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Bertelsmann, Napster Lace Up the Gloves

Bertelsmann AG dropped a bombshell in the record industry's lap when the media giant unveiled an eleventh hour deal with Napster to reshuffle the peer-to-peer newcomer into a pay-for-play service. The German conglomerate, for its part, dissented from the deep-pocketed group of record labels suing the wildly popular MP3 file swapping start-up, instantly taking on the swagger of a swashbuckling gambler strutting up to a craps table.

Recognizing that such a bold move would undoubtedly send shockwaves through the staid record industry, Bertelsmann Chairman Thomas Middelhoff wrote an internal memo to his employees, telling the troops that its deal with Napster would be popular with some, poison to others. But in the end, Middelhoff was adamant that he believed the joint venture with Napster simply showed good forward-looking business acumen.

New revelations shed some light on Bertelsmann's long-term plans for Napster after an unidentified Bertelsmann executive was quoted in The Financial Times as saying, "Under the best-case scenario, Napster will be a publicly quoted company." That likely serves as insult to injury for record labels still scrapping in an appeals court to bring about the ultimate demise of Napster. While Bertelsmann once joined rivals EMI, Universal, Sony, and Warner Music as a collective voice of opposition to Napster, the remaining plaintiffs have been caught flatfooted by Bertelsmann's dramatic about-face.

As if the revelation that Bertelsmann intends to float Napster in the new issues market weren't enough to digest, it's also been revealed that while Bertelsmann retains a minority stake in Napster, the privately-held Deutsche bellwether has an option to purchase a majority interest. Bertelsmann has also made clear that should its record label rivals prove successful in a bid to unplug Napster in a federal appeals court, it would simply retool the service and bring it back online in short order.

This entire move by Bertelsmann is likely a carefully crafted preemptive strike to wrestle future digital mind-share from the hands of eight hundred pound gorillas, America Online and Time Warner , friends/foes which Bertelsmann knows intimately. Bertelsmann and America Online have undertaken international joint ventures in the past with the likes of AOL Europe and AOL Australia. In the nascent days of AOL's rise to prominence, Bertelsmann even had the opportunity, and some say inclination, to buy the ISP outright. But with the announcement of AOL's acquisition of Time Warner, the landscape has shifted.

Time Warner's Warner Music Group is one of the staunchest holdouts in the suit to shut down Napster; and, aside from the obvious reasons, Warner is quietly looking ahead to its mega-merger with AOL. Under AOL-Time Warner, consumers can expect to see the combined entity aggressively selling digital music to more than 150 million users of AOL's seemingly benign AIM and ICQ instant messaging services. The next closest competing killer app that could effectively hawk digital media is Napster, with its nearly 40 million strong homegrown user-base.

AOL-Time Warner has a lucrative financial incentive to see Napster stumble under the weight of ongoing legal proceedings. Bertelsmann, on the other hand, with its own vast collection of media holdings, has a vested interest in pulling Napster's fat from the fire. However, for all the contentious chess matches that are being played out by these rivals, the outcome really rests on if media giants can convince fickle consumers to ditch their newfound love for free music. And that's a big if.

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