While the two companies have revealed few details about the proposed alliance, analysts believe the deal between Bertelsmann's new eCommerce Group and Napster could result in an ad-supported venture -- one that would move Napster to a sustainable legal business.
Bertelsmann's BMG Entertainment and four other major record labels sued Napster for its service, which provides what the companies say are illegal music downloads as fans swap files of recorded music.
Marketing executives say a key goal for the success of the two companies' new venture is in keeping intact Napster's base of 38 million users -- one of the largest of any Internet company.
To keep the audience in place while still generating money to pay record labels for their intellectual property, Napster and Bertelsmann might attempt to garner virtually all the new venture's revenue from advertising.
AD-BASED SERVICE TALKS
With an Internet customer base that large, "who is not going to advertise?" asked Michael Kassan, president of media/e-commerce at Massive Media, Los Angeles, a digital commerce company, and former vice chairman and president of Western Initiative Media Worldwide. "When you throw advertising on, it's still free."
He said talks are continuing between Massive Media and Napster to create an ad-based service. "In the digital commerce cycle, there is great opportunity to utilize advertising as a method for the delivery of content so that the token exchange is the same as it's been on broadcast," Mr. Kassan said. "We can now know who is listening, watching and doing."
Still, some music marketing executives question whether this proposal will be completed. "BMG is in the business of selling pre-recorded music, not in selling advertising," said David Hazan, senior VP-marketing for Universal Classics Group, a division of Universal Music Group. Then again, "Maybe they need to get into that business."
Napster executives wouldn't comment. Previously, Napster discussed a formula for a new file-sharing service that would charge users $4.95 a month. This was proposed by Hank Barry, Napster CEO.
But the pay model, music marketing executives said, would rip away valuable users. "They expect to lose 80% of their current user base if they went to a pay system," said Ric Dube, music analyst for Webnoize, an Internet consultant.
That would mean another tough task for Napster -- signing on the other four major record labels.
Napster still has other problems, most notably litigation with those four -- EMI Group, Sony Music, Time Warner's Warner Music Group and Universal Music Group. Plus, according to the agreement with Bertelsmann, BMG won't drop out of the joint lawsuit unless Napster establishes itself as a legal business.
In response to the proposed Bertelsmann/Napster deal, other major record labels expressed support. Recording Industry Association of America President-CEO Hilary Rosen also praised the move.
Analysts believe Bertelsmann's initiative has left the ball in the court of other record labels -- to follow or compete with Bertelsmann. This could come in the form of Listen.com.
In a separate development last week, Listen.com, a distributor of online music products and services, bought assets of another music site, Scour.com, which has a Napster-like file sharing technology. Scour.com, backed by Michael Ovitz, filed for bankruptcy protection earlier this year. Complicating the Napster situation is that Listen.com is financially backed by all five major labels. Mr. Dube said he believes Listen.com could establish a file-sharing service to compete against Napster.