Napster's recent cash influx from a prominent VC could help legitimize a company derided for enabling music piracy.
But Liquid Audio, which specializes in securing -- not swapping -- digital music and also has ties to Hummer Winblad, might have a tough time cooperating with new brethren Napster.
On Monday, Hummer Winblad –- the same venture capitalist firm that helped launch digital right's management company Liquid Audio -- closed a $15 million round of financing with Napster.
As part of the financing deal with Napster, Hummer Winblad partner Hank Barry took over as the company's interim CEO, and partner John Hummer joined the company's board of directors.
Before becoming CEO of the most visible file-trading application on the Internet, Barry worked as a corporate and securities partner at Wilson, Sonsin, Goodrich & Rosati. One of his clients included publicly traded Liquid Audio, where Ann Winblad sits on its board of directors.
The close ties between Napster, Liquid Audio, and the VC firm could prove to be dicey for Liquid in dealing with the major labels' efforts toward digital distribution of music. While Liquid remains committed to creating secure distribution methods, a company spokeswoman said it would not rule out working with Napster in the future.
Liquid Audio was founded in 1996 with the objective of "protecting the rights and integrity of the artist," which sharply contrasts with Napster's mission to "reliably find, share, and download digital music over the Internet."
"We view Napster as a potential partner, and we (Liquid Audio) are always open to working with any music companies who want to use our technology or content," Kim Strop, public relations manager at Liquid, wrote in an email.
"There's a possibility that we could work with Napster the same way we work with Scour.net, in which Scour could offer secure music through Liquid Audio as a legitimate alternative," Strop said. "The fact that we share our investors could breed more closeness between the companies, however, Liquid Audio does not support piracy."
Possibly at stake is Liquid's reputation, which its founders have spent four years building up.
Liquid Audio was a part of the Secure Digital Music Initiative, the music industry's attempt to create security standards of Internet music, while also working independently to develop watermarking technology.
The company was even able to curry favor with two major labels. BMG began offering music samples in Liquid format on three of its websites in 1997 and EMI enlisted the company to encode its entire music catalogue in 1999.
"I think that Liquid Audio is an innovative technology that is proven to have a business model that can be supported in the music industry," said new Napster CEO Barry. "We are going to work with all innovative companies to provide the best solutions for Napster and all the constituencies that are involved with using the application."
Despite the inherent problems that close ties between these companies could present, the general council for the Recording Industry Association of America said this might be an opportunity for Napster to go legitimate.
"I think that what is important is that this company now actually has to look for a business model where they can actually make money for their investors," said Cary Sherman, the senior executive vice president and general counsel for the RIAA.
"We regard the VC funding as sort of a fresh opportunity for this company to actually think of an innovative way they can abide by the copyright laws and take advantage of the technology that they are offering. I don't know what they are going to do, but they think there is a business potential and that means dealing with the laws."
"It would be different if Liquid were a smaller company and weren't already public," said riffage.com CEO Ken Wirt, who has some experience dealing with tricky industry relationships. He previously worked at Diamond Multimedia which was simultaneously sued by the RIAA while joining the RIAA-led SDMI consortium.
"But once a company goes public, the venture capitalists have a lot less influence on what goes on at a company even if they remain on the board of directors."
