- The Washington Times - Wednesday, November 1, 2000

One of the nation's top five record companies suing Napster changed its position yesterday and said it is teaming up with the song-swap company to start a subscription Internet music service.

Bertelsmann AG, parent of record label BMG Entertainment, is buying a stake in the Redwood City, Calif.-based Napster and giving it a loan to help start a new music-sharing service that charges users a subscription fee and pays royalties to artists.

The German media giant said once the service is up and running, it would drop its copyright infringement lawsuit against Napster and allow it access to its entire music catalog. Bertelsmann invited other record labels to join the service.

Bertelsmann's change in position toward Napster means the controversial service would be legitimized as a key player and could possibly revolutionize the way people get music.

"Napster has pointed the way for a new direction for music distribution, and we believe it will form the basis of important and exciting new business models for the future of the music industry," Thomas Middelhoff, Bertelsmann's chairman and chief executive officer, said yesterday in a joint statement with Napster officials.

Napster's software was written a year ago by a college student, Shawn Fanning, who was 18 at the time. Since then, it has become the fastest growing Internet site ever, gaining close to 38 million users.

But Mr. Fanning's renegade service is facing an enormous legal battle over copyright infringement with the top record labels BMG, Universal Music, Sony Music, Warner Music Group and EMI Group Plc. as well as the Recording Industry Association of America and artists Metallica and Dr. Dre.

This summer, U.S. District Judge Marilyn Hall Patel ordered Napster shut down pending a full trial. But the company took its case to the 9th Circuit Court of Appeals and won a last-minute stay.

The final decision in the suit will determine how songs, films and books are distributed on line. It is of particular interest to Bertelsmann, owner of several book and magazine publishers, a European broadcasting network, on-line music retailer CDNow and a large stake in barnesandnoble.com.

Analysts hailed yesterday's announcement, saying doors are beginning to open for this new method of distribution that could generate as much as $3 billion a year.

"Because of the popularity of Napster and because it is such a huge potential revenue generator, [record labels] have realized [Napster] is too big to kill off," said Matt Bailey, an analyst with Webnoize, a Cambridge, Mass.-based digital entertainment research firm.

Webnoize just released a survey saying that 67.6 percent of Napster users would pay $15 per month or the average price of a CD to use the service.

But most analysts speculate the subscription service would charge $4.95 per month, a price that Napster's chief executive, Hank Barry, offered the record labels a month ago in an effort to compromise. At that price, he said Napster would generate some $500 million in revenues for labels and musicians.

Mr. Barry's offer was then rebuffed, but Bertelsmann's willingness to work with Napster now may lead to other labels' acceptance of it as well.

"This is the largest step taken along this path," said Mr. Bailey. "Digital music has become a part of everyday life, and [users] are willing to pay for it… . There is a huge market."

By wanting to start a joint service with Napster, Bertelsmann recognizes that "new technology should not be buried but rather should be exploited for the benefits of consumers and creators," said Jonathan Potter, executive director of the Arlington, Va.-based Digital Media Association, a trade group for the digital media industry.

"I think Napster has so many users that it's hard not to leverage it as a legitimate business," Mr. Potter said.

Bertelsmann and Napster said the new subscription service will start soon. Analysts speculate that means by the end of the year, given that technology to secure the site already exists.

"The record labels are eventually going to come around to using technology like this," said Kris Tuttle, an analyst with Wit SoundView, a Stanford, Conn.-based investment research group.

"Napster still has all this legal action with the rest of the labels, who are notoriously unfriendly. But ultimately, 12 months from now, this stuff will probably all be resolved, and computer users will have access to tons of copyrighted material for free or for a fee."

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