Bertelsmann Buys Napster

Zack Urlocker
Sunday, May 19, 2002

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T-Shirts A Key Asset

(San Mateo, Calif.) In an 11th hour reversal, German media giant Bertelsmann AG, has acquired the assets of Napster for approximately $8 million in cash along with 11 CDs and nothing more to buy. Napster, once a poster child for Internet-era dot com companies, has been virtually dormant since the service was shut down by Federal court last year. "By selling to Bertelsmann, we avert a meltdown scenario that would likely have resulted in a collapse of the company," a Napster spokesman claimed. "Instead we can take the company to it's next logical stage, Chapter 11 bankruptcy."

Bertelsmann's acquisition of Napster completes the investment that began in October 2000. At that time, Bertelsmann broke from the ranks of other music companies by investing $20 million in Napster with the goal of developing a secure membership-based file-sharing system. In total, Bertelsmann has invested an estimated $85 million in the company. "We feel there's a tremendous unrealized value in Napster," Joel Klein, head of Bertelsmann's US operations and former antitrust chief for the Department of Justice commented. "We've found dozens of boxes of t-shirts and hats already this morning."

Klein claimed that Napster fits well with the company's evolving on-line music strategy. "We looked at many of the other competing on-line music services and what we saw were services that had limited music selection. We believe Napster can differentiate by being both hard to use and more expensive." Bertelsmann plans to introduce new recordings on Napster including the Bing Crosby Jewish Holiday Collection, Barry Manilow Sings the Blues, Elvis Presley Reads the News, Kenny G. meets P. Diddy, Glenn Miller Verve Pipe, and Deepak Chopra Non-Stop Dancing among others. "These are songs we couldn't even give away," Klein said. "And now we won't have to." Bertelsman is expected to announce further strategic use of the Napster assets in the coming months. "Frankly, we need the $85 million tax write off," Klein added.

Company Sues Itself

In a bizarre twist, by acquiring Napster, Bertelsmann finds itself fighting on both sides of two separate legal cases. In December 1999, the RIAA (Record Industry Association of America) representing 18 music companies including Bertelsmann's BMG label, sued Napster for copyright infringement to the tune of $20 billion in damages. Then in October 2001, Napster sued Bertelsmann along with four other major music companies for collusion in attempting to eliminate competition in online music distribution.

"Admittedly, it appears that we are suing ourselves," Klein declared. "But we feel confident that we will prevail, one way or the other." Industry analysts gave the company a fifty-fifty chance of legal victory.

Napster Timeline

May 1999 - Napster launched by Shawn Fanning and his uncle John Fanning. Seems like a good idea at the time.

Dec. 1999 - RIAA sues Napster for $20 billion. Napster volume rises 10-fold as users try to get songs before Napster is shut down.

Apr. 2000 - Metallica sues Napster. Shawn Fanning is seriously bummed.

July 2000 - Federal Judge grants preliminary injunction against Napster. Napster volume rises 10-fold again.

Oct. 2000 - Shawn Fanning youngest copyright criminal to be featured on cover of Time magazine.

Oct. 2000 - Bertelsmann invests $20 million in Napster to develop legalized file sharing system. Considers additional investments in offshore gambling, medical marijuana import service and authorized celebrity pornography.

Feb. 2001 - Judge orders Napster shut down again. No one notices since everyone is using KaZaa and Morpheus.

Dec. 2001 - PressPlay, MusicNet file services launched by music labels. Just like Napster except there's no good music.

Mar. 2002 - John Fanning sues Napster and two of its directors for being smarter than he is.

Apr. 2002 - Napster forced to layoff employees claiming reduced need for foosball playing in the company.

May 2002 - Bertelsmann acquires control of Napster for $8 million.  Looks like a bargain after investing $85 million. 

About the author
Zack Urlocker is a Silicon Valley software executive. He is a reformed Napster user.