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What's Next for Napster?

In a classic trick or treat tailor-made for Halloween night, Napster dropped an unexpected bombshell that it has struck a pact with Bertelsmann AG. Under the deal, the two parties will cook up a peer-to-peer paid subscription service that would compensate the entire recording industry food chain, from individual artists to record companies.

German media giant Bertelsmann will front Napster an undisclosed amount of fundage to develop the pay service in exchange for a warrant to acquire a minority interest in Napster. Once the new service goes live, and Napster shelves its free music swapping service, Bertelsmann will drop its existing copyright infringement lawsuit against the wildly popular file sharing start-up.

One down, four to go

College students everywhere are probably wondering how this latest U-turn of events will affect them, or more importantly, their monstrous MP3 collections. Well, for starters, this deal means the free-for-all Napster is history. Early indications from Napster interim CEO, Hank Barry, suggest that a membership fee in the neighborhood of $4.95 per month is most likely, with Barry hinting that said figure would generate "compelling revenues."

With an estimated 38 million users currently enjoying the peer-to-peer service, if just 10% of those users opted to pony up a modest five bucks, Napster would pocket nearly $20 million each month. Compelling to be sure. When you tack on cross-promoting CDs and merchandise through Bertelsmann's recent CDNow acquisition, the revenues get real interesting, real fast.

Now for the sticky stuff. Bertelsmann was just one of the world's big-five record companies patiently waiting in line to ring Napster's neck in a federal appeals court. That leaves four remaining plaintiffs caught flatfooted by this latest announcement. While Bertelsmann has suggested it will do its best to convince fellow record labels to hop onboard the peer-to-peer gravy-train, that may prove easier said than done.

First off, Bertelsmann has been a graybeard risk-taker in the Internet space for years. At one time, the company even had a realistic chance at acquiring America Online during the ISP's fledgling days. That said, Bertelsmann also understands missed opportunities. The Deutsche conglomerate's Chairman Thomas Middelhoff penned an internal memo to his employees on All Hallow's Eve saying that Bertelsmann expects its deal with Napster to be popular with some, poison to others. But in the end, he's convinced the deal makes sense.

The remaining holdouts are EMI, Seagram's Universal Music Group, Sony Music, and Time Warner's record label, in that order. The likelihood of a kiss-and-make-up scenario with Napster likely hinges on Time Warner, which already has ambitious plans to roll out its own music service with America Online. To an eight hundred pound gorilla like AOL-Time Warner, an upstart like Napster can only be seen as a roadblock, which means the chances of Napster avoiding its day in court are slim to none. This latest deal with Bertelsmann hardly marks a new beginning, or for that matter, an end to Napster's headaches. What it does promise, though, is to make the ongoing peer-to-peer tug-o-war more entertaining than a fishbowl full of Sea Monkeys.

Stay tuned.

Any questions or comments, love letters or hate mail? As always, feel free to forward them to kblack@internet.com.

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