NEW YORK (CNN/Money) -
Online music swapping service Napster Inc., which has been involved in legal turmoil over copyright infringement for more than a year, filed for bankruptcy protection Monday in an effort to move forward with a relaunch of its once popular service.
The Redwood City, Calif.-based company filed under Chapter 11 of the U.S. Bankruptcy Code with the U.S. Bankruptcy Court in Delaware.
"Today's filing marks a new beginning for Napster. It is clear that the demand for an Internet-based music file sharing community that benefits artists and consumers is as strong as ever," said Napster CEO Konrad Hilbers. "The chapter 11 process will allow the company to move forward with a talented team and continue on the path toward launch, while pursuing a plan to make payments to our creditors."
Napster, which began the Internet craze of trading music files and boasted 60 million users at its height, agreed in March to comply with a court order to remove all copyrighted material from its file-sharing service and began the long process of trying to settle litigation with the recording industry to keep its service alive.
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In March, a federal appeals court judge supported a July shutdown order by U.S. District Judge Marilyn Hall Patel, who is hearing an ongoing lawsuit from several record companies charging that Napster violated copyright laws by allowing millions of users to download and swap protected music for free.
German-based Bertelsmann AG agreed to buy Napster's assets for $8 million on May 17 -- and one of the stipulations of the agreement was that Napster would seek bankruptcy protection and emerge as a wholly-owned unit of Europe's second largest media group. The media company has invested more than $85 million in Napster since October 2000.
Napster CEO Hilbers and founder Shawn Fanning, among other executives, resigned in mid-May during the negotiations with Bertelsmann, but rejoined the company after the agreement was finalized.
Bertelsmann spokeswoman Liz Young said the company had no comment on the situation.
The bankruptcy filing is the last step in making the company available for liquidation and, effectively, for purchase by Bertelsmann. While people close to the situation say that it is likely Bertelsmann will come out with ownership of Napster at the conclusion of the hearings, the final decision has yet to be made by a bankruptcy judge. Another bidder likely would have to offer close to $100 million for consideration, topping the total investment by Bertelsmann.
"It is an unfortunate reality of the history of Napster," said Chris Kwak, an Internet analyst at Bear Stearns. "This is effectively the death of Napster as we know it."
Industry experts expect that if Bertelsmann wins the rights to Napster, the media company will move forward in leveraging the Napster brand in conjunction with its own music offerings, including BMG Entertainment. Bertelsmann has a stake in the online music subscription service MusicNet, in partnership with EMI Group and Warner Music Group. The service competes with Pressplay, for which Sony Music Entertainment and Universal Music Group supply content, but neither are anywhere near as successful as Napster's free service.
AOL Time Warner (AOL: down $0.12 to $18.58, Research, Estimates) is the parent of Warner Music Group and CNN/Money.
Ultimately, Napster's lack of profit and its enormous legal fees led to the bankruptcy filing.
Several Napster imitators, including MusicCity.com, that use a peer-to-peer system in which MP3 music files or other files are housed on a user's computer rather than a central server - as was the case with Napster - have also been sued recently by the RIAA, alleging copyright infringement.
Napster has been offline since Dec. 14, testing a new version of its software. The new pay service, which it agreed will respect the copyrights of owners and artists, is expected to debut later this year but no date has been set.