Napster CEO touts new swapping service

It's been a busy week for Napster CEO Konrad Hilbers.

After six months of wait-and-see promises, Hilbers on Thursday is finally giving a preview of what Napster will look like when it officially relaunches. It's still a far cry from what the final service will be, and nowhere near the grassroots phenomenon that only last summer seemed poised to subvert the entire music industry. The public beta test is limited to just 20,000 members and will provide access to just 110,000 independent-label songs.

But as competitors such as AOL Time Warner and Yahoo start offering their own music subscriptions, Hilbers needs to make sure his company stays in the spotlight. Thursday's tease, with promises that he's close to settling Napster's long-running battle with record labels, is one part of that. Another is his request Monday in Washington, D.C., for congressional scrutiny of the music industry.

If it sounds like mixed messages, it's no accident. Hilbers is walking a fine line in resurrecting what was once the fastest-growing service in the Internet's history. Napster remains an outsider and needs to retain at least some of its original renegade flavor if it is to keep former fans in the fold. But at the same time, Hilbers needs to win the active support of Napster's archenemies, the major music labels.

With the new service, the company has finally been able to satisfy one side of the fence, Hilbers said in a conference call with reporters Wednesday. Settlement of the landmark lawsuit and licenses from the labels should come by the end of the first quarter, possibly in the next few weeks, he said.

"We've been able to execute what we've been talking about for a long time: the development of a secure peer-to-peer system," Hilbers said. "That was the criteria for getting licenses from the (major labels)."

As part of his drive to cut these independent deals with the labels, Hilbers also said he's all but abandoning the surprise deal Napster cut with the label-backed MusicNet service last fall. Because of restrictions on that deal, which would have

Amos Biegun of Counterpoint Systems describes the rights management component of Napster's new membership service. Play clip

forced Napster into using different formats and limited deals with rival Pressplay, the company will be better served by forging separate arrangements with each label, he said.

In his move toward legitimacy, Hilbers is providing one of the most dramatic tests of just how well the anarchy of the early Internet can be translated into the button-down, pay-to-play online vision of 2002.

Napster was the undisputed king of grassroots Net growth, attracting more than 60 million registered users to its free, unlicensed song-swapping service in the space of two years. Those millions melted away nearly as quickly as court decisions and technological filters interrupted the free flow of music, and Napster finally shut down all trades in July.

Analysts aren't optimistic that Hilbers can transform Napster's previous cachet into momentum for a subscription service, however.

"Napster has an immense challenge," said Mark Mooradian, a Jupiter Research analyst who has long followed digital entertainment. "I'm very skeptical. In the consumer's mind Napster stands for something, and that's free music."

Looking at the new Napster
A dip into the new Napster finds it much like the old, minus the millions of songs. The company has retained the peer-to-peer structure, allowing customers to trade files with each other directly. But it has added a layer of security to prevent trading in unauthorized songs, meaning the freewheeling days are over.

On the upside, Napster has also added a quality-control system, which effectively blocks low-quality copies of songs, such as those recorded at a low bit rate.

A software face-lift has left the basic interface roughly the same, while the design elements have been updated to look more professional.

The software still includes basic search features for artist or title. An internal player substitutes for Microsoft Windows or Winamp, and a mini-browser taps into the Napster Web site for music recommendations or help files.

The biggest change is the entry of the ".nap" file, in which most songs are now distributed. This is a secure file that can't be played outside the Napster player, and can't be moved to other devices like MP3 players. Some record labels are also licensing their catalogs in ordinary MP3 format, which also will be available for customers to trade freely with each other.

The cost of the service is still undetermined, although Hilbers said it would likely be between $5 and $10 for access to 50 downloads a month.

On its Web site, the company has told visitors for months to wait just a little longer for the new service, offering new details and hints from time to time.

In one unusual note, the company concedes that many people might ask why they should use the new Napster while other free alternatives such as Kazaa or Morpheus are still operating.

"You mean aside from the fact that Napster is the coolest?" the company writes on its Web site. "Seriously, we know that there will always be a lot of alternatives. Ultimately, the choice will be yours, but we feel that file-sharing communities that pay copyright holders...are going to prevail."

Connections, not cachet
These days it's obvious that the driving force behind Napster is not peer-to-peer technology, founder Shawn Fanning or the service's reputation. It's Hilbers, and most particularly his direct connection to Bertelsmann executive offices.

Outsiders have seen Bertelsmann's Napster strategy as a risky gamble with little hope of a payoff. But as a longtime and trusted Bertelsmann lieutenant, Hilbers has enjoyed considerable confidence from his boss--a factor that more than anything else has allowed the company to press on.

German conglomerate Bertelsmann has already poured well over $100 million into Napster, allowing the company to survive and develop its new software without revenue or access to venture capital. Starting with the surprise $60 million loan in late 1999, Bertelsmann Chief Executive Thomas

The new Napster at a glance Overview: It's still Napster. People will trade files between their own computers, although songs will have to be authorized. It will no longer be free. Price: Undetermined. Likely $5 to $10 for 50 downloads a month. Content: 110,000 indie songs in beta. Napster hopes to sign deals with all five major labels. Availability: In beta with 20,000 users who were selected from a pool of 2 million applicants. The company plans a launch by the end of the first quarter. Format: Supports MP3, if the record company allows it. But most files will come in .nap, a secure format created by the Napster software that can't be used in other players or transferred to MP3 devices. New features: • New file management and playlist system • Quality-of-service filter blocks bad copies of songs • Resume function can pick up in the middle of an interrupted download • Parental controls can block bad language • Genre directory expands search options

Middelhoff has consistently approved more outlays as Napster has needed funds for operations or legal costs.

Much of that strategy hangs on the personal relationship between Middelhoff and Hilbers, who have worked closely together for years. Before taking the Napster assignment, Hilbers had worked for Middelhoff through stints at AOL Europe, CompuServe and then BMG Entertainment, where he became Bertelsmann's Napster liaison.

It was Middelhoff who suggested Hilbers take the Napster job, Hilbers said.

"Middelhoff said, 'Hey, these Napster people want you over there,'" Hilbers remembers. "He was assuring me of his support for Napster going forward, and I was building on that promise. That promise seems to have come true."

A few conversations with then-CEO Hank Barry, a trip through Napster's offices and a whirl around Silicon Valley with venture capitalist John Hummer convinced Hilbers that Napster was the right place for him. He said he was attracted to the risk, and to the fast-paced, high-tech workplace--a far cry from the more corporate BMG environment.

Moreover, he was convinced that Barry and Hummer had finally accepted the vision of Napster working within the boundaries of copyright law, he added.

"It was a rather perfect experience," Hilbers said. "There was a feeling of trust, of openness, of shared vision and also of shared concerns."

Since taking the job, he's maintained a low profile. Part of the time has been spent winning over a Napster employee base steeped in a very different conception of the company's future. Some employees left, but the majority wound up staying. It helped that Hilbers was able to win the trust of founder Shawn Fanning, who has remained as the company's chief technical officer.

He maintains a close link to Middelhoff, talking to him several times a week. He stresses that Napster is still an independent company, taking action based on his own initiative with the advice of a small board of directors.

Bertelsmann has a tradition of giving its separate businesses and their "owners" fairly free rein, at least until poor decisions start showing up on radar screens, Hilbers notes.

At this point Napster isn't officially a Bertelsmann company, although the conglomerate has indicated that it ultimately wants to be the majority shareholder, Hilbers said. Middelhoff and others see the company's technology as a useful "business-to-consumer" platform that could be used for products other than music, even if that vision is several years away.

Climbing mountains
Hilbers' office at Napster is sparsely decorated. Framed photos of his young daughter and son sit on his desk. Notes are scribbled on a white board hanging on the wall. A first-floor window in the generic Silicon Valley office park looks out on a San Francisco Bay yacht club.

During a recent interview with CNET News.com, Hilbers appeared relaxed as he discussed the decisions that brought him to his present situation.

He's a risk taker by nature, a skier and mountain climber who has spent weeks trekking in the Himalayas, he said. His boyish face makes him look a little like actor Tim Robbins, and he exudes a matter-of-fact optimism about the company's future that feels almost jarring given the hurdles facing it.

He first has to figure out how to neutralize the enmity of the major music labels. This entails settling a lawsuit that could be worth billions of dollars in damages, in a way that doesn't immediately bankrupt the company.

Moreover, it means finding license terms that will allow Napster to make money, even as it pays the labels for use of their closely guarded works. The lawsuit ensures that Napster has almost no bargaining leverage in this negotiation.

Finally, he's financially constricted by what Bertelsmann is willing to extend. The company provided the $26 million to satisfy music publishers' much smaller claims, and Hilbers said proposed terms of settlement with the labels are "multiples" of that.

"There is an end to (Bertelsmann's) money," Hilbers said. "It's not like they're going to spend billions."

Nevertheless, Hilbers remains confident that he's close to agreements that all sides can accept. He delayed the launch of the new Napster by several months, from the last quarter of 2001, in hopes that it can open its doors to the public with a full catalog of music.

"We've made great progress," Hilbers said in Wednesday's conference call. The service might launch if it is lacking just one or two of the labels, he said, but he emphasized that he was confident of having all five onboard. "We are not completely closed yet, but we are confident we are close."

Executives from other labels are loath to comment on Napster, citing the ongoing litigation. Some appear to have marginally more sympathy for Hilbers, a familiar face, than for his predecessor Barry.

"I think he's doing the best job possible in a tough situation," said Jay Samit, vice president of new media for EMI, one of the record companies still suing Napster. "He's got a number of constituencies to please. Those are not easy shoes to walk in."

Even if he is able to win over the majors, Hilbers faces the task of selling a new music subscription service in a market suddenly brimming over with competitors. AOL, Yahoo, MSN and RealNetworks all are offering their own subscriptions.

Individual ISPs are headed in this direction, with the ability to bundle music subscriptions along with high-speed Net connections. Even TiVo will be jumping into the game, marketing RealNetworks' music plan to its subscribers.

"Now they're having to go head to head in marketing campaigns with the heavyweights of the industry," Jupiter's Mooradian said. Those companies have "much deeper pockets, and the ability to...offer packages, which are really going to make this take off."

Actual revenue is likely to be slim for some time. Jupiter estimates that music subscription services overall won't reach an aggregate 1 million users until late 2003.

And if that weren't enough, there is the balancing act between satisfying the major labels and keeping some shred of Napster's original outsider attitude intact.

Even as Hilbers seeks to cozy up to the labels, Napster's legal strategy has kept old wounds open. The company has accused the major labels of something very near antitrust violations, prompting critical comments from federal Judge Marilyn Hall Patel regarding the labels' joint ventures.

In this week's trip to Capitol Hill, Hilbers raised similar concerns with lawmakers, hinting that the labels should be forced to license their works to third-party Internet distributors like Napster.

In this Napster has shown that it is willing to bite the hand that feeds it. But, seeking to follow a path taken by many successful rebels in the music business, it is learning to keep from biting too hard.

"We were never coming at it from the angle that we want to do what the music industry thinks is right," Hilbers said. "While we're not in any way anarchistic about it, we are daring, and we are provoking. We want to move this marketplace (to) where Napster has shown the consumers want to be."