Bertelsmann, Napster Form Alliance

Bertelsmann AG, one of the five major music companies suing Napster, announced today that it is forming an alliance with the controversial file-sharing service. Via its newly formed e-commerce group BeCG, Bertelsmann — parent company of BMG Entertainment — aims to develop Napster into a secure membership-based service that will pay royalties.

Once the new model is in place, BMG will drop its copyright infringement suit against Napster. BeCG will provide Napster with a loan to cover costs of developing the revamped service and will hold a warranty to acquire a percentage of Napster's equity.

"Person-to-person file sharing has captured the imagination of millions of people worldwide with its ease of use, global selection of content, and community features," said Bertelsmann chairman and chief executive officer Thomas Middelhoff in a statement.

"Napster has pointed the way for a new direction for music distribution, and we believe it will form the basis of important and exciting new business models for the future of the music industry. We invite other record and publishing companies, artists and other industry members to participate in the development of a secure and membership-based service."

"I am excited that Bertelsmann appreciates and values the uniqueness of the community Napster users have built," added Napster founder Shawn Fanning. "I look forward to Napster becoming a part of even more people's lives, helping the way people discover and explore music."

The announcement of the strategic alliance comes as Napster awaits an appeals court decision as to whether or not it will be allowed to continue operating pending a final verdict in the landmark copyright lawsuit brought against it by the five major record companies. In addition to BMG, Sony Music, Universal Music, Warner Music Group, and EMI — all represented by the Recording Industry Association of America — are involved in the suit.

"Today's announcement of a strategic alliance between Napster and Bertelsmann AG makes clear that Napster has come to the same conclusion we have been urging from the start: that it is better to work with the creative community than against it," said RIAA President and CEO Hilary B. Rosen in a statement. "This is a welcome development.

"We welcome anyone's decision to become a legitimate player in the online music industry, building a business based on licensed uses of copyrighted works.

"Today's announcement does not bring an end to the court case," Rosen added. "There are multiple plaintiffs in addition to BMG; and BMG itself has said that it won't withdraw its complaint against Napster until they actually implement a legitimate business model. And frankly, it is important for everyone — Napster included — that the ground rules of the Internet music business be established once and for all.

Analysts said the agreement was good news for the music industry, which has been roundly criticized for failing to enter the online arena in a timely fashion.

"This is a very important first step toward developing an appropriate file-sharing mechanism for the music industry," said Chris Dixon, an analyst with PaineWebber.

"There's no question that Napster, with over 35 million users, represents the killer application, and Bertelsmann's acknowledgement that they're looking to create an economic platform is a terrific way to accelerate an adoption for a new delivery mechanism within the music industry."

The challenge, Dixon added, will be refining the business model. "The issue is whether or not they can come up with a business model and then the other [music labels] will come on board."

Reuters contributed to this report.