Bertelsmann chief executive Thomas Middelhoff earned himself some unexpected street cred last week when he sealed an alliance with Napster, the renegade provider of free music online.
His elder son, Jan, who was with him in New York, met Napster founder Shawn Fanning, who has become something of a hero in the software world after devising the programs that enable music fans to swap songs over the Web. "Jan thought it was really cool," says Mr Middelhoff. "He thought Shawn was really cool." The boss of Europe's largest media company, by contrast, is many things but hardly cool. He was an altar boy in Dusseldorf in his youth. His MBA focused on "planning-oriented subjects in information technology". Today, despite his garrulous warmth and hearty laugh, Mr Middelhoff's style remains conservative: he is dressed in a double-breasted suit, a button-down white shirt and a custard-yellow tie. But Mr Middelhoff has built his career - and rebuilt his company - by hooking up with trend-setters in the world of media and technology. In 1994, he met Steve Case, a Hawaiian-born entrepreneur with grand plans for a company called America Online (AOL). The pair hit it off and Mr Middelhoff, then the co-ordinator of Bertelsmann's multimedia businesses, returned to the group's headquarters in Gutersloh to persuade the board to invest in AOL.
Despite resistance from some colleagues, Bertelsmann acquired 5 per cent for $50 million (€57.85 million). As AOL grew into the world's largest Internet group, that downpayment became the most rewarding investment in Bertelsmann's history. When AOL's stock price hit its peak last year, the stake was worth $10.5 billion. By then, Mr Middelhoff had become chairman and chief executive. The Napster deal marks another leap of faith into a realm of new technology. Bertelsmann is to extend a loan, thought to be less than $100 million, to help Napster develop its file-sharing technology. Napster works like this: you want to listen to Love Me Tender. You download the Napster software and make a request for the song. Your computer searches for other Napster users hooked up to the Web. When it finds Love Me Tender, stored in MP3 format as a file on the hard disk of a computer anywhere in the world, it is copied and sent to you - free.
Access to an ever-expanding catalogue of songs has made Napster the fastest-growing phenomenon on the Internet and, possibly, in business history. Since 1999, it has signed up 38 million users. File-sharing, or peer-to-peer networking, could extend beyond music. "Books and magazine articles and movies will be exchanged in the future," Mr Middelhoff says. At present, the free exchange of songs has landed Napster in court. The five biggest music companies - including Bertelsmann Music Group (BMG), which owns the copyright to the Elvis Presley catalogue - are suing Napster for facilitating mass copyright infringement. Under the Bertelsmann-Napster alliance, Mr Middelhoff pledged that BMG would withdraw its lawsuit once Napster had transformed itself into a legitimate business. That commitment did not go down well with some of Bertelsmann's music executives, who have seen Napster as the pariah of the $40 billion music industry. But Mr Middelhoff has faced internal resistance before and sometimes seemed out of step with his company.
Even in public, Mr Middelhoff has been frustrated in the past by Bertelsmann's over-cautious pace. He has made it his business to get the company moving at "Internet speed". Nearly three years after taking the top job at Bertelsmann, he says: "We have made a lot of progress . . . It is not a new company but it has got the message." Mr Middelhoff must now attempt to bring the rest of the music business round. He promised to try to persuade the other big music companies - EMI, Warner Music, Universal and Sony - to drop their cases against Napster once it showed respect for copyright. The music companies, particularly Universal, are not all that enthusiastic. An executive at one of them suggested that the strategic alliance with Napster was a "classic Middelhoff" deal: "A lot of PR noise. He is playing to the press, not to Wall Street."
Turning Napster's file-sharing technology into a viable business model is now the biggest challenge for Mr Middelhoff. There are many who suspect that once Napster sets itself up as a membership-based business, charging users a mooted $4.95 a month to use its service, many music fans will look elsewhere for songs online that are still free. But Mr Middelhoff suggests the reformed Napster business will include some free music for promotional purposes, as well as access to a further catalogue of songs for members and yet more for people who pay a premium subscription. The new business model is still a long way from being worked out. But Mr Middelhoff suggests that with Bertelsmann's history in book clubs it knows about the underlying principle - building communities.
"It was no coincidence that Bertelsmann found AOL in 1994," he says, suggesting that, in its early days, AOL was about building online communities with e-mail and chatroom services. "It is no surprise we are doing a deal with Napster. Membership-focused communities are in our genes." In New York, Mr Fanning presented Mr Middelhoff with a Napster T-shirt. He promptly asked for more for his children. If Mr Middelhoff can build a viable business out of file-sharing, it will not only be his kids who are pleased - others in the media industry will think he is cool, too.
