Analysis: Napster slouches on

By T.K.MALOY, UPI Deputy Business Editor  |  May 20, 2002 at 5:24 PM
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WASHINGTON, May 20 (UPI) -- The steep decline of online music pioneer Napster Inc. is at least temporarily halted with the company expected to file for bankruptcy but then be taken over by German multimedia giant Bertelsmann AG under a fire sale deal.

At question now is whether Napster can overcome legal, technological and purely consumer problems to relaunch its onetime influential music platform and reclaim the millions of almost cult-like users who once flocked to the online music service.

Bertelsmann finally negotiated an $8 million buyout for the online music company on Friday after Napster's board earlier rejected a more lucrative offer from the German company, and Napster's founder Shawn Fanning and Chief Executive Officer Konrad Hilbers resigned in protest against the board.

The two senior Napster officials agreed to return as part of the purchase deal inked with Bertelsmann. Under the terms of the deal, which opens the way for Napster to declare bankruptcy, the German giant will excuse the earlier multi-millions it invested and use the $8 million to pay off the online music company's various creditors.

"We are very pleased to have reached an agreement with Napster's board of directors," said Joel Klein, CEO of Bertelsmann. "We are happy to see Napster move forward with Konrad Hilbers at the helm. We are committed to providing (recording) artists the best possible distribution opportunities for their work, and to provide consumers more choice and control."

"Creating new ways of doing business is never easy, but Napster will be at the forefront of finding business models that respect copyright, reward artists, and deliver entertainment value to consumers," Klein added.

The Cupertino, Calif.-based Napster was at onetime the high-flyer of the online music world with nearly 70 million users, but it has lost its way since effectively shutting last spring as the result of ongoing legal problems with the major record labels over copyright infringement complaints.

Founded in a college dorm room in 1999 by the then 19-year-old Shawn Fanning using innovative file sharing technology, Napster encountered mixed fortunes as it tried to become an actual business with revenues and a plan.

The problems were myriad, as Napster was hounded with lawsuits by the major record labels and as its evolution into a pay service was hampered by its user base, which the company was uncertain would actually pay for online music.

Also, the company has yet to overcome technological problems with turning it file-sharing technology into a pay-per-download service which can track usage of content.

Among the former litigants against Napster was Bertelsmann, which had exited the large-scale copyright lawsuit to become an investor in the digital music startup amid a change of heart over the potential for online music. Over the last year-and-a-half, the German company has invested $85 million in Napster.

"Bertelsmann understood our vision when they first invested in us. They still believe in that vision," said Fanning of last week's deal. "I'm ready to work with the many talented people at Napster to complete the new service and get it off the ground."

At issue for the record labels in the ongoing legal proceedings was the rampant file swapping of copyrighted material that Napster made possible, though supporters of the service defended the music downloads as unprecedented promotional vehicle for the music industry -- even if it was for free.

Big time music recording artist -- among them the heavy metal group Metallica -- blasted Napster for large-scale free distribution of the band's copyrighted material. But other bands and industry figures stepped in to support the online music service.

With the expectation of eventually having a profitable pay-per-download service, Napster had proposed a billion dollar settlement to the record labels, which ultimately foundered. Under one proposal, the major labels -- including Sony, Warner, EMI, Universal and formerly the Bertelsmann Music Group -- would have collectively received $150 million per year for a non-exclusive license to use their music, divided according to those respective files transferred through Napster.

Also, $50 million per year was to be set aside for independent labels and artists, according to Napster.

But the recording industry has proved cool to any ongoing proposal by Napster, with continuing legal troubles hampering any progress by the online music service.

However, even as Napster's fortunes remain uncertain, the online music platforms launched by the recording industry, such as Pressplay and MusicNet -- of which Bertelsmann is also an investor -- also have yet to hit pay dirt on the profit front.

So Napster and the future of online music somewhat slouches on, with online distribution a killer application, but one that is waiting for a service that balances the interest of the recording labels and the world's hundreds of millions music fans.

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