BMG and Napster: If You Can't Beat 'Em, Buy 'Em!

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The revolution will be subsidized. By the Germans.

The mainstreaming of Napster — and the capitulation of Big Music to the looming future of a music business without $15 plastic discs — began Tuesday with a surprise deal between the online free-music outlaw and German publishing giant Bertelsmann (home of BMG, one of music's Big Five). The upshot: Napster just changed the "free" to "fee."

"Now the show begins," said Thomas Middelhoff, chief executive of Bertelsmann. "We have to evolve Napster and make it the best service available to people who love music." By "best," of course, he means "best one that doesn't rob record labels of their marketing investment and artists of their royalties" — heck, BMG's (and the other Big Four's) suit against the Napster site is still on; a San Francisco judge's ruling is expected any day.

Under the deal, BMG will pull out of the Napster case as soon as the company develops a for-pay version of the service that accommodates the rights of copyright holders. Bertelsmann will also chip in with a loan in the tens of millions — most of which will be sunk into developing song- and user-tracking technology, which is how royalties will be toted up — in exchange for options on as much as 58 percent of Napster.

Details of the coming fee-music service were conspicuously absent, as was any sign of a standing-down by the other big labels. But that seems entirely appropriate — while everyone seems to agree that some alliance between Big Music and the Internet is an inevitable future, a business model has yet to emerge. Napster, apparently, will be the laboratory. "This is a call for the industry to wake up," said Middelhoff, adding that BMG "couldn't ignore" Napster's 38 million users. "They can't all be criminals."

Maybe. But if they're merely cheap, Gnutella and FreeNet are still in business — as is Napster, pending the lawsuit's outcome. With his legal department looking on, Middelhoff figures Bertelsmann's getting a speculative stake in the online music revolution. But as can tell you, taking the "r" out of "free" can drive users away faster than yelling "directed by Kevin Costner" in a crowded movie theater.

And right now, all he's really got so far is the lousy T-shirt 19-year-old Napster founder Shawn Fanning (wearing a suit) handed him at the press conference.