Music labels mum on Napster invitation

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LOS ANGELES, California (Reuters) -- Entertainment conglomerate Bertelsmann AG's unexpected deal with song-swap company Napster Inc. has put rivals of its BMG record company on the spot -- should they jump on the bandwagon or tough it out.

All of Bertelsmann's big music competitors -- such as Seagram Co. Ltd.'s Universal Music, Sony Corp.'s Sony Music, Time Warner's Warner Music Group and EMI Group's EMI Music -- issued statements on Tuesday supporting the deal by Bertelsmann to try to legitimize Napster. Time Warner is the parent company of CNN.com.

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But a day later, many music company executives privately talked about how surprised they were by the timing of the deal and questioned Bertelsmann's motives. BMG, along with the other music companies, is suing Napster for copyright infringement.

As part of the deal, Bertelsmann invited other labels to participate in the pact to transform the renegade song-swap service into a membership-based service that pays royalties.

"If their intention was to involve all of us, then you'd think we would have gotten a phone call from Bertelsmann the day before. But there was nothing," said one executive at major recording company.

Napster's service, developed by 19-year-old college dropout Shawn Fanning, lets fans swap songs for free by trading MP3 files, a compression format that turns music on compact discs into small computer files. It has attracted 38 million users.

It is unclear whether the other labels, who consider Napster a haven for online piracy, will join in the alliance, particularly as questions abound regarding the success of the deal. Napster and Bertelsmann have promised they would develop services that both pleases Napster users -- accustomed to getting vast amounts of music for free -- as well as compensates rights holders, but have given few details.

"There's nothing to invest on. They have no working structure to speak of. Its just a theory right now," said one executive at a rival music label.

In fact, several industry sources said BMG executives were initially opposed to the alliance between its parent company and Napster. Several analysts, nonetheless, said the deal was a win-win for both Napster and Bertelsmann.

"Bertelsmann should be commended for taking such an adventurous approach toward the Internet," said Eric Scheirer, analyst with Forrester Research. "It's a great idea and they have a great opportunity to learn a lot of things about file-sharing from Napster. Let's just see now if they can make money or not," he said.

Many industry experts expect the labels will wait for an appeals court decision on whether or not to shut down Napster pending a final decision in their landmark copyright case against the wildly popular service.

Bertelsmann Tuesday said it would drop its suit against Napster once it implements a secure, membership-based service, and Wednesday it said a court-ordered shutdown of Napster would not terminate its alliance.

A Bertelsmann spokeswoman said it would restart Napster's activities if it were shut down with "technology in line with the legal claims."

In another copyright case involving online music, San Diego-based Internet music provider MP3.com Inc. settled with all but Universal Music on a case related to its My.MP3.com service, which lets users store music and then access it via any computer.

But analysts said the Napster case was different because, unlike My.MP3.com, there is no business model that promises to generate revenues. And even in the MP3.com case, Seagram's Universal has steadfastly refused to come on board.

"I think all the labels are going to sit and wait. There is no hurry because of the lawsuit and because we haven't seen any evidence of them losing revenues because of Napster," said Webnoize analyst Ric Dube, citing strong growth in compact disc sales.

While the recording companies have been criticized for lagging in their online initiatives and have mostly just charged fees for the small amounts of songs they have offered online, they are all attempting to develop online-music subscription services.

"We've been working on all the things that Napster will now have to do, such as putting in digital rights management systems, worrying about customer service and licensing. It will be interesting to see how they'll implement this. It sort of levels the playing field," said one music executive.

In a gesture, signaling that subscription is emerging as the next big music distribution channel, America Online Inc. recently said it was planning to launch a music subscription service.

"Warner (which is set to merger with AOL) is in the best position with AOL. Its answer to Napster is sort of staring it right in the face and that is why they may not move on the BMG/Napster deal," said Dube.

Universal Music also began testing a subscription service of its own last month and has plans to develop a subscription service with Sony, which is not participating in the trial.

Copyright 2000 Reuters. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.

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