Online music provider sings duet with recording giant

NEW YORK - Controversial online music site Napster has formed an alliance with Bertelsmann, owner of the world's third-largest record company, taking it further away from its original mission of letting consumers download free music.

Germany's Bertelsmann will drop a lawsuit against Napster after the US company starts a music-sharing service that charges a fee, which Napster said may be about $4.95 a month.

Bertelsmann gets an option to invest in the new service.

Napster, with about 38 million users, has been sued by all five big record distributors and lost an initial round of that case, which is now on appeal.

The alliance could transform Napster into a legitimate, commercial music service in the eyes of the music industry. Both companies hope to get wide support from the industry for Napster's file-sharing technology, also known as "peer to peer," which lets users exchange music over the web.

The agreement "is potentially big news for the entire recorded music industry," Raymond James analyst Phil Leigh said yesterday.

"It illustrates that one of the top five major record label companies is prepared to embrace the peer-to-peer model of internet music distribution so long as it can be assured that its content will not be pirated through the mechanism."

Record companies, including Bertelsmann's BMG Entertainment, have been vehement in their opposition to Napster over the past year.

Napster has been viewed as the ultimate threat to the industry's profitability. Bertelsmann chairman and chief executive Thomas Middelhoff became the first top record industry executive to embrace Napster's potential.

"Napster has pointed the way for a new direction for music distribution, and we believe it will form the basis of important and exciting new business models for the future of the music industry," he said.

Middelhoff has often said he wants to make the company's BMG Entertainment unit the world's largest music company, a spot now claimed by Seagram's Universal Music Group.

BMG is at present No 4 in the US, with artists including Whitney Houston and Santana. The other major record companies include Time Warner's Warner Music Group, Sony's Sony Music Entertainment and EMI Group.

Under terms of the agreement, Bertelsmann will offer Napster its entire digital music library and an unspecified loan to make the switch to a paid-subscription service.

Germany-based Bertelsmann said it would guarantee that royalty payments were made to labels, songwriters and artists.

BMG said last month that it would sell its music through Lycos' internet site in an attempt to draw consumers away from Napster.

Music companies such as BMG and Warner Music Group are also developing their own technology to sell music over the internet to compete with Napster, which has free software to let people swap music files stored on their computers.

Music companies could miss $3.1 billion in potential profit by 2005 through online piracy and digital distribution systems, Forrester Research said in a report last month.