's own party after the awards, but there were signs that
his campaign to rehabilitate Napster's
image was failing to take hold. A spokesman advised a guest to remove
the Napster pin from his lapel,
saying, "You don't want to wear that in here." And Middelhoff found
himself warmly welcomed into the
V.I.P. lounge by a confused partygoer as "the man who put Napster out
of business." He nearly spit out his
wine.
By the time I met with Middelhoff a few days later, Bertelsmann's rivals
were planning new digital
jukebox services in an effort to steal Napster's 80 million registered
users. AOL Time Warner was
creating a service of its own, and Vivendi Universal and Sony Music
teamed up to start another, to be
called Duet. For one anomalous moment, Middelhoff seemed almost mournful
about Napster's
predicament. "What is Duet?" he said. "Nobody asked the consumers to
know whether they like Duet.
What we know is that these people love Napster." The music industry,
Middelhoff was convinced, was
squandering a rare marketing opportunity by dispersing Napster's millions
of fans. "The music industry is
killing their own music lovers. They are acting aggressively against
the interests of their own consumers.
So maybe Napster can't survive all these different circumstances. So
what? It is not a problem for
Bertelsmann and BMG. Everybody will survive. But the music industry
will have made a tremendous
mistake, a tremendous mistake. It is shame."
Since then, the struggle over the future of digital music has come down
to a kind of media-mogul
Realpolitik. Music industry executives all say they plan to license
their catalogs of songs to anyone, but in
the short term each hopes to use access to its music as leverage to
build its own distribution service.
Middelhoff holds a valuable card, an archive of copyrights stretching
from Elvis Presley to Whitney
Houston and Dave Matthews. Bertelsmann's rivals need Bertelsmann's
music for their own digital jukebox
plans as much as Bertelsmann needs theirs for Napster. And Middelhoff
will let his rivals have access to
his company's music only if they play ball with Napster. So, for now,
it is a standoff.
On April 2, Middelhoff struck a deal that he now calls a crucial victory.
Bertelsmann, AOL Time Warner,
EMI Group and the Internet company RealNetworks formed a partnership
called MusicNet that would
pool their music catalogs and develop a common format for digital music.
MusicNet will license its
catalog to any service that meets security and legality requirements,
including Napster, if it pulls off the
promised transformation. "This was the breakthrough," Middelhoff told
me the next day. "This means that
Napster will definitely survive."
In truth, Napster's
fate will probably be decided this summer, when all of the companies creating
online
music services plan to open them for business. AOL Time Warner
and RealNetworks are basing theirs
on MusicNet's technology and repertory. Sony and Vivendi struck a deal
with Yahoo! to develop Duet
using another platform and their own songs. With typical bravado, Middelhoff
has vowed repeatedly that
Napster will convert to subscriptions by July 1 -- If not, it should
be shut down," he said.
But people involved say Napster will probably miss that deadline. And
many obstacles remain. The
lawsuit continues, leaving the threat of liability over Napster's head.
It will now have to compete against
huge companies with proven track records building online communities.
Adding software that tracks usage
and protects copyrights may gum up its works. And even if it succeeds,
its competitors will be quick to
imitate it.
As Napster has blocked access to hundreds of thousands of copyrighted
titles, the most popular hits have
vanished. What remains are mostly obscure older songs, bootlegs, small
indie recordings and world
music. The average number of songs available from each user has fallen
from 220 in February to just 37 in
April, according to the news and research firm Webnoize. The number
of files downloaded has fallen
from 2.79 billion in February to 1.59 billion in April. Still, the
traffic remains high -- close to six million
people still sign on every day, and hundreds of thousands volunteered
to test an early version of its pay
service.
And Napster remains, for the moment, the only contender banking on file-sharing
rather than on
downloading songs from a central server. That gives it a few distinctions.
It provides the sense of
interconnection that Middelhoff finds so inspiring; its open system
offers a potentially limitless selection
of recordings; and passing files directly between users can be more
efficient than sending them all the way
from a central server.
People around Middelhoff at Bertelsmann assert that his friends from
AOL agree in their hearts about the
future of file-sharing. But when I asked Case, he did not sound so
sure. "The jury is still out in terms of
how Thomas's bet on Napster plays out," he said. "A lot of people criticized
it, and some still do. There
are strong feelings about that at a lot of companies, including among
people here at AOL Time Warner."
Was it naive of Middelhoff to think he could use his personal connections
with rival media executives to
bring them around? "Maybe a little," Case said. "Maybe overoptimistic.
But that does not mean it wasn't
the right decision to make. Time will tell, but everybody recognizes
it was a bold move. A year ago, most
people didn't talk about Bertelsmann or have much of an appreciation
for it. But Napster has helped
Middelhoff put himself on the map and put Bertelsmann on the map. It
demonstrated that he had a seat at
the table on these issues and he was willing to make bold bets. You
know, Babe Ruth was the home-run
king, but he struck out a lot."
Far from admitting defeat, Middelhoff is effectively doubling down.
In February, he managed to persuade
Mohn, whose family foundation owns Bertelsmann, to agree to sell a
quarter of the company to the public
within four years. The decision, which was a byproduct of a complicated
European television deal, will
greatly increase Middelhoff's power over Bertelsmann's far-flung divisions.
It will also mean investors in
the stock market will be scrutinizing Middelhoff's plans, including
his scheme for Napster.
Middelhoff says that he is sticking to his instincts, just as he did
when he first met Case. "When I did my
investment in AOL, most analysts said, 'Oh, my God, this guy's company
will be dead very soon,"' he says.
"Maybe I am wrong, maybe I am right. I cannot predict how the consumer
will react. But even if the judge
closed Napster down completely, I have no regrets, because I believe
that Napster has 18 months more
experience in file-sharing technology. And it has a very powerful brand.
If we leverage it, and if we add
new content, then we have a realistic chance to be a worldwide brand
for peer-to-peer file-sharing across
every media. This technology is going to be enormous for the future."
David D. Kirkpatrick is a reporter for The Times.
Copyright 2001 The New York Times Company