Napster Strikes Deal With 3 Major Labels

Besieged Internet company Napster Inc. said Tuesday that it had reached a deal to license music from three major record conglomerates once it starts operating as a legal service.

The agreement between the Redwood City, Calif.-based firm and MusicNet, an online representative for record companies AOL Time Warner, Bertelsmann and EMI Group, marks Napster’s latest step toward legitimacy.

The major record conglomerates obtained a court injunction against the company in March. Napster’s file-swapping service, record executives say, allows users to exchange copyrighted music files.

On Tuesday, record executives from the companies backing MusicNet cautioned that, even under the new deal, Napster must transform itself into a legal service before it receives access to their music offerings.

“EMI has always said that we’d be prepared to consider licensing our music to Napster, but only when certain critical conditions are met, particularly in the area of copyright [security]. Those conditions have not yet been met,” the label said in a statement.

Napster said it doesn’t plan to unveil a new fee-based version of its service until late summer. Under the deal, users would pay an as-yet-unannounced monthly subscription fee to access Napster’s database, which is expected to contain only songs from independent record labels. Then users could pay another fee, to be determined by Napster, for access to MusicNet’s content.

At least initially, fans also would have to run two separate software programs to participate in Napster and MusicNet, said Richard Wolpert, a strategic advisor to MusicNet.

The deal could also have far-reaching implications for the world’s five major record conglomerates as they race to dominate distribution of music on the Internet. The three record companies lined up with MusicNet are maneuvering against their two rivals, Vivendi Universal and Sony, who are planning their own online service, called Duet.

As part of Tuesday’s deal, MusicNet would become the exclusive supplier of major-label music to Napster’s made-over service. If Napster is able to hang on to its audience, the deal could give MusicNet’s backers an edge over Duet.

But Napster’s audience has been slipping, reflecting the restrictions Napster imposed on its users in the wake of the federal court injunction, according to a new survey by Webnoize Research.

The March 5 order by U.S. District Judge Marilyn Hall Patel barred Napster from helping users make unauthorized copies of songs from the major record labels and music publishers.

Webnoize found that the average number of simultaneous Napster users fell from more than 1.5 million in February to 840,000 in May--a sharp drop, but still a huge number for an online music service.

During the same period, the estimated number of songs downloaded per month fell from 2.8 billion to 360 million, and the average number of files shared per user fell from 220 to 21.