Napster: Let's make a deal!

Is the music-trading service increasingly desperate, or crazy like a fox?

By Janelle Brown

Published February 21, 2001 8:17PM (EST)

You've got to hand it to Napster: If nothing else, the company has certainly mastered the art of the press release. The last week has witnessed a flurry of announcements from the besieged file-sharing company, dating back to the moment the Ninth Circuit Court of Appeals ruled on Feb. 12 that Napster users were indeed violating music copyrights and that Napster was knowingly helping them do it. You could, perhaps, call Napster's latest machinations the death throes of a company in the last minutes of life; but this final rally could also be interpreted as a savvy attempt to pull the record industry's strings by gaining public sympathy.

On Tuesday, Napster announced that it would be willing to settle with the record labels for a whopping $1 billion paid out in licensing fees over the next five years ($150 million per year for major labels and $50 million per year for indies). This wasn't Napster's first offer to settle (previous attempts have been soundly rejected by the record labels), but it was certainly the first time that the company had been so public about it. (Never mind the fact that Napster doesn't have $1 billion in the bank; it's counting on subscription fees to Napster II, and the backing of Bertelsmann to make those payments.)

On Wednesday, the record companies dismissed Napster's ploy with barely disguised scorn. Time Warner, Sony and Universal rejected the $1 billion deal on the grounds that it simply isn't enough money. The annual $200 million payments Napster proposed amount to about 1 percent of the industry's annual revenues.

But Napster's savvy publicity stunt has left music industry execs looking like killjoys determined to put an end to music sharing once and for all. After all, all five record labels have already settled with for decidedly less money than that.

Napster's offer was yet another clever move to boost confidence in the company's future and flexibility. On Friday, for example, the company announced details of the "Napster II" service that it's hoping to roll out this summer. Essentially, Napster II would look the same from the outside, but would use a "digital rights management" (DRM) system that would encrypt each MP3 sent through the Napster service with special "rules" that dictate when and where the tune can be played. You could still rip MP3s from your collection and upload them to the service, but anyone who downloaded the tune would find that it had been "wrapped" by an onionskin of information when it was sent through the system. Napster users would be able to listen to the music according to what type of membership they had paid for: Their client software program would contain a "key" that would decrypt the tune and determine how often they could listen to downloaded songs.

The new Napster would have a two-tiered subscription model service: $2.95 to $4.95 per month for a "basic membership" that gives you limited access to music, and $5.95 to $9.95 a month if you want unlimited file transfers. The ability to burn CDs or transfer music to your MP3 player would cost extra. The service would be "promotional" only, which means that high-fidelity MP3 recordings would be prohibited.

This was Napster's first card, a public declaration that was supposed to appease the record labels, which have long complained that they wanted to control when and where their music was played. "We are giving the record labels what they've been asking for," the announcement was essentially saying, not just to the labels themselves but also to consumers and the judges writing up the preliminary injunction.

But in the wake of the record industry's latest rejection, does Napster have a good hand to play? It offered everything the record labels have asked for: a good chunk of money, a digital rights management system, limits on music and lower-quality recordings so that the service won't pillage revenue from CD purchases.

In fact, the record labels were foolish to turn the offer down. If they persist in shutting down Napster, they will be driving tens of millions of users away from a system that the labels could potentially control. Instead, everyone will flock to free P2P services like Gnutella, FreeNet or OpenNap, which are more decentralized, less commercial and far more difficult to control or shut down. Sure, you could argue that $150 million a year may not compensate for the losses in CD sales revenue that Napster represents (this would certainly be the record labels' argument), but it's still unclear whether Napster has caused any significant erosion in CD sales. And if the labels accept Napster's offer, they've got the Net's biggest P2P service in the palm of their hand.

But do consumers want a new, industry-approved Napster? Fifty million music lovers may have been thrilled to download Napster when it was free and easy to use; but how many will be willing to pay for a service that puts limits on when and where you can listen to your music, has only lower-fidelity recordings, is potentially slower (thanks to the encryption process) and is being controlled by the record industry? Right now Napster may be able to offer better chat rooms and a more reliable service than Gnutella or FreeNet, but hundreds of open-source programmers are ready and eager to take on that challenge, too.

Despite all the savvy press releases, desperate conciliatory offers and carefully crafted business models, Napster still has to face one brutal fact: It's damn hard to compete with free. A seamless service that can be everything to all people -- consumers, labels, musicians and Napster alike -- may not be possible. But even if Napster survives the lawsuit and succeeds in hammering out some other kind of partnership with the record labels, it's still got a long, difficult road ahead.

Janelle Brown

Janelle Brown is a contributing writer for Salon.

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