The Billion-Dollar Gambit - Company Business and Marketing

Industry Standard, The, March 5, 2001 by Dan Goodin, Hane C. Lee

Napster offers to go legit and launches a PR campaign aimed at pressuring Big Music to end its legal assault. Is it too little, too late?

IT'S CALLED PLAYING THE HAND YOU'RE dealt. Spanked by the federal courts and desperate to stay afloat, Napster last week deployed its most valuable resource: the 64 million fans who use the service to download everything from Eminem to obscure French opera.

The pitch to Napsterites came Tuesday in a San Francisco press conference. Interim CEO Hank Barry unveiled a version of the business model that the company has for months been privately urging record executives to accept. The plan outlines a subscription service that would allow Napster to pay the labels $1 billion over five years. The company also promises to build industrial-strength security into its network to prevent unauthorized copying. In exchange, the record companies would drop their 14-month-old legal siege. "We want our users to be clear in understanding that if Napster is shut down, it's because even though we're willing to pay the record labels, they don't want to take our money," Barry told journalists. The message was clear: Napster is remaking itself as an enterprise that respects intellectual property -- and users need to pressure the mean, old record companies to sign on.

But the labels hold all the legal cards and, not surprisingly, show no inclination to compromise. "We would not support a proposal that allows Napster to continue to operate in the current unlawful form while developing a business model," says Richard Parsons, co-COO of AOL Time Warner, which owns the Warner Music label. "They need to shut down. Then we can talk." Time is on the labels' side. Their application for an order to shut down Napster is in the hands of Federal District Court Judge Marilyn Hall Patel, and she could issue an injunction anytime.

Meanwhile, Napster users weren't exactly moving mountains. By week's end no boycotts were called, and white knights from Congress -- which the company hoped would draft a law forcing the labels to license their music -- had failed to ride in. That put Napster back where it started 18 months ago, when its best hope of fending off a crippling legal blow was to make peace with the labels. Napster execs still cling to the possibility of signing more labels onto the pact it formed in October with Bertelsmann, parent of label BMG, by sweetening the proposal with more money or other concessions.

But money alone won't bring the record labels around. What Napster has failed to publicly acknowledge is that its best chance of settling the case is to shut down the service -- as online music distributor MP3.com did last year before it reached a deal with the labels -- while negotiations continue.

That move has one huge downside: It could forever alienate those millions of Napster users. And in this high-stakes game, the upstart company isn't ready to cash in its chips.

Everybody Gets Paid

Eager to prove itself as a business, Napster has proposed a new model for the digital distribution of music.

What They Get

* RECORD LABELS: $200 million a year for five years. Exact amount paid to each party depends on the percentage of that party's songs traded over Napster's network. Major labels may also be eligible for a stake in the startup.

* RECORDING ARTISTS AND MUSIC PUBLISHERS: Labels pay them out of revenues from Napster.

* NAPSTER: $3 to $10 a month per user in subscription fees.

How It Works

USER A: Buys subscription and shares files via Napster servers. Premium services, like files that can be copied onto CDs or MP3 players, cost extra.

NAPSTER: Company software tracks each song traded over the network and credits the copyright holder for each download.

USER B: When downloading song from User A, Napster encrypts file as it transfers, so User B can listen to song only if he is a paid Napster subscriber.