Nov 4

BMG & Napster Tying the Knot
Sun Review November 4, 2000

Napster isn't going to be a free service for very much longer. CEO Hank Barry said Tuesday that the 38 million Napster users will soon have to pay "monthly dues" of, perhaps, $4.95 to access each other's hard drives. The "new Napster" may also include a link to CDNow (www.cdnow.com) and could be used to swap other types of content, including video.

All of this is the result of a deal Napster reached with one of five record companies suing it for copyright infringement. Bertelsmann AG, parent of music company BMG Entertainment (www.bmgentertainment.com), said on Tuesday it would drop its copyright infringement lawsuit against Napster and that it would form a strategic alliance with the online company to further develop it into a secure, membership-based service that pays royalties.

BMG is home to many of the best-known names in the music industry, including such superstars as Alan Jackson, Annie Lennox, Barry White, Christina Aguilera, Clint Black, Dave Matthews Band, Kenny G, Sarah McLachlan, and Whitney Houston.

"Person-to-person file sharing has captured the imagination of millions of people worldwide," Bertelsmann CEO Thomas Middelhoff said in a prepared statement. "Napster has pointed the way for a new direction for music distribution."

Middelhoff said the way Napster distributes music "will form the basis of important and exciting new business models for the future of the music industry."

As a result of the deal, Bertelsmann will own a piece of Napster and will loan money to the company to enact the changes to the file-swapping service, Bertelsmann officials said. It will also make its catalog of songs available to Napster users.

Napster's service, developed by Shawn Fanning, a 19-year-old college dropout, lets users swap songs for free over the Internet by trading MP3 files, a compression format that turns music on compact discs into small computer files. It has attracted 38 million users. CEO Hank Barry says Napster is still 'about file sharing, file sharing, file sharing' -- but it will no longer be about free music.

Major music companies Universal Music, Sony Music, Warner Music Group, and EMI Music later said the alliance was a positive step towards protecting copyrighted music online but they also appeared to stand by their lawsuit against Napster.

So far there are only a scant few terms of the agreement being released, but Barry did say that the service would cost $4.95 per month. Bertelsmann AG's e-commerce group BeCG will loan Napster cash to create a "membership-based service" and in exchange buy a piece of the company.

Analysts and pundits have had their say on whether Napster Inc. can survive if a fee is attached. Most say it will. But a sampling of the 38 million Napster users sounding off shows many are wondering the same thing. Chat rooms have been burning up since the alliance of Napster and Bertelsmann was announced.

Some may call this the new business model. Others, like Jon Stewart, host of the Daily Show, are more skeptical. While commenting on the Napster-BMG alliance, Stewart urged viewers to wake up and realize "It's called a STORE".