September 24, 2001 2:40 PM PDT

Napster reaches settlement with publishers

Music-swapping company Napster announced a major deal with music publishers Monday, settling part of its outstanding lawsuit and helping clear the way for its planned subscription service.

The fallen file-swapping company has been hunting for legitimacy for months, striking deals with record companies in an attempt to win rights to distribute music through its new service, which is slated to launch later this year. Publishers have said they are amenable to discussions, but this deal is the first tangible sign of agreement.

As part of the deal, Napster has agreed to pay $26 million to settle its ongoing legal disputes with music publishers and songwriters. That doesn't mean the lawsuit troubles as a whole will disappear--record labels are continuing with their own litigation, which still threatens Napster with even more substantial legal damages.

According to the terms of the deal, the owners of music-publishing rights will receive one-third of the royalties that Napster will pay content owners, leaving two-thirds of those royalties for record labels. Although that gives publishers a much better deal than they have in the offline world, it's not clear exactly how much money that will be, or what proportion of Napster's revenues that figure might represent. Napster did say it would pay an advance of $10 million against future licensing fees, however.

Napster has not yet said exactly how much its subscription service will cost, or when it will launch. Chief Executive Konrad Hilbers said in a conference call Monday that the service would be available to consumers by the end of the year.

Although the price of the settlement and the amount of money slated for publishers is already raising eyebrows, Napster said it will allow the company to survive and make money.

"This is not a rushed agreement," Hilbers said. "We've found an agreement that everyone can live with here. There's nobody here that's willing to lose money in the long run."

Pressure from above
Monday's announcement emphasizes the pressure that Washington officials have been putting on music and Internet companies to settle the rancor that has stalled services and sparked a myriad of lawsuits over the past two years.

Hilbers noted that Sen. Orrin Hatch, R-Utah, had called a meeting in Washington, D.C., that included Napster and the publishers. "I was happy to see the climate created by that meeting," Hilbers said, without elaborating.

Edward Murphy, president of the National Music Publishers Association (NMPA), said that Sen. Patrick Leahy, D-Vt., had also played a key role. The two senators "have been very instrumental in helping us through the negotiating process," Murphy said.

What precisely has been negotiated is still cloudy, however.

The legal settlement itself still must be approved by individual publishers who are represented by the NMPA and by a federal court. That process could take several months, Murphy said.

Napster's service, which has been outlined several times by the company's executives, is meant to be a paid, authorized version of the original unfettered file-swapping system. The company has already cut deals with many independent labels, and is expected to launch offering primarily this music. Another deal with MusicNet, which includes Warner Music Group, BMG Entertainment and EMI Recorded Music, could ultimately give the company access to those labels' music--but only after Napster has satisfied them that it has wholly stopped copyright violations.

The company hasn't yet publicly said how much it will charge for its subscription service or what proportion of this revenue will go to content owners. All that is evident is that publishers will get a third of that revenue, whatever it might be.

Those questions make analysts wary.

"It says absolutely nothing about what business model (Napster) is using," said Jupiter Research analyst Aram Sinnreich. "It sidesteps the issue of how you can have a royalty model based on a percentage of revenue" that can support the kind of subscription levels Napster is planning.

Building an audience
Hilbers said that he expects to have 1 million to 2 million subscribers within 18 months after the subscription service launches.

That's a steep growth curve for a company that has dropped from tens of million of loyal fans to almost zero in just a few months. Napster has blocked file transfers through its network since early July, and most of its former fans have gone to rival free services such as MusicCity or Audiogalaxy.

Nevertheless, the news of the settlement is welcome, analysts said.

"Napster needs good news like a desert needs water," Sinnreich noted. "This will show that it is moving ahead."

Still outstanding is the record labels' suit, however. The two sides are scheduled to meet in court Oct. 10, when a judge will hear arguments on whether the case should be concluded in the labels' favor without going to a full trial. That could still result in considerable legal damages for Napster.

Hilbers said he is still working on a settlement with the record labels.

"I have pursued (publishers and labels) with equal effort," the former Bertelsmann executive said. The publishers proved more immediately amenable, but "I am hoping to settle with the others," he said.

 

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