Deal With Bertelsmann Could Signal End Of Napster Revolution

The dance between the music industry and renegade file-sharing service Napster just got a lot friendlier. Napster and German media giant Bertelsmann AG have formed a strategic alliance that could fundamentally change Napster's contentious relationship with the music industry. The two companies are working together to develop a membership-based business model that would result in Napster's 38 million users paying a small monthly fee to gain access to the fast-growing file-sharing community.

The agreement calls for Bertelsmann's newly formed E-commerce group, BeCG, to extend a loan to Napster to develop the revamped service, in exchange for which BeCG will receive a warrant to acquire minority interest in Napster. Once the new business model is implemented, Bertelsmann's BMG Entertainment has agreed to withdraw its lawsuit against Napster and make its music catalogue available to Napster users. During a press conference Tuesday, Bertelsmann CEO Thomas Middelhoff said the agreement represents the company's recognition that Napster is doing for file sharing what America Online did for the widespread acceptance of E-mail. "File sharing will be a very important part of the music industry," Middelhoff said. "There's no other way to deal with this fact other than to develop a business model for file sharing."

Both companies say the goal is to preserve the Napster community while creating a revenue stream that can ensure payments to artists, labels, and publishers. While no specifics of the business model were divulged, Napster CEO Hank Barry says a monthly membership fee of $4.95 would generate the desired revenue. BeCG CEO Andreas Schmidt says the companies plan to enlist the cooperation of the other major music labels. "As of today, the industry has not embraced file sharing," Schmidt says. "We are going to change that."

The development is one analysts had been expecting for some time. Jupiter Research, which predicts that the online music market will grow to $5.4 billion by 2005, in July issued a report suggesting that because Napster users are more likely to purchase music offline, the music industry would have to embrace file sharing. Now that the first step has been taken with the cooperation of a major label, Napster founder Shawn Fanning says fans should expect the service to get better, albeit more expensive. "If you think Napster's great now," Fanning says, "just wait."