Wednesday, February 14, 2001

Napster Inc., its survival threatened by a court ruling that favored major record labels, is trying to work out agreements for a subscription service to distribute the record companies’ music.

An appeals court ruling Monday that the company was guilty of helping users share copyrighted material nonetheless would likely permit Napster to remain in business if it polices its network to prevent continuing violations.

But Napster’s attorneys have said that is nearly impossible.

So the Redwood City, Calif.-based company is trying to work out deals with major record labels like the one it has with Bertlesmann AG.

“They haven’t reached any deals yet,” said Cary Sherman, senior vice president and general counsel for the Recording Industry Association of America, one of the groups suing Napster.

Bertelsmann AG struck its deal with Napster last fall. BMG, a Bertelsmann unit, was part of the original lawsuit. Under the agreement, Bertelsmann agreed to drop its lawsuit if it can create a subscription service with Napster. That would allow Napster to place BMG’s music catalog on line and give Bertlesmann a controlling stake in Napster.

Bertlesmann has said the subscription service will begin by July.

But the other plaintiffs in the suit against Napster Sony Music, Warner Music Group, Universal Music, EMI Group PLC and the Recording Industry Association of America are forging ahead with the lawsuit.

Warner Music Group one of the AOL Time Warner Inc. properties said yesterday it won’t negotiate a deal to let Napster distribute its music until after the lawsuit is settled.

With the courts deciding Napster helped users violate copyright laws, the record labels may be more willing to negotiate the terms of a subscription service.

“Maybe the labels were waiting for a rule of law,” Mr. Sherman said.

How soon Napster and the record labels can reach an agreement on how to distribute music remains to be seen. Napster competitors said Monday’s ruling is a boon to their businesses and will help them not Napster secure contracts with the major record labels.

Gene Hoffman, president of Redwood City, Calif.-based EMusic, said it is not clear whether the labels are willing to do business with Napster because the company was founded on a principle of piracy.

EMusic, which sits less than two blocks from Napster, has distributed digital music since 1998 and lets users download music files from 700 independent record labels. The service costs subscribers $9.99 a month.

Even if Napster is hobbled by Monday’s appeals court decision, it isn’t without leverage in negotiations with record labels because it has a devoted following of up to 60 million users.

By contrast, EMusic had 4,500 subscribers as of Dec. 31.

Other digital-music distributors are small, too., which has teamed up with a handful of firms in the recording industry, hasn’t said how many people have signed up for its subscription-based streaming-audio service.

FullAudio Inc., a Chicago-based digital-music subscription service, will begin distributing music later this year.

In a nascent industry, Napster stands out. But it must find a way to leverage its size and set up a subscription service.

“They each have something valuable to the other. Napster has the audience and the labels have the content,” Mr. Sherman said.

But the longer Napster takes to work out deals with the record labels, the more it threatens its survival, Mr. Hoffman said.

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