fyi ... k Dow Jones Financial Wire 20-05-02 04:02:59 WSJ(5/20) Napster's Fate Is Cloudy, Despite Bertelsmann
By Nick Wingfield NAPSTER Inc., after a tumultuous week that saw most of its senior executives resign and then return, reached a deal Friday to be acquired by German media titan Bertelsmann AG. But the fate of the music-sharing service is far from certain. "They will have to make deals with the same labels that they leave at the altar in bankruptcy," said Mark Radcliffe, an attorney at Gray Cary Ware & Freidenrich. Those record labels are plaintiffs in a long-running court case brought by the record industry against Napster in 1999 for infringing music copyrights through its service, a system that allowed users to share music libraries on their computers with anyone else running Napster's software. The Redwood City, Calif., company's pioneering music service once teemed with a seemingly limitless library of songs -- from the Beatles to Beethoven -- most of it pirated and shared by the 60 million users Napster boasted at its peak. Napster shut the service down last summer following a court order. Bertelsmann's acquisition of the company provides a more solid financial footing, but it remains unclear whether Napster, stripped of pirated music, can come close to its former popularity by launching a commercial service with music licensed from major record companies. Moreover, it is far from certain that those companies, which might have received hundreds of millions of dollars in damages from Napster if they had won their case, will be willing to cut deals with it now. "What really is the value [of Napster] at this point in time, particularly when you're going to introduce a service nowhere near the original value of Napster?" asked Peter Astiz, another attorney at Gray Cary, a Palo Alto, Calif., law firm that specializes in technology companies. Under the agreement between the two companies, Bertelsmann of Guetersloh, Germany, said it will provide $8 million to Napster's creditors to purchase the company's assets. As a condition of the deal, Napster is expected to soon file for protection under Chapter 11 of the U.S. Bankruptcy Code, through which it will reorganize with the aim of keeping its senior management team intact. Most of Napster's executives resigned en masse early last week after negotiations with Bertelsmann fell apart, but by Friday most of them, including Napster CEO Konrad Hilbers and founder Shawn Fanning, had rejoined the company. The agreement brought an end to months of testy negotiations between Napster and Bertelsmann, talks that became mired in an internal battle between Napster shareholders. Napster shut down the service last year to comply with a preliminary court ruling that forced it to filter out pirated music while the case proceeded. Filing for Chapter 11 is expected to temporarily stay the record industry lawsuit against Napster. Yet, it isn't clear whether the court will decide to discharge the plaintiffs' claims of willful copyright infringement since there has been no final determination of Napster's guilt, according to people close to the companies and legal experts. But those same record companies, whose legal claims against Napster will be in question because of its expected bankruptcy filing, still hold the keys to the company's future. That's because Napster needs to license music from major record labels to launch a service. Matthew Oppenheim, senior vice president of business and legal affairs at the Recording Industry Association of America, which is representing the record labels in the Napster lawsuit, declined to discuss how his legal strategy might change following the Bertelsmann deal. Mr. Oppenheim questioned whether a bankruptcy judge would allow the company to reorganize under Chapter 11 without holding music licenses that suggest it has a viable business to pursue. "The issue of whether or not Napster should be permitted to reorganize pursuant to bankruptcy code will be a significant issue," he said. Bankruptcy specialists played down the importance of that point though, saying Bertelsmann's financial backing alone should be sufficient to allow a Chapter 11 reorganization to proceed. People close to Bertelsmann said it will "turn squarely" toward the task of cutting deals with the five major record companies now that it has a deal with Napster. The company is likely to have a better bargaining position with the record companies than Napster would have had alone: After all, Bertelsmann owns one of the five major labels, BMG Entertainment. Industry executives say Bertelsmann could push BMG to license its music to other Internet music services -- for instance, to pressplay, a venture controlled by Sony Corp.'s Sony Music Entertainment and Vivendi Universal SA's Universal Music Group -- in exchange for an agreement for Sony and Universal music for Napster. BMG is one of the parties to the lawsuit against Napster. So far, the record industry has done little to give paid music services licenses that allow the services to keep pace with the Napster clones on the Internet. Songs downloaded from paid services like pressplay and MusicNet lack the broad song selection and flexibility of music from Napster-like services such as LimeWire and Kazaa. The paid services are negotiating with the labels for better music licenses, and there is also movement afoot on Capitol Hill by some industry executives to persuade Congress to mandate song licenses for Internet-music services. "Creating new ways of doing business is never easy, but Napster will be at the forefront" by respecting copyright, rewarding artists and delivering entertainment value, said Joel Klein, chairman and CEO of Bertelsmann Inc., a division of Bertelsmann, in a statement. The $8 million Bertelsmann agreed to pay to Napster creditors, on its own, seems a pittance for a onetime Internet darling. But Bertelsmann had funded Napster for more than a year, putting in upward of $85 million to keep the company going as it fought the record industry in court and struggled to launch a new service. Bertelsmann will waive claims to recover Napster loans as part of the agreement, meaning the company effectively is paying closer to $93 million for Napster. Napster's other investors, meanwhile, will get nothing. (END) Dow Jones Newswires 20-05-02 0300GMT Categories: I/CSV I/HOU I/MED I/PUB N/DJWI N/ANL N/CAC N/CNW N/DJSS N/DJWB N/FRT N/JNL N/LWS N/TNM N/WLS M/CYC M/NCY M/NND M/TPX R/CA R/EC R/EU R/GE R/NME R/PRM R/US R/USW R/USW Primark --------------------------------------------------------------------- To unsubscribe, e-mail: [EMAIL PROTECTED] For additional commands, e-mail: [EMAIL PROTECTED]
