Napster --- If Bertelsmann Wed Napster, It Could Sue Itself, and More
April 22, 2002
If Bertelsmann Wed Napster, It Could Sue Itself, and More
By MATT RICHTEL
By pursuing a possible deal to buy the music-trading service Napster, the German media conglomerate Bertelsmann is opening the unusual possibility that it may be financing an antitrust investigation against itself.
The deal to buy Napster is being promoted by Bertelsmann's chief executive, Thomas Middelhoff, who told a German newspaper this month that he was willing to pay $15 million to $30 million, in addition to the $85 million that his company has already lent Napster over the last few years. He said he believed a for-pay version of Napster could still become the Internet's most successful service.
At the same time, BMG Records, a division of Bertelsmann, has joined four other record labels in pursuing a lawsuit against Napster for copyright infringement. That suit succeeded in knocking the service off the Internet last July.
Napster, in turn, has said the case against it should be thrown out because the record companies had engaged in antitrust activities, joining to thwart competition to their own Internet music services. A judge has given Napster permission to gather evidence from the record companies for its claims.
So if Bertelsmann buys Napster, it will have two of its divisions on opposite sides of a serious legal divide, with billions of dollars in damages at stake. As Bertelsmann is only one of a number of plaintiffs seeking damages from Napster, it could not on its own simply drop the suit.
Bertelsmann officials refused to comment.
With negotiations continuing, the digital music market continues to evolve. Even as the new Napster and other services seek to create for-pay exchanges, a new generation of services has emerged that continues to give consumers the option of tapping into free music on the Internet. Some of these services are also being sued by the major record companies.
Eric Scheirer, an independent music industry analyst, said it was unlikely that Bertelsmann would buy Napster for the express purpose of closing the antitrust investigation by Napster's defense team. But Mr. Scheirer also said that it was also unlikely that the company would continue to finance Napster's legal defense. "It makes no sense to be investigating itself," he said.
Rather, Mr. Scheirer said, the probable outcome is that the sides will settle in "rapid order" because neither Bertelsmann nor its fellow record labels want to see Napster's investigation proceed.
Adding another wrinkle, the Justice Department said in October that it had started an antitrust investigation of its own into whether the record companies have misused their copyrights to dominate the digital market.
Legal experts said that government investigators could have additional ammunition if Bertelsmann buys Napster and then shuts down the service's antitrust investigation.
The future of Napster, however, depends on its ability to transform itself into a for-pay service. The company, which in its heyday was used by millions of people each day to exchange free music, has been running low on finances.
Under its chief executive, Konrad Hilbers, himself a former Bertelsmann executive, Napster has been seeking to license music from the same record labels that succeeded in ending its free service.
Mr. Hilbers has said he has made progress, but he has not signed any deals yet, and his plans to start the service by the end of the first quarter have failed.
That appears to account in part for Mr. Middelhoff's interest in taking control of Napster. "Middelhoff thinks he can work out the deal that Napster hasn't been able to do," said a person close to the negotiations, who then added, referring to the record labels, "He thinks he's going to be able to convince people to come along."
Still, parties close to Napster and Bertelsmann say talks are grinding slowly, partly because of an internal dispute on Napster's own board. John Fanning, the uncle of Sean Fanning, Napster's founder, has sued to wrest control of the board from Hummer Winblad, the Silicon Valley venture capital company that invested around $15 million in Napster.
Napster's very existence could depend on the company being acquired. People close to the company say that without receiving a new capital infusion — from Bertelsmann or elsewhere — it could exhaust its money in the next two months. Last week, the company laid off 30 people to cut expenses.
For Bertelsmann's part, even a $30 million investment would be a relatively minor capital outlay.
That said, Mr. Scheirer, the music industry analyst, said he was not convinced that Bertelsmann would be making a sound investment. He noted that since Napster has gone offline, many new services have emerged, with names like LimeWire, KaZaA and Grokster, that have replaced Napster.
"I suppose somebody could honestly believe that the Napster brand name is worth something, but I don't agree," Mr. Scheirer said. "I don't know what's left that you're buying."
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