- The Washington Times - Tuesday, June 4, 2002

Napster Inc., the online music-swapping service, filed for Chapter 11 bankruptcy protection yesterday, about two weeks after agreeing to sell its assets to Bertelsmann AG, Germany's biggest media company.
The bankruptcy was planned and expected, because Bertelsmann's acquisition of Napster requires the approval of a bankruptcy judge. On May 17, Napster accepted an $8 million purchase offer from Bertelsmann. In exchange, the company agreed to forgive $91 million in debt Napster owed it.
Analysts said the bankruptcy, while not a surprise, magnified the difficulties Napster has had in starting a fee-based music service while defending itself against charges of copyright infringement by major record labels.
Napster was founded in 1998 in the dorm room of college student Shawn Fanning, who sought a way to easily swap MP3s and other digital music over the Internet. It began as a free service and had more than 50 million subscribers at the height of its popularity.
But nearly every major record label and the Recording Industry Association of America filed suit against Napster, arguing that its users were illegally trading copyrighted songs.
"I think everyone who appreciated legal music found it troubling," said Jonathan Potter, president of the Washington-based Digital Media Association.
Napster agreed in July to halt music trading through its service. It has debts of $101 million, compared with assets of $7.9 million, according to documents filed at U.S. Bankruptcy Court in Delaware. It has 18 employees, after eliminating 30 jobs in April.
Observers said Napster changed the way consumers enjoy music, and view artists and record labels. While music had been created and distributed digitally before Napster came along, many analysts credit Napster with popularizing the format. The result is that artists and record labels have been scrambling to figure out how to market, sell and profit from digital music just as they have with compact discs.
"The content creators are left with the decision of what to do with the digitization of that content," said Gene Alvarez, a vice president with the Meta Group, a technology-analysis firm in Stamford, Conn.
Only Bertelsmann and the London-based Association of Independent Music have signed agreements allowing Napster to license their music. Most record companies have instead chosen to continue battling Napster in the courts.
Analysts agree that a fee-based service will not succeed if music from only certain record companies is available.
"It's at least going to have to have breadth and depth in certain genres, if not universally," Mr. Potter said.
Some analysts question whether a fee-based service would catch on at all, given the emergence of Napster-type services such as AudioGalaxy, BearShare and Gnutella, which are free and, because of their decentralized structure, not as vulnerable to suits from record companies.
"It won't be as popular when it's not free," Mr. Alvarez said. "Teen-agers, who drive the business, are cheap."

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