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Napster offers $1 billion to settle suit

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From staff and wire reports

SAN FRANCISCO, California -- Acting on the eve of the Grammy awards, Napster Inc. offered $1 billion Tuesday to the recording industry to settle a copyright infringement lawsuit.

The offer follows last week's damaging ruling from a federal appeals court that the company knew its users were violating copyright laws through its music file-sharing service.

Under the offer, Napster would pay $150 million per year for five years to the major record labels -- Sony, Warner, BMG, EMI and Universal -- and pay $50 million per year for five years to independent labels.

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Napster would also establish a three-tiered membership plan with the top membership costing $5.95 to $9.95 per month. Under that plan, users would have access to unlimited transactions in downloading music. Less expensive plans would limit the number of transactions.

Napster chief executive Hank Barry said it was urgent to reach a deal.

"We all ought to sit down and settle this case as fast as we can," he said. "We're saying this is something consumers really want. Let's do something to keep it going."

But a recording industry group instead urged Napster to accept a federal injunction ordering it to block copyrighted music from its service.

"This path would be more productive than trying to engage in business negotiations through the media," said Hilary Rosen, president of the Recording Industry Association of America.

Other recording industry officials also balked at the settlement offer.

"It is Napster's responsibility to come to the creative community with a legitimate business model and a system that protects our artists and copyrights," said Universal Music Group.

"Nothing we have heard in the past and nothing we have heard today suggests they have yet been able to accomplish that task."

AOL Time Warner co-chief operating officer Richard Parsons also downplayed the notion of letting Napster distribute material from its catalog of more than 1 million songs.

"From this perspective, we divide the world into two kinds of people: those who respect the rights of creators and owners of intellectual property to determine how and when their property is used, and those who do not," Parsons said. "Napster and its ilk are in the latter category."

AOL Time Warner is the parent company of CNN.

Court ruling

The RIAA, which represents a host of record companies, including Warner Records, owned by CNN parent company AOL Time Warner, filed a federal lawsuit against Napster just months after the popular song-swapping service launched in 1999. The lawsuit claimed that Napster could rob them of billions of dollars in lost revenue.

A three-judge panel of the 9th U.S. Circuit Court of Appeals ruled earlier this month that Napster must stop millions of users from exchanging copyrighted musical recordings.

The court found that Napster had infringed on the copyright holders' rights to control the reproduction and distribution of their music.

It also said that the recording industry "would likely prevail" in its lawsuit against Napster.

But the appeals court said the scope of the preliminary injunction issued last July was "overbroad" and must be redrawn.

"The preliminary injunction which we stayed is overbroad because it places on Napster the entire burden of ensuring that no 'copying, downloading, uploading, transmitting, or distributing' of plaintiffs' works occur on the system," the court ruled.

Senator not pleased with ruling

Napster insists its service does not violate copyright laws, and that it is protected by the Audio Home Recording Act, which allows people to record music for personal use.

The Justice Department has claimed in court that the act does not protect Napster because a home computer is not a recording device as defined in that statute.

The chairman of the Senate Judiciary Committee said last week he will hold hearings to examine the appeals court's ruling on Napster.

Sen. Orrin Hatch, R-Utah, said the court decision could have troubling implications.

"I guess my feeling about this Ninth Circuit decision is a gnawing concern that this legal victory for the record labels may prove pyrrhic and short-sighted from a policy perspective," Hatch said in a speech on the Senate floor.

Hatch agreed with the court's finding that Napster violated copyright law, but said that, if it is shut down, users might migrate to decentralized systems like Gnutella that are more difficult to control.

Hatch said music companies should speed up efforts to roll out their own online music-distribution systems and should move quickly to establish licenses for the legitimate distribution of online music.

Other music systems

The day after Hatch's speech, Toshiba voted in favor of online music with the announcement of a new Internet download service -- although it shunned the popular MP3 format in favor of competing formats combined with copyright control.

The company will launch its new Internet music download service, Du-ub.com, with the support of three major domestic record labels. When Du-ub.com opens its virtual doors, it will feature six singles by Japanese artists with an additional three added next week.

During March, the service plans to offer an additional seven songs from Toshiba EMI and also begin featuring songs from Warner Music Japan. Content from Universal Music will also be added in the near future, the company said in a statement.

Napster's popularity exploded in 1999 after founder Shawn Fanning released software that made it easy for personal computer users to locate and trade songs stored as computer files in the MP3 format, which compresses digital recordings without sacrificing quality.

It is the central server that has both made Napster liable for their user's copyright transgressions and also vulnerable to being shut down. Savvy software developers at Nullsoft (authors of the popular WinAmp MP3 player) recognized this flaw and in March 2000 released a program called Gnutella.

The early version of Gnutella was flawed but it demonstrated a pure peer-to-peer protocol that was quickly reverse-engineered by other developers, who created programs such as BearShare, Gnotella and LimeWire.

Napster has reached an agreements with former foe Bertelsmann Inc., the parent company of the BMG music unit. The German media giant has promised much-needed capital if Napster switches to a subscription-based service that pays artists' royalties.

Bertelsmann executives were at the news conference Tuesday at which the Napster settlement offer was revealed.

The Associated Press contributed to this report.

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