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Napster, BMG in music pact
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October 31, 2000: 4:49 p.m. ET
Controversial online music-sharing site mends fences with Bertelsmann
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NEW YORK (CNNfn) - Napster Inc. and German entertainment giant Bertelsmann AG, opponents in a groundbreaking lawsuit over copyright and Internet distribution, laid down their arms Tuesday and announced plans to develop a service for swapping and sharing music.
The software company and a new e-commerce unit of Bertelsmann said they have developed a subscription-based service that will allow consumers to use Napster's Internet service while at the same time providing payments to those who hold the rights to those tunes.
 Once the service is launched, BMG intends to drop its copyright infringement suit against Napster, which still faces a legal challenge from the other four leading recording companies.
Equally significant for Napster, a year-old company with neither an income stream or a business model, is that BMG will provide a loan to Napster. BMG then will hold a warrant to acquire an ownership stake in Napster.
Details of the potential investment were not disclosed. Last July, Hummer Winblad invested $15 million in Napster and installed a partner, Hank Barry, as the fledgling company's interim CEO.
Despite pact, BMG and Big Music still suing Napster
Bertelsmann's BMG music unit is one of the big recording companies that, through the Recording Industry Association of America (RIAA), is suing Napster. The industry charges the Redwood City, Calif.-company with fostering copyright infringement by its 38 million users, and that the service "causes serious and irreparable harm" to the music business.
The RIAA, which represents BMG, Seagram Co. Ltd.'s (VO: Research, Estimates) Universal Music, Sony Corp.'s (SNE: Research, Estimates) Sony Music, EMI Group PLC and Time Warner's (TWX: Research, Estimates) Warner Music Group, still are pursuing their case against Napster.
"Today's announcement does not bring an end to the court case," RIAA CEO Hilary Rosen said. "There are multiple plaintiffs in addition to BMG; and BMG itself has said that it won't withdraw its complaint against Napster until they actually implement a legitimate business model."
"The courts need to make clear that, contrary to what Napster has been
claiming, companies like Napster do need to get permission before they
launch businesses built on other people's creative property," she added.
A Time Warner spokesman told CNNfn.com that the deal, and its promise to deliver the music that people want in a secure fashion that compensates artists and rights holders, is "a positive step for the industry." But he had no comment as to the existence or status of similar talks with Napster.
Time Warner is the parent company of CNN.com and CNNfn.com.
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 FACTS ABOUT NAPSTER
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Created in 1999 by Shawn Fanning
Boasts over 28 mln users
Company has earned no revenues
Service banned by many colleges
Millions of hit songs are swapped
Service is free
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Napster's service allows users connected to the Internet to exchange music files, in the MP3 format, for free. The RIAA says millions of copyrights have been infringed upon because of Napster. In July, U.S. District Judge Marilyn Patel in California concurred, and slapped an injunction on the service, pending a trial later this year.
Despite the looming court battle, BMG executives at a press conference in New York, laughed and embraced Napster executives and founder Shawn Fanning, while praising the benefits of the file sharing model.
"Peer-to-peer file sharing is one of the many new digital commerce models that BMG has been actively exploring for some time, and we recognize its tremendous potential for artists and music fans alike," a BMG statement said. "Napster's unique community of users represents a tremendous opportunity for BMG to bring our artists closer to their fans as well as to reach new audiences."
Would you pay for Napster? Take our poll.
Napster and Bertelsmann said they will seek support from other music companies to establish Napster as a widely accepted membership-based service.
"The industry has not embraced file sharing – we are going to change that," said Andreas Schmidt, CEO of Bertelsmann eCommerce Group (BECG)."We invite everybody in the industry to work with us."
The Ninth Circuit Court of Appeals in California currently is struggling to decide whether to shut Napster before a trial begins late this year.
Hurdles still exist for Napster
For its part, closely-held Napster, founded by Shawn Fanning during his freshman year at Northeastern University, has said it is no more than a song-swapping service that has run up against recording industry attempts to maintain a "chokehold" on music distribution.
Fanning, 19, still plays a key role in the ongoing development of the Napster service.
Ric Dube, analyst for Webnoize Research, the research arm of Cambridge, Mass.-based Webnoize, said that while the development is important in the evolution of distribution of music and other types of content over the Internet, there still are several factors at play that could influence Napster's fate.
For one, there is no guarantee that the other major music companies will come to a similar relationship with Napster.
 "They have money to build a pay service, and if they can build the service, (but) then they are in 20 percent less trouble then they were yesterday," Dube said, referring to the fact that BMG represents only one of the five major recording companies.
At a New York press conference, BMG and Napster executives said the form and function of the new service will be very similar to Napster's current system, which lets users peer into the hard drives of others and pluck off the songs they desire. Barry said a free promotional portion of the system will remain once the pay service goes online.
While neither partner would discuss the price of the service, Barry has in recent months said that he found a price of $4.95 "compelling." Declining again to disclose financial details, Barry said that it is likely that "a large percentage" of the revenue derived from the service would go back to the recording companies. 
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