Record labels scoff at Napster's $1 billion plan

Record industry insiders respond to Napster's $1 billion music licensing offer by suggesting the deal is little more than a publicity stunt.

Jim Hu Staff Writer, CNET News.com
Jim Hu
covers home broadband services and the Net's portal giants.
Jim Hu
4 min read
Record industry insiders on Wednesday responded to Napster's $1 billion music licensing offer by suggesting the deal was little more than a publicity stunt.

The labels said they are still waiting for a blueprint showing how a copyright-protected version of Napster will work; how the company plans to secure the music files being swapped by millions of subscribers; and how it will pay artists, publishers and copyright holders.

"It is Napster's responsibility to come to the creative community with a legitimate business model and a system that protects our artists and copyrights," Universal Music Group, which is owned by Vivendi Universal, said in a statement. "Nothing we have heard in the past and nothing we have heard today suggests they have yet been able to accomplish that task."

Napster, which faces a court-ordered shutdown, is seeking to arrange a truce with the record labels that would allow it to continue operating while it develops technology to block copyright violations. If the charges stick, Napster could be held liable for trillions of dollars in damages for songs that have already been traded over its network.

Hoping to intercept that legal action, Napster on Tuesday proposed a music licensing deal that would offer $150 million per year for the five major record companies to split and $50 million annually divided among the independent labels. Napster would raise most of this $200 million annual payment through its subscription fees and other revenue sources. Company executives said Napster would charge $2.95 to $4.95 a month for limited downloads and $5.95 to $9.95 a month for unlimited downloads.

An offer of $200 million per year may seem like a hefty sum, but it amounts to just more than 1 percent of the recording industry's revenue in 2000.

"It's obvious to anyone that follows the music business that the numbers Napster proposed on Tuesday do not make sense for a $40 billion industry," Sony Music Entertainment said in a statement.

Trying to make it work
The popular software company has developed a free service that lets people search for songs on other Napster members' hard drives. Given Napster's 64 million members, the available database spans millions of copyrighted songs that people can download for free. Music lovers have flocked to the service, and many executives in the record industry have tacitly acknowledged its consumer appeal.

At the same time, the recording industry is ready to take on Napster until the bitter end, or until the company develops a system that the labels approve.

Four months ago, German media giant Bertelsmann unveiled a controversial agreement to invest in Napster. The deal required Napster create a paid subscription service that would compensate artists, publishers and copyright holders through its subscription revenue while ensuring subscribers could not distribute the songs illegally.

Bertelsmann executives also said they would court the recording industry to help them create this new, secure Napster. But to date, industry executives and insiders maintain that neither Bertelsmann nor Napster has approached them with an outline of a service that would ease their concerns about copyright infringement.

Many industries besides the labels and online music companies are considering creating paid subscription services that give people unlimited songs for a price. Web giants such as Yahoo and broadband Internet service providers such as Excite@Home are hungry to cook up subscription services that would appeal to customers.

Losing freedom
But for Napster, the situation is dire. The recording industry is trying to shut down the service by suing it for copyright infringement. Napster is trying to strike a legal agreement with the record industry before a federal judge acts on last week's appellate court ruling and shuts down the service.

A few days after the appellate court decision, Napster said it would use Bertelsmann subsidiary Digital World Services to develop security for the transfer of files throughout its service. The announcement added that Napster will remain a peer-to-peer file-sharing service but will implement restrictions on what can be done with the files, such as limiting the ability to burn songs onto CDs.

On Tuesday, Bertelsmann Chief Executive Thomas Middelhoff said engineers are working on creating the secure system, expected to launch in July.

Nevertheless, the industry is still searching for more meat to Napster's claims.

"Napster needs to do what they said they were going to do almost four months ago," said a source close to a major record label. "They need to put forth a technology architecture that will enable the service to operate the way they said it would in order to address the concerns of copyright holders. They still have not done this. Beyond this, they still need a business model that works."