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I was riveted by the legal showdown over the song-swapping software Napster even before those Metallica millionaires started carping about losing their livelihood and their disgruntled fans began smashing CDs in protest. Beyond the drama, rhetoric and legal verdicts, I’ve become convinced the Napster case represents a transformative historical moment.

The way I see it, some 38 million Napster users toppled a central held-over fallacy from the Old Economy: that knowledge can comfortably be treated as a commodity. Let’s face it. With populist power tools like Napster, digitized knowledge simply will not remain shrink-wrapped.

In this sense, the take-home message about Napster was evident long before the deal it struck last November with media giant Bertelsmann AG, in which it agreed to charge users a subscription fee and share the profits. Such settlements aside, and no matter how pending lawsuits come out, the really big story is that grassroots file sharing is here to stay. In an economy increasingly driven by knowledge-intensive, “content-providing” industries from software to Hollywood, the implications are even bigger than, well, Britney Spears. Little wonder that EMI executive Jay Samit has warned that the highly centralized music industry is merely “the canary down the digital mineshaft.”

Known as peer-to-peer, or P2P software, grassroots networks like Napster, Gnutella and Freenet will keep expanding. Like so much of the New Economy’s best, these systems feed off the decentralized power of the network itself. They allow users discretion to seek information from others as well as to pass around whatever information they possess. Even with these first-generation P2P tools, we can no more hope to keep a centralized rein on copyrighted material than the old Soviet regime could hope to control publishing by preventing access to copiers. Call them pirates, but Napster users perceive a bounty out there and view their system as an empowering way to share it-much like a turbocharged public library.

Ironically, especially in light of Napster’s new subscription fee, the essentially noncommercial “sharing” quality of P2P systems is precisely what makes them so threatening to knowledge-intensive industries. It is also what makes the Napster phenomenon so fascinating: We stand deadlocked between two unworkable systems. The penchant of the P2P principals to freely share music includes no way to compensate the innovators who create content. Meanwhile, record labels are belatedly trying to add digital watermarks and other security features to recordings as they watch their intellectual property leach away. In a P2P world, these efforts are doomed as long as the industry insists on treating its wares like tangible packaged goods.

Perhaps most fascinating of all is how many smart people seem determined to willfully resist the central lesson of Napster. Their argument seems to be that exchanging songs via Napster is no different than stealing a stereo or guitar because both the songs and the physical items are the result of knowledge work. (See “Your Work Is Mine!” TR November/December 2000.)

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