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.


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