Bertelsmann to buy Napster for a song

German media conglomerate Bertelsmann has agreed to acquire Napster in a deal that will keep the controversial file-sharing service alive for the near future.

Napster CEO Konrad Hilbers and Shawn Fanning, Napster's creator, will remain with the company.

On Tuesday Hilbers announced his resignation after Napster's board of directors rejected a deal for the company to be acquired by the German company. Fanning at that time also decided to leave the company, sources said.

Under Friday's deal, Bertelsmann will pay $8 million to Napster's creditors to acquire the company's assets. The transaction opens the door for Napster to file for Chapter 11 bankruptcy protection, according to sources close to the deal.

"We are very pleased to have reached an agreement with Napster's board of directors," Joel Klein, CEO of Bertelsmann, the services and legal arm of Bertelsmann AG, said in a statement.

"We're happy to see Napster move forward with Konrad Hilbers at the helm," Klein continued. "We are very committed to providing artists the best possible distribution opportunities for their work, and to provide consumers more choice and control."

The deal is a bargain for Bertelsmann, which offered to buy Napster for $16 million earlier this week, according to sources familiar with the deal. Quarrelling board members who opposed the deal caused the earlier transaction to fall through, the sources said.

Gartner analyst Charles Abrams says the new Napster will likely set trends for the way music content is distributed, sold and marketed over interactive channels--providing Bertelsmann funds it properly. see commentary

Representatives for Bertelsmann and Napster declined to comment.

In its heyday, Napster turned the music industry on its head by offering software that allowed music lovers all over the world to share files online. Yet after a series of damaging lawsuits over copyright issues, the service was effectively shut down.

Napster and Bertelsmann executives promised that they would secure licensing and publishing rights to launch a legal service, but those plans have been long in coming. In the meantime, Napster has remained mute.

In October 2000, Bertelsmann shocked the entertainment world when it announced it would invest in Napster--even though BMG Entertainment, a record company owned by Bertelsmann, was suing the file-swapping software company. Bertelsmann has since spent millions of dollars to prop up Napster and has remained upbeat that Napster would be a powerful force when reinvented as an online music-subscription service.