Deal signals end of free music

The Washington Post

Bertelsmann AG, one of the world's largest music conglomerates, announced a strategic alliance with Napster Inc. yesterday in a deal that strengthens the recording industry's grip on the Internet and suggests that the days of free and easy-to-access music on the Web are numbered.

The announcement, which took the four other major labels by surprise, could reshape the world of online music by neutralizing the industry's most popular Internet opponent. Napster, which started as an outlaw file-swapping service offering unlimited access to a vast body of music, has grown into an Internet phenomenon with more than 37 million users.

The deal is the clearest evidence to date that corporate copyright holders are winning the war over intellectual property on the Internet. By joining hands with a former enemy, Napster's creators have signaled that they are willing to abandon their free-music model in exchange for the ability to make money on their technology.

Companies such as Napster have found that it's easy to build Websites that offer free songs, books and movies online, but turning those sites into profitable businesses has been nearly impossible in the face of legal challenges from the industry. The Bertelsmann-Napster deal could turn out to be a model, proving that the adversaries in these fights have plenty to offer each other: One company has copyrights and the other a Web technology and core of dedicated fans.

For its part, Bertelsmann has broken from the once-united front that took Napster to court and recently pushed it to the brink of legal extinction. And the label - home to artists such as Christine Aguilera and Santana - has handed the service not just a badly needed infusion of cash but the chance to earn its very first dollar of revenue.

"We believe that file-sharing technology needs to be embraced and needs to be exploited in a format that respects artists' rights," said Thomas Middelhoff, Bertelsmann's chairman and chief executive officer at a joint news conference yesterday with Napster officials. "That fits our strategy perfectly."

Under terms of the alliance, Bertelsmann will invest an undisclosed sum in Napster and withdraw from the industrywide infringement suit once the service has reconfigured itself to pay royalties to Bertelsmann's artists through pay-for-play subscriptions fees.

Bertelsmann will offer Napster every song in its digital music library, and Napster will charge about $4.95 a month for access to the songs. Officials at Germany-based Bertelsmann said it will ensure that royalty payments are channeled to labels, songwriters and artists.

News of the deal was hailed by some Web entrepreneurs as long overdue recognition that the Internet will be a money-making force for major labels once they get over fears that online piracy will destroy their industry.

"It's the shot heard round the world," said David Pakman of Myplay.com, a music subscription service. "This is a major label proving that the lights are on, that 37 million consumers can't be wrong and that this is an alternative distribution method that must be built on."

The Napster-Bertelsmann strategy, however, is risky for both partners, say music analysts and competitors.

For starters, the deal won't end the lawsuit against Napster, filed by the Record Industry Association of America, which nearly unplugged the company when a San Francisco federal judge issued a temporary injunction in July to shut the service down until the resolution of a trial.

An appeals panel stayed that injunction, pending review, but there remains the very real possibility that Bertelsmann's new business partner could be ordered, at least temporarily, out of existence.

Moreover, by charging subscription fees, Napster could end up alienating its users, some of whom were drawn to the site, designed by 19-year-old Shawn Fanning, precisely because it seemed so eager to undermine corporate pop. That could drive traffic to rival free music sites, scores of which have cropped up in recent months.

All of these rivals offer MP3s, the preferred file format for downloadable songs, but for now they offer a fraction of the songs and they're far trickier to navigate.

Many - especially those built around Gnutella file-sharing technology - tend to get clogged when they build a large enough library of songs to attract a few million users.

"Napster has to survive the lawsuit and at the same time convert customers into paying people," says Gene Hoffman, chairman of Emusic.com, a subscription-based music service. "That won't be easy."