Napster offers recording industry $1 billion

In a bid to prevent a possible court-ordered shutdown, Napster executives offer record companies $1 billion over five years for the right to allow copyrighted music to be traded on its network.

John Borland Staff Writer, CNET News.com
John Borland
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John Borland
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Would you pay for Napster?
The word on the street
In a bid to prevent a possible court-ordered shutdown, Napster executives on Tuesday offered record companies $1 billion over five years for the right to allow copyrighted music to be traded on the popular file-swapping network.

In a press conference in San Francisco, executives from Napster and Bertelsmann appealed to other record company executives for a temporary stay of legal hostilities that threaten Napster's existence, saying pressing on would ultimately harm everybody's interests.

"What we're saying is this community ought to be allowed to stay together," said Napster interim CEO Hank Barry. "We all ought to sit down and settle this thing."

Barry and Bertelsmann's head of e-commerce, Andreas Schmidt, said they had contacted the other four major record labels Tuesday with word of the $1 billion offer. Previous offers based on a percentage of Napster revenue had been rejected, Barry said.

Specifically, Napster is offering $150 million per year to the five major record companies and $50 million annually to be shared by independent labels.

The company, which plans to change its free service into a tiered subscription model as early as July, said it would create a yearly guaranteed $150 million fund for major labels and another $50 million annually for independent labels. The labels would be responsible for distributing the funds to artists and songwriters.

The annual payment of $200 million would come out of projected subscription fees and other potential sources of revenue. The company gave a few new details on just what those fees would look like. A service allowing limited numbers of downloads per month would likely cost between $2.95 and $4.95 per month, while an unlimited download service would likely cost $5.95 to $9.95, Barry said.

Hank Barry Today's free, unlimited service will go away after an "orderly" transition, Barry added.

The offer did not include any money that might have to be paid for damages as a result of past file swapping through Napster's service. But Bertelsmann and Napster executives said the offer should serve as a token of good faith to bring the other labels back to the negotiating table, and to allow a temporary legal truce that would keep Napster operating.

However, in a statement released shortly before Tuesday's press conference, Hilary Rosen, chief executive of the Recording Industry Association of America, dismissed Napster's latest negotiating efforts. The company needs to stop trading copyrighted works now, she said.

"To the management of Napster I say again: You claim you want to be legitimate and negotiate licenses based on real business models," Rosen said. "I urge you to act accordingly. Stop the infringements, stop the delay tactics in court, and redouble your efforts to build a legitimate system."

Shutdown threat
The company is scrambling to do damage control after a court ruling last Monday that threatens to cripple its popular music-trading service. In that ruling, a federal appeals court determined that Napster is likely to be held liable for copyright infringement and ordered that a lower court slightly modify an earlier ruling that would require copyrighted materials to be pulled from Napster's service.

In a sign of just how seriously the company and new partner Bertelsmann take the threat, Bertelsmann's top executive, Thomas Middelhoff, and Schmidt each appeared at Tuesday's press conference to support Napster's appeal. Middelhoff, who said he had stopped past on his way to the upcoming Grammy celebrations, said he was confident that Napster-like technologies would help boost revenue in a music market that is stagnating with or without the Internet.

"I am the only executive, or CEO, in the entire entertainment world who can judge objectively about Napster," he said, citing his company's sprawling holdings in publishing, music, distribution and other entertainment fields.

He said his company gave Napster a $60 million loan in return for rights to take equity in the company last October with the assumption that the service could provide new revenue without substantially cutting into offline record sales. He read a statement from BMG Music calling for a "standstill agreement" from the rest of the music industry, saying that continuing the lawsuit all the way to a shutdown of the Napster service "wouldn't be in the interests of either party."

Napster and Bertelsmann executives confirmed they had been working since Dec. 18 with a court-ordered mediator to find some basis for settlement with the record companies. The RIAA had sent a letter to the district court asking that the mediation process be closed, they said.

An RIAA representative could not immediately be reached for confirmation.

A lower-court judge is expected to release a revised preliminary injunction any day that could essentially force Napster to close. Napster has said it would appeal this to a higher-level appeals court.

Building Napster II
As part of their presentation Tuesday, Napster and Bertelsmann also gave new details on how the planned paid subscription would work, and on how they expect to reach revenue that would allow them to pay labels a minimum of $200 million per year.

Middelhoff repeated earlier comments that he expects the service to launch in July. Engineers working to create copy-protection technology for transferred files have agreed with this timetable, he noted.

Barry also said this timetable would be realistic from Napster's perspective--the first time he has publicly talked about the timing for a paid service.

Copy-protection technology being developed by Bertelsmann subsidiary Digital World Services would prevent the songs from being copied to CDs or transferred to other devices such as portable MP3 players, Barry said. People might be able to perform these functions by paying more per month, he said.

This kind of service would provide at least enough revenue over the next few years to support the $1 billion payments, executives said. If the company kept only 2 million of its 64 million registered users, it would make about $119 million per year, based on an average payment of $4.95 a month, Barry said. If that subscriber base grew to 14 million paying customers, revenue would reach $832 million a year.

Although it's unknown how many customers would actually stay with Napster's service if it switched to a paying model, recent surveys by Webnoize and Harris Interactive each have found that close to 70 percent of consumers surveyed have said they would pay for a subscription to Napster.

Those dynamics could change if fewer people were to use the service, however, because it would mean far fewer songs available for download.

Tuesday's news met with some resistance on Napster's public bulletin boards.

"Well, let's see how Napster ends up getting the funds for this $1 billion deal," wrote one person, identified only as "Anonymous Coward."

"Not from us, the users. If they actually think that users will pay a cent for their service, they are sadly mistaken."

Although payments of $200 million per year could be a headline grabber, the sum amounts to only a little more than 1 percent of the recording industry's revenue in 2000.

But Schmidt said the Napster payments would be a gateway to seeing similar fees from other file-swapping services from companies such as Yahoo or AOL Time Warner. The $1 billion fee would be the equivalent for the industry of selling another $5.4 billion in CDs, since the labels would have no additional production and distribution costs associated with that fee, he noted.

"This is the biggest revenue stream that labels and rights holders can have," Schmidt said. "And this is just Napster. Others will come after Napster."