Napster Inc. said Monday that it reached a tentative settlement with a major music publishing group, a deal that provides both a sizable cut of royalties for songwriters and a precedent for how publishers and labels would divide online music revenue.
Under the tentative pact between the controversial Redwood City, Calif.-based online song-swapping service and the National Music Publishers Assn., association members would receive $26 million in damages and one-third of the future royalties Napster pays to the music industry.
That's an unusually large cut for the publishers, which receive less than 10% of the revenue from CD sales. The deal also calls for the members to receive a $10-million advance against future royalties.
"That's a big win for the publishers," said James Glicker, president of music services for FullAudio, an online music distributor. "It establishes a benchmark for [the publishers'] deals with the labels."
The publishers and the labels have been wrangling for months over how to split the proceeds from Internet music services, with the labels trying to preserve the status quo and the publishers negotiating for more. The two sides are widely expected to strike a compromise that lets the labels start their online subscription services before a royalty rate has been set.
"I think the record companies need to wake up . . . and recognize that this and many other [deals] are precedent-setting," said Martin Bandier, chairman and chief executive of EMI Music Publishing Co., the largest music publisher.
Before it takes effect, the proposed settlement must be approved by U.S. District Judge Marilyn Hall Patel in San Francisco and the publishing group's 800-plus members. The settlement would apply only to the association, not the labels or other plaintiffs in the copyright infringement lawsuit against Napster.
That lawsuit is entering a critical and potentially deciding phase. Patel has scheduled a hearing for Oct. 10 on whether she should declare Napster liable for copyright infringement without going to trial.
Napster's legal troubles stem from its wildly popular free service, which enabled consumers to search for and copy music from one another's computers. In a preliminary ruling this year, Patel ordered Napster to stop helping consumers violate the labels' and publishers' copyrights.
Napster suspended its free service in July as it struggled to comply with Patel's instructions. Although it may never revive its no-holds-barred downloading, the company plans to launch a service this year that lets consumers swap industry-authorized copies of songs for a monthly fee.
The new service has been held up in part because Napster didn't have a deal with the publishers, which control one of two key copyrights covering each piece of recorded music. The deal with the publishing group would include a two-year license for Napster to distribute the publishers' works in exchange for one-third of all the royalties paid to copyright holders.
Just how much that translates to per song is unclear because it depends on the number of people who sign up for the service and the number of songs they download. Neither Napster nor the publishers association would say how much of Napster's subscription fees would go to copyright holders.
Nor is it clear whether Napster will attract a substantial number of subscribers. Since it started restricting downloads to comply with Patel's order, Napster steadily has lost much of its customer base to rival services that place no limits on piracy.
The lawsuit against Napster also may result in an astronomic award to the labels, wiping out Napster before its new service takes off.
Napster had offered to give the labels and publishers 64% of the subscription fees, or about the same percentage that they collect from CD sales. In February, the company switched tactics and started offering the copyright holders a lump sum of $200 million per year.
Neither of those offers won over the major labels or publishers, which called on Napster to shut down the free service as a prelude to any licensing deals.
Cary Ramos, the association's lead attorney in the lawsuit, said Napster's appointment of Konrad Hilbers as chief executive in July was an important factor in reaching the settlement.
"The scorched-earth approach taken by Napster [previously] was really counterproductive," Ramos said. "Had they 'fessed up that they'd done things wrong and come to us back then and said, 'Look, can we make a deal here?,' maybe we would have made a deal earlier."
If found liable for violating the publishers' copyrights, Napster would have faced far more than $26 million in damages. But Ramos said, "We made a pragmatic decision that we should settle on terms that Napster could afford to pay."
Napster hasn't raised any significant revenue from advertisers or sponsors, but it has received sizable loans from Bertelsmann, the entertainment conglomerate that owns the BMG label. That money is expected to cover payments to the publishers.
Edward P. Murphy, president and chief executive of the publishers group, said the publishers might end up collecting less from each Napster download than the 7.55 cents per song they typically receive from CD sales. "Either way, we're going to learn from it," he said, adding, "That's what I think we need to do, have a controlled learning."
Napster's license will cover mainly songs from the many independent labels the company has already struck deals with. It won't extend to the major-label music Napster obtains from MusicNet, a joint venture by EMI, BMG, Warner Music Group and RealNetworks, Napster officials said.