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Napster Angles for the Straight and Narrow

MusicNet's and Duet's wheelings and dealings have all the makings of a nuclear arms race.

According to hints dropped from sources close to the busy online music industry, Napster Inc. is in talks with the three major media giants who back MusicNet to offer users a pay version of its popular service.

The New York Times reported that AOL Time Warner's Warner Music, Bertelsmann's BMG Entertainment and EMI Group, all of whom have smacked the file-sharing company with a copyright infringement lawsuit, may agree to offer their content through the MusicNet consortium under the popular Napster brand, which already boasts an impressive 70 million users.

Interestingly, the lawsuit to mute Napster will not be affected -- perhaps just put on the back burner -- as the parties hammer out a deal.

The Times said Napster would offer a basic version excluding the catalogs of the five major companies in July. Subscribers who pay a monthly fee will be able to load digital audio files onto their computers for sharing. Users who obtain files over Napster would not be able to load them onto discs or send them outside its network.

In a second service plan, users of Napster would have access to a premium version based on the RealNetworks technology and MusicNet's aggregation, which currently includes music from Warner Music, BMG and EMI. This service, of course, would yield an additional fee. Under the plan for the MusicNet system, all the music files would come from a central server, although members would be able to pass them among themselves. Subscribers would pay a monthly fee for a fixed number of downloads and downloading from either the central server or a fellow user would count against the monthly allotment.

These are big plans from a company so fraught with legal trouble -- so embattled, in fact, that its effectiveness was seriously crippled by the U.S. District Court injunction mandating that the company attempt to block specific songs. According to research released Tuesday by Webnoize, the number of songs downloaded using Napster was 360 million in May, down 87 percent from a peak of 2.79 billion songs downloaded in February. There are also, according to the research firm, 46 percent fewer simultaneous users on the average.

"Consumers are still using the Napster application, but the way they use it has changed over the last three months," said Webnoize Senior Analyst Matt Bailey. "The Napster software on a user's PC is now being used to organize and play music stored on the hard drive rather than as a means to access shared music."

As for the question of whether or not users would pay to use Napster as a service, MusicNet and its backers may rest assured if they take Webnoize's studies to heart. In a report titled "The Digital Singles Bar: Demand-side Change and the Case for Music Services," Webnoize found that over half of U.S. college students are willing to pay $10 or more per month to use Napster, suggesting the college market alone could generate over $400 million per year in revenues for the service.

"More than 23% don't want to pay for Napster at all, and 4% are willing to pay $20 or more," said Webnoize Analyst Ric Dube, who authored the report. "It's fortunate that Napster plans a commercial service with multiple payment tiers, because that's definitely what people want."

Warner Music, BMG, EMI and RealNetworks aren't alone in their quest to bring online music subscriptions to the forefront this summer; they face worthy competition from Yahoo! Inc. Sony and Vivendi Universal, which are collaborating on a similar service of their own, dubbed Duet.

In a much larger picture, the idea of the MusicNet and Duet camps picking up technologies and services is becoming an intriguing trend. On May 21, Vivendi Universal snared MP3.com, a company it successfully sued a year ago, for $372 million in stock. That deal came more than a month after it scooped up EMusic for $23 million. Then, on May. 30, Bertelsmann poached Net music start-up MyPlay.com for $30 million, perhaps in trying to keep pace with Duet.

Many analysts, such as Forrester Research's Eric Scheirer, have said a probable reason for Vivendi's acquisitions is that it feels Duet is outgunned by the larger MusicNet, whose content will be released under the aegis of RealNetworks Inc.'s secure content delivery platform. Scheirer also said no startups enjoy stability as long as the Big 5 are growing stronger with each passing week through acquisitions and partnerships.