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Bertelsmann, Napster Create Membership-based Service

International media giant Bertelsmann AG, parent of BMG Music, Tuesday cut a deal with erstwhile enemy Napster Inc. to create a secure, membership-based person-to-person file sharing service.

Bertelsmann said the new service would provide the Napster community with high quality file sharing that preserves the Napster experience while also providing payments to the rightsholders -- recording artists, songwriters, recording companies and music publishers.

The alliance signals a move away from Napster's current pirate image and may be just what the company needs to survive in the face of its financial and legal woes. But, the deal could also be a coup for Bertelsmann, which is pursuing a more focused approach to its online presence.

The company, whose media empire stretches from Barnes & Noble and Random House to CDNow, and to newspapers, magazines and television and radio broadcasters, declared last month that it would divest itself of most of its ISP holdings -- including stakes in America Online Inc. and AOL Europe -- to focus on content e-commerce.

Also, BMG's competitors have been warming up to the Net game. AOL has made noise about creating its own music subscription service using Time Warner's Warner Music division. Other big music players, like Universal Music Group and Sony Music Group, are developing their own subscription services as well.

By dealing with Napster, Bertelsmann gets an already proven technology and pre-installed user base.

"I think it's Bertelsmann's attempt to move early on the potential value of a Napster post-lawsuit," said Mark Hardie, chief executive officer of ETC Music Inc and former digital music analyst with Forrester Research. "They're staking their claim that on the other side of the lawsuit there will still be a Napster and the question is whether or not Napster the brand is of value, and they're arguing it is."

However, Hardie questioned how much of Napster's community would be willing to migrate to a membership-based service.

"It's going to be interesting to see how you convert Napster into a for-pay model because I think it's appeal is it's free," he said. "Napster under a payment model or Napster with a subscription fee isn't Napster, it's something else."

For Napster, however, the deal is fairly clear cut. Bertelsmann will drop its long-running lawsuit against the music-swapping service once Napster successfully implements its new membership-based service. Also, Bertelsmann will make the BMG music catalog available to the new service and the Bertelsmann eCommerce Group (BeCG) will loan Napster the money to enable development of the new service. BeCG will hold a warrant to acquire a portion of Napster's equity.

"Person-to-person file sharing captures the imagination of millions of people worldwide with its ease of use, global selection of content, and community features," said Thomas Middelhoff, chairman and chief executive officer of Bertelsmann. "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."

Middelhoff also invited the Recording Industry Association of America (RIAA), other record and publishing companies, and artists and other industry members to participate in the development of the service.

Andreas Schmidt, president and chief excecutive officer of BeCG, echoed the sentiment, "Our strategic alliance with Napster is key to providing consumers in the future with access to the largest global music catalog of high quality music files -- with added convenience and features. We will work closely with Napster to establish a new membership-based service that achieves acceptance by other music providers. For