Global media conglomerate Bertelsmann struck a deal with Napster Inc. on Friday to buy the company after Napster emerges from bankruptcy, paying creditors $8million but leaving investors in the pioneering song-sharing service empty-handed.
Among the creditors are the major record labels and music publishers that sued Napster for copyright infringement, saying Napster users made millions of unauthorized copies of their songs for free. But their claims may take a back seat to the $12 million to $13million in debts the company reportedly owes for products and services.
The deal, which also calls for Bertelsmann to waive the $85 million in loans it made to Napster, brings founder Shawn Fanning, Chief Executive Konrad Hilbers and other top executives back to the fold. But it doesn't solve Napster's biggest problem: It still can't offer songs from the major record companies through the new, copyright-protecting service it has developed.
"The only thing Napster really has to offer at this point is its brand," said analyst Stacey Herron of Jupiter Research, a technology research and consulting firm. "Surprisingly, Napster still does have a really strong brand name, not only in the digital music community but with consumers overall.... [But] the more that time passes, the more Napster continues to bury itself in the ground."
Friday's developments capped a roller-coaster month for Redwood City, Calif.-based Napster. Amid negotiations between Bertelsmann and Napster's board, dissident board member John Fanning, uncle of Shawn Fanning, sued to wrest control of the company from its major investor, venture capital firm Hummer Winblad.
Last week, Bertelsmann withdrew its offer to buy the shares held by Hummer Winblad, John Fanning and other investors. Instead, it offered to pay creditors $5million for Napster's assets as part of a bankruptcy proceeding, with no money for Hummer Winblad and other shareholders.
A few days later, Bertelsmann withdrew that offer as well, prompting the company's top executives to resign and most of its employees to be laid off. Having fended off the Fanning lawsuit, the board made a new overture to Bertelsmann on Wednesday, which resulted in Friday's deal.
Led by Hummer Winblad, investors had poured more than $15million into Napster to help it grow from a college dorm-room project into a hugely popular song-sharing network. But the major record companies and music publishers sued for copyright infringement, and a series of federal court rulings effectively shut down the company's free service.
According to Jupiter, Napster attracted more than 13.5 million users during its peak month, February 2001. But those users quickly switched to other file-sharing networks online as Napster blocked users from downloading a growing number of copyrighted songs.
The bankruptcy filing, expected next week, not only will wipe out Napster's debts and its shareholders' investments, but it also will end the labels' and publishers' claims for damages, according to several officials involved in the deal. But Napster still may have to compensate the labels and publishers for the infringements in order to distribute their artists' songs.
Analyst P.J. McNealy of GartnerG2, a technology research and consulting firm, said labels and publishers are certain to extract some compensation before letting Napster resurface. "If they don't, they send the message that that kind of piracy is acceptable," he said.
Napster has spent months trying in vain to obtain licenses from the labels on terms that would support its vision--and Bertelsmann's--of a service that consumers would be willing to pay for. Friday's deal "is an indication that Bertelsmann believes it can happen," McNealy said.
A source close to the negotiations said Bertelsmann is committed to file sharing and plans to make Napster the flagship of its digital distribution strategy. "This has never been a short-time or one-time opportunity," said the source, who asked not to be named.
Martin Pichinson, president of consulting firm Sherwood Partners, said the big losers in the process are music fans, artists, investors and Napster itself.
"It's a good name, but you've got to rebuild it. I don't think [Bertelsmann] can do it," Pichinson said. "They've lost the community. The people have moved away from the village."