Bertlesmann Has Napster Stuck in Its Head

Still convinced that file-swapping can be profitable, the German media giant is pumping $25 million more into the upstart

He's either a dreamer or a prophet, but Bertelsmann CEO Thomas Middelhoff still hasn't given up on Napster, the music file-sharing site currently mired in legal wrangling. The proof -- Bertelsmann is kicking in an additional $25 million to keep Napster alive, BusinessWeek has learned. That's in addition to the $60 million "loan" that the German media giant gave a year ago to the Redwood City (Calif.) upstart.

Why throw more money at a venture that essentially has no revenue? Middelhoff still believes that the basic idea behind Napster is potentially as powerful as that behind America Online, in which the German CEO was also an early investor. Before industry lawsuits forced Napster to suspend its file-sharing service, more than 80 million people had downloaded its software, which they used to swap music tracks for free.

Now, Bertelsmann plans a last-ditch effort to convert those users to paying subscribers. "We think even more than before that there's a real business here." says Andreas Schmidt, CEO of Bertelsmann eCommerce Group.


  That's not the only reason. The music industry is taking longer than expected to create online marketplaces for music because of copyright and technology issues. That leaves a vacuum illegally filled by other file-sharing services, which unlike Napster often don't have any pretense of going legit.

And more theft is the last thing the industry needs right now. Bertelsmann's BMG Group is losing money, and the industry as a whole suffered a 5% sales decline worldwide in the first half. "The fundamental problem for the music industry isn't solved. It has gotten worse," says Schmidt. That may convince the quarreling major music labels -- who've so far balked at a legal settlement -- to finally make a deal with Napster.

If that happens, Napster is ready to go with software that allows users to swap their favorite tracks, yet protects copyrights. Subscribers will pay a monthly fee that allows them to download a fixed number of tracks. Then they'll be able to swap the tracks with other subscribers. Nonsubscribers won't have the encryption software necessary to play the music. The software also incorporates chat and instant messaging, in a bid to encourage lots of communication among subscribers and help to build a "community" of loyal users.


  Even though its file-sharing feature has been shut down since midyear, Napster still attracts more than 100,000 users a day. They log on to chat and get the latest news on Napster's saga. That suggests that the brand name still has some clout. "The brand has been established," says Konrad Hilbers, Napster's CEO.

Bertelsmann also gets another benefit from its Napster investment. The Gütersloh (Germany)-based company plans to use the Napster software for its existing online music sites, such as CDNow and BMG Direct. "Napster is ready to roll," says Schmidt. "Now, it's up to the industry to finally take the opportunity to build a viable business." Middelhoff, who admits that his own children have used Napster to get audio versions of Harry Potter books, still hopes for a magical payoff.

By Jack Ewing in Frankfurt

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