With the help of congressional lawmakers who oversaw copyright infringement settlement negotiations earlier this month, Napster has moved closer to a relaunch.
Senators Orrin Hatch (R-Utah) and Patrick Leahy (D-Vermont) oversaw negotiations that paved the way for a settlement between Napster and the music publishers.
The much-maligned file-trading company agreed to pay $26 million to the music publishers for past copyright infringement in a move that would effectively end litigation between the two parties.
Napster also agreed to pay $10 million to the Harry Fox Agency, the licensing arm of the National Music Publishers Association, for the future use of copyrighted materials.
The landmark deal -- which is expected to be certified within the next 60 days by District Court Judge Marilyn Hall Patel -- settles a major part of litigation brought by the music industry that forced the company to shutter its file-trading service in July.
The new agreement would give Napster access to 700,000 songs from major label artists like Madonna, Santana and Britney Spears, although the company must still reach a settlement with the five major music labels.
Still, the agreement does lay the groundwork for future business deals.
"This is a landmark proposal," said Ed Murphy, the NMPA's CEO. "We've brought a series of complex issues into a very friendly agreement. This allows the public to have songs of great magnitude available to them."
But the price tag is very high. Other companies -- most notably music locker service Musicbank, which went bankrupt before it could launch -- have seen disastrous results after paying up front for the use of copyright music.
Napster CEO Konrad Hilbers insists that his company has learned from past mistakes.
"This is not a rushed agreement, and we've found an agreement that we can all live with," Hilbers said. "Nobody here is going to make a deal that won't work in the long run."
However, it remains unclear whether the deal will be economically viable for Napster, since both parties declined to set out the specific payment plan.
Napster has agreed to pay music publishers one-third of the revenues given to content owners. However, executives declined to outline how much of a monthly subscription price would be distributed to content owners.
That makes it impossible to determine how much money music publishers will make.
Even if the company can reach agreements with the major record labels, Napster must still convince its users to come back.
Since the service shut down in July, the company has watched its 70 million registered users migrate to other free, peer-to-peer services.
While the Napster brand name remains strong, there is still doubt whether users will come back to a service that no longer offers free music.
"Napster as a company still matters, even though it's been offline since the beginning of July," said Matt Bailey, a research analyst with Webnoize. "It still remains the most widely recognized music service, and when they do anything, consumers and the media do listen.
"It's possible the brand name might hurt them when people come looking for free music, but the name won't hinder them when they compete against other commercial networks. It will hurt them when they try to compete with other free networks."
Ironically, it could be other free file-trading networks that doom Napster.
In September, four new file-sharing services -- FastTrack, AudioGalaxy, iMesh, and Gnutella -- were used to download 3.05 billion media files. That is more copyrighted material than was ever shared by Napster.
That news has bothered Napster executives, who face the same problem that other online retailers once faced with the rogue file-trading service: How do you compete with free?
Quite surprisingly, the answer from Napster's Hilbers is more litigation.
"I'm convinced of the power of the Napster brand name," said Hilbers. "People will come back and check out what Napster is up to next. I would hope that the other services out there would face the same fierce litigation that we've faced, and that everyone has to live within the same boundaries."
Those legal battles won't be fought by Napster, though. Instead, the company will continue to make deals and dispose of the litigation that forced the company to shut down.
The reason the newer, free services aren't currently threatened by the music industry is because they use a different technology.
Besides being the first successful file-trading network, Napster became a target of litigation because it is a centralized server: Users sign up for the Napster service and all of the traffic is routed through the company. So if the Napster servers were shut down, the company would cease to operate.
The new file-trading services operate without one central location. In effect, each user becomes a server. So the recording industry would have to shut down millions of individual computers for the other free services to be rendered ineffective.
Monday's deal is the latest in a long line of agreements Napster has reached.
The company already accepted a $50 million loan from German media conglomerate Bertelsmann AG, the parent company of one of the music labels suing Napster for copyright infringement.
The money is being used to develop the new, subscription service set to debut before the end of the year. In return for the loan, Bertelsmann then has the option to purchase a majority stake in the company.
The company also signed up with MusicNet, the subscription service clearinghouse developed by EMI Recorded Music, BMG Entertainment and the Warner Music Group. The three major labels -- also involved in the copyright lawsuit against Napster -- are withholding their music until Napster proves its new, secure delivery system works.
After signing a deal with England's Association for Independent Music (AIM) -- a consortium of independent music labels -- Napster set up an escrow account with $4 million. The money is to be used as an advance on royalties -- a down payment on future music use by consumers.
The account would insure that the indie labels are compensated whether or not the new pay service is successful. If consumers flock to the service, Napster and AIM would then work out a new royalty payment plan to pay musicians and songwriters for the additional use of their music.
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