Napster Offers Record Labels $1-Billion Deal

Attempting to settle a potentially crippling copyright-infringement suit, Napster Inc. offered Tuesday to pay record companies $1 billion over five years for the right to include their music in a new fee-based Internet song-swapping service.

Company executives and Thomas Middelhoff, chief of media conglomerate Bertelsmann, implored the labels to suspend their legal assault while all the parties work out a deal.

The offer, which fans and critics see as a last-ditch gamble, comes as the company and its users nervously await a preliminary injunction from U.S. District Judge Marilyn Hall Patel in San Francisco. That injunction could force Napster to block access to the most popular songs, eviscerating the current version of the service.

The major labels reacted coolly to Tuesday’s offer, although they didn’t rule out a deal with Napster if their concerns about unauthorized copying were met.

“We would not support a proposal that allows Napster to continue to operate in the current unlawful form while developing a business model,” said Dick Parsons, chief operating officer of AOL Time Warner Inc. “They need to shut down. Then we can talk.”

Bob Bernstein, a spokesman for Vivendi Universal’s Universal Music Group, said: “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. . . . Nothing we have heard in the past and nothing we have heard today suggests they have yet been able to accomplish that task.”

A spokeswoman for the record labels’ trade association dismissed Napster’s offer as a public-relations gimmick.

“This is a strategy to put public pressure on the [record] companies, rather than have face-to-face meetings with the companies they’re trying to deal with,” said Amy Weiss of the Recording Industry Assn. of America.

Industry and legal experts questioned how Napster could raise the promised $200 million a year, given that few of its current members are expected to sign up for the new version. Napster’s model assumes that more than 98% of the 64 million registered users will abandon the service in the face of the new fees, which are tentatively set at $3 to $10 per month.

If Napster loses that percentage of users, it will have only about 1 million people paying for the service, said Phil Leigh, an analyst at Raymond James Associates Inc. investment bank in St. Petersburg, Fla.

“At $10 a person, that’s only $120 million a year,” he said. “They’re either going to have to convince more people to stay with the service or draw revenues from other sources.”

The appeal of the new service will depend heavily on Napster’s ability to attract the major recording labels. None has signed on so far, although Bertelsmann-owned BMG has said it will work with the new Napster service if it meets BMG’s criteria for security. German media conglomerate Bertelsmann lent Napster $60 million to develop its new software and can convert the loan into an ownership stake in the company.

“For this to work, Napster has to have everything, from any MP3 file you want to terrific customer service,” said Gene Hoffman, chief executive of EMusic.com, an online rival. “If it has everything, then people will pay. Right now, it doesn’t have everything.”

A hint of possible help came Tuesday from EMI , which has struck more deals with online music companies than any other major label group.

“We’re open to any and all models that help our artists make a living and help our bottom line,” said Jay Samit, a senior vice president at EMI. “It sounds on the surface like at least somebody’s thinking about ways of compensating everybody in the food chain.”

Napster Chief Executive Hank Barry said the company will go out of business if it can’t raise the $200 million in promised payments.

The offer caps payments to the labels at $200 million a year. If the company succeeds wildly, that would put the record labels in the awkward position of having a ceiling on their income from Napster but not the royalty payments they owe artists and songwriters, who typically collect each time a recording is reproduced.

Under the proposal, the five major music label groups--Universal, Sony, Warner, BMG and EMI--would divide an annual kitty of $150 million, with independent labels and unsigned artists dividing an additional $50 million per year. The deal would be the largest offer made for music licenses, Napster officials said.

The labels and independent artists would divide the royalty pools according to how often their songs were downloaded. Consumers would be able to try the service for free but soon would have to pay $3 to $5 for a limited number of monthly downloads, or $6 to $10 for unlimited use.

The exact fees are still to be determined, Barry said.

The new service, which Barry said would be ready by July, would include software on users’ computers to add a layer of security to the system. Among other things, the software would restrict the fidelity of recordings and would bar users from transferring song files to CDs or portable devices unless they paid extra fees.

Still to be resolved is whether users would lose the ability to play the files they download from one another if they stop paying monthly fees. Barry said he would not like to do that, but that issue is open to negotiation with the record labels.

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Times staff writer Jeff Leeds contributed to this report.

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