Napster Gains as Bertelsmann Decides Online Music Is Its Friend - TheStreet

The online file-sharing service

Napster

and one of the major record labels are finally singing the same tune.

Napster -- which has incurred the wrath of the music industry for offering a service that enables computer users to share recordings of music with one another over the Internet --

announced Tuesday that it had reached an agreement to rejigger the service in cooperation with the German media giant

Bertelsmann

, parent company of

BMG

, one of the world's five-biggest record companies. The agreement calls for charging a monthly membership fee to Napster users.

Though the deal leaves much of Napster's legal battles with the music industry unsettled, and though the announcement doesn't answer all questions about how the popular Napster service might change, Tuesday's news indicates that it's indeed possible for the recording industry to come to terms with -- and perhaps even welcome -- a world in which Internet users freely exchange copies of audio CDs with strangers.

"It shows that at least one of the majors has begun to take peer-to-peer music sharing seriously," says Aram Sinnreich, senior analyst at the

Jupiter Research

unit of

Jupiter Media Metrix

.

It also appears to be a mildly positive development for other companies involved in the distribution of music online, including

MP3.com

(MPPP)

and

InterTrust Technologies

(ITRU)

. InterTrust jumped $2.06, or 26%, to $10, though MP3 rose just 6 cents to $3.56.

Waking Up?

But the deal raises the question of whether and how many of the 38 million Napster users, a million of whom are online at any one time, will react to a significant new feature of the service -- namely, having to pay a monthly subscription fee.

Under the agreement, Bertelsmann's e-commerce group,

BeCG

, will work with Napster to develop a mutually agreeable version of the service, one that would take monthly membership fees from users and pass them on to the various record companies, recording artists and songwriters with a stake in the music.

Although Napster interim CEO Hank Barry stressed that the membership fee hasn't been set, he said that charging a $4.95 per month membership fee generated "compelling revenues." Among other revenue streams, the companies assume that they'll be able to generate compact disc sales through Bertelsmann's

CDNow

and other online music stores.

Bertelsmann is lending an undisclosed amount of money to Napster, will hold a warrant to acquire an undisclosed portion of Napster's equity, and will work with Napster to persuade its brethren in the music industry to join in with Napster on the new service. Once Napster successfully launches its new service, BMG will drop its lawsuit. In addition to the music that Napster members upload themselves, BMG will also make its music catalog available, though the companies didn't disclose what access to BMG-supplied music might cost.

Napster, which is being sued by multiple music-industry plaintiffs that have sought to shut the service down, got some positive response Tuesday to its deal with Bertelsmann.

"This is a welcome development, said

Recording Industry Association of America

President Hilary Rosen. "We welcome anyone's decision to become a legitimate player in the online music industry, building a business based on licensed uses of copyrighted works."

Time Warner

(TWX)

, which is in the process of merging with

America Online

(AOL)

, also issued a positive statement about the deal.

The Delicacy

Both Napster and Bertelsmann seem well aware that persuading current Napster users to sign onto this new arrangement will be a delicate process, with the potential for alienating users who have come to regard free downloads as an inalienable right.

"We're going to let Napster be Napster," Barry said.

Napster founder Shawn Fanning said he and Bertelsmann shared the same goals for the service, including improving system reliability and making it easier for users to locate people with similar musical tastes and interact with them.

Fanning said his message to the Napster community was, "If you think Napster is great now, just wait. We're just getting started."

Onlookers say that Napster and Bertelsmann have reason to be cautious as they alter the service. Charging a membership fee "goes right against Napster, because everyone is on there because it's free," says Mark Hardie, CEO of the

ETC Music

in-store music downloading service and former analyst for

Forrester Research

. "Napster is popular because it's free."

Consumers might be willing to pay, says Sinnreich, as long as the price is low enough and the service includes features such as virus protection, guaranteed file quality and "having someone to complain to."

The deal is also a good sign for other companies involved in online music distribution, Sinnreich says. "This isn't going to be the online deal that BMG strikes in this space," he says. Record labels want online music services decentralized to increase competition and provide as many conduits for music as possible.