he online song-swapping service Napster is close to an agreement for permission to use music from three of the major record companies in a pay version of its service, according to people close to the situation.
Terms of the proposed agreement remain unclear and some obstacles remained to be worked out last night. The proposed deal would not affect a lawsuit the music industry filed accusing Napster of abetting copyright infringement, nor would it alter a preliminary injunction crippling Napster's service by forcing it to block traffic in copyrighted songs. The three record companies — AOL Time Warner's Warner Music, Bertelsmann's BMG Entertainment and EMI Group — would retain the right to cancel the deal if Napster fails to meet certain security standards.
But the deal under discussion would be Napster's biggest step yet toward transforming itself into a profitable business and the strongest indication since the injunction in early March that Napster may survive in some form.
The discussions are also the latest tactic in a competition among the major record companies trying to control the distribution of music over the Internet. The media companies that own record labels are each seeking to use access to their music catalogs as leverage to advance their own online jukebox systems.
According to the people close to the talks, Napster would agree to license music for a period exclusively from a consortium called MusicNet, a partnership formed by the three record companies and the Internet company RealNetworks.
MusicNet is an intermediary created to license the music of Warner Music, BMG and EMI to online music services that use RealNetworks' secure technology for distributing music over the Internet.
The partners have promised that their system will be operating by late summer. The agreement would help to establish RealNetworks technology and the MusicNet system as the predominant format for distributing music over the Internet by providing access to some of Napster's more than 70 million users. Napster would be precluded at least for the time being from licensing music and technology from a rival online music venture called Duet, which is being formed by the other two media companies in the music business, Sony and Vivendi Universal.
MusicNet's partners are seeking to persuade Sony and Vivendi Universal to join them in licensing their music through the MusicNet intermediary. Exclusive access to Napster's many users would strengthen their hand.
Napster's planned deal with MusicNet is the latest twist in a story of strange bedfellows that began last October when Bertelsmann agreed to lend Napster $60 million to convert itself into a fee-collecting subscription service. In exchange for the loan, Bertelsmann received the right to buy a majority ownership stake in Napster. The two companies pledged to broker a settlement of the lawsuit with the other record labels in an effort to establish Napster as the premier venue for distributing music online. That initial plan failed to pan out, but the new agreement appears to fulfill some of Bertelsmann's original objectives by turning Napster into its own contestant in the race to build a profitable digital music service.
The talks between Napster and MusicNet also raise the odd possibility that three record companies might be licensing their music to the service at the same time that they are still pursuing litigation to shut it down.
People close to the talks say that Napster now plans to offer two interconnected forms of service. The first, basic version will exclude the catalogs of the five major companies. Subscribers who pay a monthly fee will be able to load any other digital audio files — like the music of independent labels, their own recordings or other material — onto their computers and share it with other Napster users. The fidelity will be just below the sound quality of compact discs and users who obtain files over Napster will be precluded from loading them onto their own discs or sending them outside its network.
Napster has said that service will be available in July and will pay artists and independent labels for the use of their work. The proposed agreement with MusicNet would be contingent on Napster's ability to execute that plan.
Under the second form of the service, Napster users would, for an additional fee, have access to a premium version based on the RealNetworks technology and MusicNet's repertory — so far the catalogs of Warner Music, BMG and EMI. Under the plan for the MusicNet system, all the music files would originate from a secure central server, although members would be able to pass them among themselves. Subscribers would pay a monthly fee for a fixed number of downloads — perhaps 50 a month — and downloading from either the central server or a fellow user would count against the monthly allotment.
All of the services, including Napster's basic service, would require settling the issue of permission from songwriters, who want higher royalty rates on digital music than compact discs.
AOL Time Warner and RealNetworks each plan to start operating digital music services based on MusicNet's technology and music by the end of the summer. Napster would not be allowed to open its version of MusicNet, which would appear under a Napster brand, before its rivals. Who gets to be first, if anyone, has yet to be determined.
