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Bertelsmann Snaps Up Napster

SAN FRANCISCO (Reuters) -- Embattled Internet music upstart Napster Inc. was handed a new lease on life Friday as German media giant Bertelsmann stepped

SAN FRANCISCO (Reuters) — Embattled Internet music upstart NapsterInc. was handed a new lease on life Friday as German media giantBertelsmann stepped in with $8 million to buy its assets and keep theonline song-swap service in business.

The surprise deal also brought Napster CEO Konrad Hilbers andfounder Shawn Fanning back into the fold just days after they quit thecompany amid fears that mounting legal, financial and technicalproblems would silence Napster for good.

“While this has been a very unusual week, I’m pleased that I and mycolleagues can move forward and give our full attention to Napster’sfuture,” Hilbers said in a statement.

Bertelsmann’s agreement to provide $8 million for Napster’screditors will allow the company to file for Chapter 11 bankruptcyprotection and emerge as a wholly owned subsidiary of Europe’ssecond-largest media group, officials said.

It will then resume its much-delayed plan to relaunch as asubscription digital music service that complies with U.S. copyrightlaw.

Analysts said the deal, which gives Bertelsmann control of Napsterfor far less than the $15 million to $30 million it might have cost tobuy the company outright, could nevertheless prove a good deal for theonline music company.

“This development could very well breathe new life into thisNapster,” said Phil Leigh, a financial analyst at Raymond James &Associates.

Napster, once one of the hottest properties on the Internet, has beenoffline since July 2001, as it fights a music piracy lawsuit by majorrecord labels.

The service this week signaled it was nearing the end of the game asHilbers, Fanning and several other senior executives quit after adispute among board members derailed a Bertelsmann bid to buy thecompany outright.

That quarrel was resolved by a Delaware court Tuesday, setting up anew Napster board chaired by Hilbers.

Bertelsmann, which broke ranks with other music companies by buyinga stake in Napster in 2000, said it was now ready to help push thecompany toward its goal of becoming a secure, membership-chargingservice.

“Creating new ways of doing business is never easy, but Napster willbe at the forefront of finding business models that respect copyright,reward artists and deliver entertainment value to consumers,” JoelKlein, chief executive of the U.S. arm of Bertelsmann, said in astatement.

“Peer-to-peer is a transforming technology, and we’re proud to haveShawn Fanning continue to work on its development.”

Fanning, who founded Napster as a college student in 1999 and will nowserve as the company’s chief technology officer, said he was pleased tobe moving forward with Bertelsmann.

“Bertelsmann understood our vision when they first invested in us,”Fanning said. “They still believe in that vision.”

Fanning’s vision was in part what landed Napster in trouble in thefirst place.

While wildly popular with millions of users around the globe, theservice quickly drew the ire of the recording industry, which in late1999, filed suit charging it with abetting music piracy by allowingusers to download digital music files from other people’s computerswithout paying any royalty fees to copyright holders.

Lengthy litigation resulted in a court injunction, which barred theservice from offering copyrighted songs identified by the labels.

While Napster now says it will relaunch as a royalty-paying service,company officials concede that there have been both technicaldifficulties in setting up the system and contract difficulties withrecord labels declining to provide licenses for their music.

“The biggest remaining job for Bertelsmann is to get content, to getthe other record labels to agree to use Napster,” said Leigh of RaymondJames.

Sources close to the company said Friday they still had no firm datefor the Napster relaunch, but said it would only take place once allthe kinks had been worked out.

“For Bertelsmann, this is a longterm play,” one source said, addingthat Napster’s high brand visibility, established “community” of usersand peer-to-peer format were all assets.

Jupiter Media Matrix analyst Stacey Herron said that while Napsterremained the most famous of the digital music services, it would stillface competition from newer companies that have sprung up during thelong months of litigation.

“This announcement certainly doesn’t secure the future of Napster asa thriving business,” Herron said.

“You can’t simply turn back the clock and make Napster what it wastwo years ago.”