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AOL Time Warner wary of Bertelsmann-Napster pitch

Company executives say the German media giant has yet to convince them that working with Napster to try to create a commercial music download service is worthwhile.

AOL Time Warner executives on Wednesday said German media giant Bertelsmann has yet to convince them that working with Napster to try to create a commercial music download service is worthwhile.

"We have had discussions with Bertelsmann, but we haven't seen a business model that puts the reality around that dream," Richard Parsons, AOL Time Warner's co-chief operating officer, said during a luncheon with reporters. AOL Time Warner owns Warner Music Group, one of the Big Five record labels.

Parsons' comments shed light on the difficulties facing Bertelsmann, which last year took a minority stake in Napster with the goal of turning its free file-sharing technology into a viable music distribution platform that could win the backing of the industry as a whole.

That's a formidable task. Napster has been blamed for fueling a binge of unprecedented music piracy over the Internet, leading copyright holders to sue the company in a bid to put it out of business. A court-ordered shutdown, issued last year, is on appeal.

With a legal sword hanging over Napster's head, Bertelsmann is actively courting the remaining Big Five labels--Warner Music, Sony Music Group, EMI Recorded Music and Universal Music Group--to work together to create a secure and profitable version of the service. Cooperation is thought to be crucial to success, since separating out licensed and unlicensed works on Napster's peer-to-peer network could prove impossible.

But it seems getting all parties to agree is not an easy task.

In October, Bertelsmann shocked the music industry when it announced it would offer a loan to Napster to create a secure, digital music-swapping service. Two sources familiar with the deal pinned the loan at $50 million with a kill switch if Napster fails to create a secure service, a provision that hinges on widespread support among the labels.

Bertelsmann, which owns major record label BMG Entertainment, also said it would drop the record industry's ongoing infringement lawsuit against Napster once a version secure from copyright infringement is created.

How to convince the record execs?
During the announcement, Bertelsmann CEO Thomas Middelhoff invited the remaining four major labels to work with the company in creating a secure version of Napster. But executives from both companies gave little detail about how they would convince record executives to work with them. Sources later told CNET News.com that one way was to offer equity in Napster, a potentially lucrative windfall if Napster were to go public.

"We're working with and meeting with all the major record labels and the discussions are ongoing," said a Bertelsmann spokeswoman.

Bertelsmann's Middelhoff on Monday has said that Napster will begin charging subscription fees in June or July, according to published reports.

Trying to play peacemaker with the record labels is not an easy task. Label executives may tacitly agree that Napster has captured the hearts and minds of online consumers, but they still believe the service promotes copyright piracy. With or without Napster, getting record labels to even agree on anything would be a feat unto its own.

Earlier this month, Vivendi Universal Chief Executive Jean-Marie Messier said the company would not settle with Napster if a court finds the swapping service in violation of the law. He said Universal could get better terms if the court rules against Napster.

Nevertheless, record labels, Internet media companies and online music start-ups all agree that creating a legal version of Napster spells cash. The problem is how to do it.

AOL Time Warner executives were very clear about their intention to create an online music service. The company owns a major label, Winamp and its MP3 player, Web radio service Spinner, technology expertise and a database of nearly 27 million paying subscribers. Executives said AOL is in discussions with all the major labels. According to AOL Time Warner's other COO, Bob Pittman, AOL could offer pieces to the puzzle, such as a billing service, widespread distribution and user interface design.

But AOL Time Warner CEO Gerald Levin summed it up best when addressing the difficulties in creating this online jukebox in the sky.

"Music companies don't play well together," Levin said during the luncheon.

News.com's John Borland contributed to this report.