According to sources close to the deal, the agreement would ultimately allow Napster to sell songs offered by MusicNet, a company created by media software developer RealNetworks and three major labels--AOL Time Warner's Warner Music Group, EMI Recorded Music and Bertelsmann's BMG Entertainment.
A deal could be announced as soon as Tuesday or Wednesday, the sources said. But several of the labels involved publicly warned that any relationship would depend on Napster demonstrating that it has rooted out piracy on its network and created a near-bulletproof way of stopping unauthorized music copying.
"As previously announced, our content will not be available to Napster as part of the MusicNet service until we are reasonably satisfied that Napster is operating in a legal, non-infringing manner and has successfully deployed a technology that accurately tracks the identity of files on the service," Warner Music said in a statement released Tuesday morning.
EMI also released a statement saying it is willing to license music to Napster but only after certain "critical" copyright conditions are met. "Those conditions have not yet been met," the company said.
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 once-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 is seeing 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 proposed arrangement, 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 upgrade to download a limited number of MusicNet songs for an additional fee, the sources said.
The hard trail ahead
All of this is contingent upon Napster putting its unregulated file-trading past behind it, however--an requirement made clear by the statements released Tuesday by EMI and Warner Music.
For the last 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 the month of 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, which 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.