Online music truce called

Associated Press

NEW YORK – Napster spent the last year roiling the music industry and wound up in the legal doghouse. Now, a major music company is offering a truce and hoping that others will follow suit.

Under a deal announced Tuesday, Bertelsmann said it was teaming with the Internet music-swapping service to develop what the partners characterized as a new, secure membership-based distribution system that will guarantee payments to artists.

In exchange, the German media giant will drop its lawsuit against Napster once the new system is in place. Bertelsmann will also loan Napster money, make its music catalog available, and gain the right to buy a stake in the company.

Bertelsmann’s move marks a sharp break with other members of the music industry, which have sued Napster for copyright infringement and sought to have the service shut down. A court decision is expected in the coming weeks.

While Bertelsmann is taking a step ahead of its peers, it is also hedging its bets.

The lawsuit against Napster remains in effect until the new system is in place, and key details of the deal have yet to be worked out, including technological standards and whether files would be encrypted. Also unanswered is how much the service would cost and the record companies’ cut.

It is also far from certain that other major music companies will agree to join in the effort, as Bertelsmann and Napster are hoping. Without participation from the other four major music companies – Sony, Warner, EMI and Universal – the service would not likely become an accepted standard.

The recording industry has struggled to find a formula for music distribution that protects royalties – and no workable pay-for-play scheme has yet emerged based on encrypting music with digital keys.

Officials from other music companies issued statements cautiously welcoming Napster’s willingness to start paying for using their music, but they stopping short of saying whether they would follow Bertelsmann’s lead.

“There’s still quite a bit of work to do” said Hilary Rosen, head of the Recording Industry Association of America. “For example Napster is saying they want to have a secure system, though they have been saying to the court that a secure system is unfeasible. They have to have a way to implement these goals, and right now they’re theoretical.”

Bertelsmann’s BMG subsidiary sells music from hundreds of artists including Britney Spears, Whitney Houston, Kenny G and Carlos Santana through a series of labels that include Arista, RCA and Ariola.

Company chairman Thomas Middelhoff, speaking at a news conference in New York, called Napster’s file-sharing system an important model that could have implications for other parts of Bertelsmann’s media stable, which also includes books, magazines and broadcasting.

“There is no question that file-sharing will exist in the future as part of the media and entertainment industry,” Middelhoff said. “There is no way to deal with this fact but to develop a model to deal with file-sharing.”

Both Napster and Bertelsmann are privately held, and financial details of the deal were not disclosed.