March 6, 2001 5:00 PM PST

Napster settlement chances appear dim

The old Napster is officially on its way out.

The next few critical days and weeks will determine whether there will ever be a new one--an idea looking shakier by the minute, some analysts say.

Dealing with a court order that could force nearly all copyrighted music off its service, a mandate to do strict policing of its own members' swapping, and the threat of billions of dollars in damages, Napster's legal and financial position has rapidly deteriorated.

As the company's fortunes have fallen, those of the record companies suing the besieged service have risen. The five major record labels suing the company--EMI Recorded Music, Sony Music Group, Warner Music Group, Universal Music Group and BMG Entertainment--wield extraordinary power going into settlement discussions. If it wants to escape with its life, Napster will have to strike a painful bargain at best--and even that may no longer be possible, many analysts say.

"I see it hard for them to survive through July," said Gartner analyst P.J. McNealy, predicting that the twin burdens of looming damages and an audience that probably will dwindle is likely to drive the company out of business.

Napster and record companies will meet Friday in front of a court-appointed mediator in an attempt to hash out some common ground. Napster CEO Hank Barry said Tuesday that he is still looking for these settlement talks to bear fruit.

"We will continue to press our case in court and seek a mediated resolution even as we work to implement the court's order," Barry said in a statement. "We will continue to seek a settlement with the record companies and to prepare our new membership-based service that will make payments to artists, songwriters and other rights holders."

That July date is the drop-dead moment for Napster and BMG parent Bertelsmann, the German entertainment conglomerate that hopes to create a secure subscription service out of today's anarchic file-swapping community. The company is doing its best to hold on to as many members as possible as it approaches that date, hoping to move many into the paid service. That could become difficult if Napster successfully blocks most copyrighted works from being traded, however.

Napster has appealed the recent 9th U.S. Circuit Court of Appeals decision to a larger panel of appellate judges in San Francisco. If that "en banc" application is accepted by the court, it could reopen the issue of Napster's legality.

If that panel of judges does not take the appeal, or if it makes a decision, the case could go all the way to the Supreme Court. The issues raised by Napster's joust with the record industry are wide-ranging enough to make it likely that the nation's top court could think seriously about taking the case, many lawyers say.

Limited bargaining power
The planned subscription service and the 64 million registered Napster members that stand as potential subscribers are the only tangible enticements that Napster can offer in settlement talks.

But those aren't wholly insignificant attractions. The record labels are looking for ways to distribute their products online--as long as they can control the distribution channel. Bertelsmann's subsidiary is clearly on board, while Vivendi Universal's chief executive indicated Monday that his company, parent of Universal Music, might be willing to deal as long as Napster proves it has created a secure, piracy-proof technology.

Analysts agree that the industry will ultimately coalesce around one or more "super-aggregators"--companies not directly connected to the record labels that can distribute all the labels' songs. With a huge audience and brand name, Napster could be that company.

The problem for Napster is that other companies could fill that slot as well, reducing its bargaining power.

Already, Bertelsmann and Vivendi executives have alluded to a world where their music might be distributed by big companies such as Yahoo, AOL Time Warner and Microsoft, as well as Napster.

"This is the biggest (new) revenue stream that labels and rights holders can have," Bertelsmann E-Commerce President Andreas Schmidt said last month, talking about Napster's offer to guarantee the industry $1 billion over five years in return for licenses to music. "And this is just Napster. Others will come after Napster."

If these other companies--which don't have a history of antagonizing the record companies--are viewed as likely to jump into the music file-swapping or subscription business, there is less incentive for the record labels to settle with Napster, analysts say.

Washington wild cards
Looming in the background, however, is the growing possibility that Congress might get involved, and not necessarily on the record companies' side. That threat may help drive settlement talks forward.

At a digital entertainment conference in Washington, D.C., on Tuesday, House Commerce Committee Chairman Billy Tauzin, R-La., expressed what is becoming an increasingly common refrain in the nation's capital.

"It would be extremely good if the music industry would focus its energies into harnessing the power of file sharing," Tauzin said. "I think (the record companies and Napster) would want to solve this on their own. I think all of us would prefer that they did."

Senate Judiciary Committee Chairman Orrin Hatch, R-Utah, has called a committee hearing for early April, at which Napster will argue in its own defense.

The record labels have long said they are willing to listen to reasonable settlement proposals from Napster, but insiders have said they have not been satisfied with the business models or the guarantees of security outlined for the proposed subscription-based service.

 

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