Napster bidding war hints at future Net music offers

With all the brazenness of a mid-1999 dot-com company, a little-known streaming music site is trying to trump Napster's $1 billion offer to the record industry with its own $3 billion carrot.

John Borland Staff Writer, CNET News.com
John Borland
covers the intersection of digital entertainment and broadband.
John Borland
3 min read
With all the brazenness of a mid-1999 dot-com company, a little-known streaming music site is trying to trump Napster's $1 billion offer to the record industry with its own $3 billion carrot.

The offer itself, made Monday by streaming media player and content protection company J. River, is mostly phantom cash. Like Napster, Minneapolis-based J. River has projected that millions of people will pay subscription fees for music and says it will guarantee the record industry $3 billion over five years in return for rights to have copyrighted music available through its service.

But the appearance of even a rhetorical bidding war is a signal of a sea change underway in the online music world, only partly driven by the Napster phenomenon. After years of heel-dragging, the most pressing question is not whether the major music labels will finally license their music for online distribution--it's how and for how much, analysts say.

"The day is coming when someone will bite the bullet and license all five labels' content," said P.J. McNealy, an industry analyst with Gartner. That deep-pocketed someone is unlikely to be Napster, he added, instead giving odds to larger Net companies such as AOL Time Warner or Yahoo.

The record industry's unwillingness to offer full distribution rights to their music to online companies has been one of the biggest brakes on the young Net music business' growth, many insiders have said. A first generation of online music companies is shutting down, laying off staff or merging for survival after lacking access to much of the most popular music that would attract a large audience.

The subscription business model outlined by Napster last week, in which it would guarantee the record industry $200 million a year in return for the rights to operate a for-pay music-swapping service, is the most ambitious plan yet suggested. Andreas Schmidt, president of Bertelsmann's E-Commerce Group, touted the idea as the savior of a slow-growth entertainment industry, able to add billions to labels' bottom lines as other companies launch similar online music services and start paying similar license fees.

The prospect of others launching their own subscription services in return for billion-dollar payments could add real money to what has so far been dismissed by the labels as too little money for too great a risk.

J. River is the only other company to step forward publicly with a Napster-like offer. A few companies, including Musicbank and MP3.com, have paid millions of dollars for far more limited rights to the same music.

"Record labels recognized immediately that the Napster offer was not realistic," J. River Chief Operating Officer John Norris, said in a statement. "Napster may have undermined their credibility by underbidding. We are confident that $3 billion is a conservative estimate, and we believe that the actual five-year payout could be closer to $10 billion."

But it's not simply a price tag that the labels are looking at, analysts say. They want a business model they're comfortable with, and Napster apparently hasn't yet offered such a plan. Nevertheless, labels increasingly have signaled they are ready to license much of their content--as long as it is on their own terms.

"It's not going to be Napster?But it will likely be an independent third party," Gartner's McNealy said, calling Yahoo his own "dark horse" in the online music race. "If somebody is willing to give (the labels) X billions of dollars, they're willing to move."

A district court in San Francisco has a hearing scheduled Friday to determine how much to limit Napster's existing service to comply with an appeals court ruling earlier this month. Napster filed the first stages of its appeal of that higher court ruling last Friday.