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Halloween definitely brought a treat for Napster. Bertelsmann, the German media giant that is one of five major recording companies suing the file-sharing upstart said it would lend the Bay Area company money to build a secure technology to allow users to pay to trade music without violating recording industry copyrights. The price users would have to pay for trading privileges hasn't been disclosed.
Bertelsmann will be able to convert the multimillion dollar loan into an equity stake in Napster. As part of the deal, Bertelsmann Music Group (BMG) will withdraw its lawsuit against Napster when the startup satisfies Bertelsmann's security requirements for file-sharing (see accompanying story, "For Better or Worse, It's a New Tune for Napster"). Sources close to the company put the size of the loan at $50 million.
Bertelsmann Chairman and CEO Thomas Middelhoff spoke about the deal with Business Week Frankfurt Bureau Chief Jack Ewing. Here are edited excerpts from their conversation:
Q: So far, the music industry has been trying to kill Napster. Now, you're embracing it. Why?
A: We have to deal with file-sharing. We can't criminalize 37 million users. We have to develop business models that are legal. Somebody has to take the lead for the industry.
Q: Napster users aren't used to having to pay for music. How will you change that?
A: We're looking at a subscription-based model, a digital-download service. Subscribers in a first step would pay a fixed amount of money. We will give the money back to companies, publishers, and artists.
Q: What will happen to litigation against Napster by you and others in the industry?
A: If Napster realizes our requirements, we are ready to settle our litigation. We're inviting all the other music companies to join.
Q: What are the chances they will?
A: I've talked to other media companies, though I don't want to give their names. I hope they will agree. It's not easy. There is a lot of emotion between Napster and the music industry. We will know very soon whether they will accept it. Right now, we have something on the table.
Q: Was the negotiating process difficult?
A: [The Napster people] are "Robin Hoods." But my Internet experience [as a former board member of America Online] helped a lot. Andreas Schmidt [Bertelsmann's head of e-commerce] really bridged the gap. This is really his deal.
Q: Even if this deal succeeds, won't you still be threatened by Gnutella and other forms of free file-sharing?
A: If we demonstrate it's possible to develop business models that accept the principle of intellectual property rights, I think we can fight the others. If we didn't do anything, the music industry would die.
Copyright 2000, by The McGraw-Hill Companies Inc. All rights reserved.
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