And now, here comes Napster, following in the successful footsteps of ... MP3.com (MPPP) ?

Napster's public offer Tuesday to pay a billion dollars to settle its legal troubles sure has a ring of familiarity to it. Like MP3.com, which last year set aside $170 million to pay record labels, Napster is ready to pay the big bucks to get the music industry to call the legal dogs off. But, unfortunately, the similarity doesn't end there. Like MP3.com, Napster is getting ready to dig itself into an awful deep hole for a claim on a now-microscopic revenue stream. Unlike MP3.com, though, Napster doesn't have the benefit of a once-generous

IPO market to fill up the giant piggy bank necessary to pay off such a promise.

The examples of both MP3.com and Napster indicate how hard it will be for any company to change the nature of the online music experience without the backing of the established music industry, particularly the five majors:

AOL-Time Warner's

(AOL)

Warner Music Group

,

Vivendi Universal's

(V) - Get Report

Universal Music Group

,

Sony's

(SNE) - Get Report

Sony Music Entertainment

,

EMI Group

and

Bertelsmann's BMG Entertainment

.

Small Change

Let's start with MP3.com. In December, the company relaunched its My.MP3 service after setting aside $170 million to pay off all the companies that had sued it for alleged copyright violations related to the service. Now, how will MP3.com make back all that money, and how quickly? Hard to say, but the track record for getting people to pay to listen to music through their computer, or download it from their computer, is awfully flimsy. Sure, for the year, MP3.com reported revenue of $80.1 million, way up from $21.9 million one year earlier. But 96.5% of that revenue came from advertising; only $2.8 million came from music sales, and most of that came from online CD sales, not the My.MP3 digital music service (which was shut down for seven months of the year).

In a quick calculation,

Credit Suisse First Boston

analyst Heath Terry

estimated last December that My.MP3 could add $10 million to MP3.com's 2001 revenue through subscription and advertising dollars. But that assumes that 25% of unique users of the MP3.com site sign up for the $50 annual service, an assumption perhaps best termed as charitable.

MP3.com issues "key metrics" for its business monthly, but these shed no light on the number of people paying for the service. It does list the number of "listens," or times that users have either streamed a song from MP3.com or downloaded it onto their computers. But the company doesn't specify how many of these listens come from paying My.MP3 subscribers rather than those who use the site's free music access.

Now on to Napster. Rather than a one-time charge of $170 million, Napster says it will pay the major labels $150 million a year for five years, plus $50 million per year to independent labels and artists -- a $200 million-a-year hole to climb out of. Let's assume that it's a serious offer, which the

Recording Industry Association of America

says it isn't; how will Napster make the money back?

Answering that question starts with trying to figure out how many of the people downloading songs through Napster for free will start paying the $2.95 to $9.95 Napster envisions charging for the service. Let's start out with 10% of the more than 50 million members that Napster claims use the service -- a reasonable figure, given the estimated drop in the number of auctions on

Yahoo!

(YHOO)

since

the site started charging listing fees last month. Let's suppose Napster subscribers pay $5 a month for the service -- the high end of the range that Napster gives for its budget version of neo-Napster.

That's 5 million people, times $5 a month, times 12 months a year, and you get ... $300 million a year in subscription revenue. That seems reasonable.

Nap on This

Yet at second glance, it doesn't. It seems awful likely that people will regard the Napster fees as more onerous than Yahoo!'s new listing fees and will be less enthusiastic about signing up. After all, Yahoo! fees are one-time charges, and they max out at about $2.25; Napster is asking people to pay $60 a year. Meanwhile, the newspapers are filled with two types of stories about Napster of late: one, how plenty of other services on the Net allow people to download music for free; two, how college students have been pulling all-nighters to download music from Napster before an injunction comes through that's expected to hobble the service. With all the free alternatives likely to remain on the Internet, it seems as if it will be tough to get them to pay $60 a year.

Finally, the restrictions that Napster plans to impose on Napster to get it in the good graces of the music industry may render it unrecognizable to the people who love it -- sort of like the last scene in

One Flew Over the Cuckoo's Nest

, when Chief Broom takes a look at McMurphy after the lobotomy. Napster will limit the sound quality, and users will be asked to pay additional fees if they want to burn CDs or to transfer music to portable devices.

Even after all this happens, Napster won't just be able to find the money somewhere. When MP3.com started getting ready to pay the pipers, it had more than $300 million in cash and securities on hand. Napster, by comparison, has a $15 million venture funding round it raised last spring -- a significant amount of which, presumably, has been eaten up by legal fees -- plus a loan from Bertelsmann, amount unspecified, to cover development costs. A Napster spokeswoman says the company hasn't publicized any needs or plans for additional funding. What will be harder? Collecting money from consumers after the new service is up or raising money from the market to pay off the record companies? It's a tossup.

Chat with George Mannes and Jim Seymour Thursday, Feb. 22 at 5 p.m. EST as they discuss Napster and the record industry. Log on by clicking the icon at the top of TheStreet.com home page.