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Napster cuts deal with majors

The music-swapping service announces a deal that should allow it to sell music from three of the five major music labels as part of its proposed subscription service.

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  What's next for Napster
Capping a day of speculation, Napster announced a deal Tuesday that should allow it to sell music from three of the five major music labels as part of its proposed subscription service.

The company has struck a distribution deal with MusicNet, the music subscription service jointly created by RealNetworks, Warner Music Group, Bertelsmann and EMI Recorded Music. Expected to go live this summer, the MusicNet affiliation will eventually give Napster access to more than half of the mainstream music most often sought by consumers.

"Certainly when you think about digital distribution, and you think about the consumer experience, then Napster is at the forefront of that," Rob Glaser, CEO of RealNetworks and MusicNet, said in a conference call announcing the deal. "Napster has played a pioneering role in moving (this market) forward."

In no small way, the deal also marks a direct attack by MusicNet and its three labels against Duet, the coalition formed by Sony Music and Vivendi Universal to distribute their own music. As a part of this deal, Napster is barred from striking any similar agreement with Duet--unless the other labels come to terms with MusicNet.

"We're hoping that we'll be able to have agreements with Sony and Universal through MusicNet," Napster CEO Hank Barry said.

Nevertheless, even the conditional deal marks a considerable step forward for both Napster and MusicNet, each of which is scrambling to find a place in the uncertain online music business.

"MusicNet is focused on providing a platform that will help consumers who are used to the experience of Napster to find, acquire and enjoy music in a manner that's legal, reliable, secure and supportive of artists and rights holders," Glaser said. "Today's announcement is great for consumers, for artists and for the recording industry."

The tie-in between MusicNet and Napster is not surprising, although it does mark another step backward for the once-proud file-swapping service. Napster had hoped to ride its overwhelming popularity into a position of strength for negotiating with the labels.

The record industry has been waging a legal war, suing the file-swapping service for copyright infringement, and the battle has taken its toll. The file-swapping service has seen its audience dwindle as a court order has forced progressively more music off the service.

When the companies involved in MusicNet first made details public in April, label executives said they were open to a licensing deal with Napster. Executives also said MusicNet would license its library to numerous companies as its primary method for generating revenue.

Under the new agreement, Napster users would first have to subscribe to the company's basic service, which would allow people to swap songs by independent labels and self-produced tracks. They could then pay extra to be able to download a limited number of MusicNet songs. Napster has not announced pricing for either version of the service.

The hard trail ahead
All of this is contingent upon Napster putting its unregulated file-trading past behind it, however--a requirement underscored by separate statements released Tuesday by EMI and Warner Music. "(Our) conditions have not yet been met," EMI noted in its terse release.

Glaser and Barry said the deal represents a commitment to give the content to Napster eventually, however.

"Any time you go from a Hatfield-McCoy situation to working've got to take a number of steps along the way," Glaser said. "This (announcement) is an important step, but not the only one."

For the past several months, Napster has worked to add progressively stronger filters that block trades of unauthorized music. Early versions saw considerable leakage, as file traders changed the file names to evade text-based filters. But in recent weeks, the filters have grown vastly stronger, making it difficult to find music by major-label artists on the service.

According to figures released Tuesday by research firm Webnoize, the average number of files shared per person on Napster dropped from 220 in February to just 21 in May. The analysts' estimates of the number of files traded through the service fell from 2.79 billion in February 2001 to 360 million in May.

With that drop in files has come a decrease in use of the service. Webnoize said the average number of simultaneous users dropped from 1.57 million in February to 840,000 in May. Moreover, 87 percent of people in a survey of nearly 3,000 consumers said they would go to other unauthorized file-trading services after Napster started charging a fee.

This issue of customer convenience and adoption could be a tricky one for the service being outlined under the MusicNet deal. A two-tier Napster might expose consumers to two separate security systems, as MusicNet and Napster each work with their own proprietary anti-copying technologies.

The MusicNet service gave information about its security a few weeks ago, although the companies involved have not released full details. Subscribers would be able to listen to streamed and downloaded music, but periodically they would be required to renew their licenses to songs online. This way, people would not be able to listen to downloaded music after their MusicNet subscriptions lapsed.

The planned deal with Napster could serve as a considerable competitive advantage for the MusicNet service, which will vie with rival coalition Duet--a creation of music labels Sony Music and Vivendi Universal--for consumers' subscription dollars.

Napster had originally planned its own paid service in conjunction with German media giant Bertelsmann. In October, Bertelsmann's E-Commerce Group offered a loan to Napster to create a legal version of its service, and the pair had hoped to persuade the other major labels to join.

If Napster is successful in creating a legal, secure service, sources have said Bertelsmann would take a majority ownership of the company and drop its lawsuit against it.

Napster has already outlined a security service created by Bertelsmann affiliate Digital World Services that would prevent songs from being burned to CDs or transferred to portable devices. In early descriptions of the system, the company even hinted at creating a new format to replace the MP3 files now swapped through its service.