Napster offers deal to stay alive

Interim Chief Executive Hank Barry took the unprecedented step Tuesday of making a public offer to pay the major record labels $150 million in annual royalties for the next five years, plus another $50 million a year for independent labels and artists. The announcement follows nine months of private negotiations, which so far have failed to produce a deal.

Barry also for the first time outlined plans for Napster´s conversion to a pay service. Users would pay $3 to $5 a month for a basic plan and $6 to $10 for unlimited song transfers.

``This is a perfect time to be clear about what we´re doing: We want our users to be clear in understanding that if Napster is shut down, it´s because even though we´re willing to pay the record labels they don´t want to take our money,´´ said Barry.

The announcement -- timed, record industry executives suggested, to steal the luster from tonight´s prestigious Grammy Awards -- comes as Napster faces the threat of an injunction that would prevent its 64 million users from accessing the most popular, copyrighted songs. Napster has lost back-to-back court battles with the five major record labels -- Sony, Warner, BMG, EMI and Universal -- which accuse it of running an electronic swap meet for bootlegged music.

Napster´s conversion to a pay service would occur in July, Barry said, and would generate the revenue needed to pay royalties to song writers, artists and record labels. Users would choose from two levels of service -- a basic plan, which would restrict the number of songs downloaded; and a premium service that would allow for unlimited song transfers.

Users would also pay extra for ``keys´´ to burn custom CDs or listen to their music on portable MP3 players.


Revenue estimates

Under Napster´s most conservative estimates, the music service could generate enough revenue -- $210 million by the end of the fourth year -- to cover royalty payments, assuming 3.5 million users subscribe. That would mean converting one out of 20 current users, who now download music for free, into paying customers who shell out $60 a year for the right to download music off the Internet.

Napster´s most-optimistic projections have the service raising ample funds -- $297 million -- in the first year.

``We have tried to be very conservative in our planning,´´ said Barry. ``Frankly, the record companies have not been willing to buy into any of these scenarios.´´

One analyst said Napster´s public settlement offer -- something typically negotiated in private -- is an attempt by the beleaguered music-sharing service to gain advantage over the record labels.

``This is a PR campaign,´´ said P.J. McNealy, an entertainment analyst with the Gartner Group in San Jose. ``They´re trying to present themselves as being fair and equitable to the music labels after they´ve been yelled at for being bad, bad, bad.´´

Universal Music group said Napster has a responsibility to develop a legitimate business model that compensates artists and rights holders.

``Nothing we have heard in the past and nothing we have heard today suggests they have yet been able to accomplish that task,´´ said Universal spokesman Bob Bernstein.

Andreas Schmidt, president and chief executive of Bertelsmann eCommerce Group, which has invested in Napster, described the settlement offer as all upside for the record labels, which he described as trapped in a slow-growth, low margin business.

Schmidt said digital distribution represents a fresh revenue stream for the labels -- with little of the manufacturing and overhead costs associated with pressing and shipping discs to record stores.

``This is the biggest new income stream artists and rights-holders can have,´´ said Schmidt.

One industry observer said Bertelsmann has more at stake than the $60 million it invested to convert Napster to a subscription service. The German media conglomerate needs to bootstrap Napster into a legitimate provider to compete with AOL Time Warner and Universal, which plan rival music distribution services. The $1 billion settlement offer is meant to sweeten the pot -- and help the record labels overcome their animus toward Napster.

``If anyone can heal the leper, it´s Bertelsmann,´´ said Talal Shamoon, senior vice president of InterTrust, a digital rights management technology in Santa Clara.


Legal precedents

Shamoon said the record labels, meanwhile, can´t agree to a settlement until legal precedents are in place. ``It´s very important that they cook the anti-venom so that when the next Napster comes alone, they´re ready,´´ said Shamoon.

To track royalty payments, Napster would change the very structure of its peer-to-peer file sharing service. It will insert powerful network computers called servers to verify that users are legitimate subscribers and also track the songs requested so it can allocate payments to record labels based on usage.

``We´re in favor of anything that increases the revenue for our artists and our shareholders,´´ said Jay Samit, senior vice president of EMI Recorded Music. ``This was not presented to us. We haven´t seen any details.´´

EMI already distributes songs through more than two dozen Internet music ventures, including MP3.com.


Take it easy

Noah Stone, executive director of Artists Against Piracy, a group backed by the record labels and retailers, said artists shouldn´t be too quick to grab for the gold.

``You have to be very cautious as to what sort of deal you make with Napster, because in the future, when the majority of music is delivered interactively, over the Internet or wireless services, they will definitely offset CD sales,´´ Stone said. ``So it is imperative that artists shore up performance rights for digital uses of music. If we allow Napster to become a promotional tool rather than a distribution tool, then we may have lost the whole ball game.´´