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German giant's Napster buy music to ears of site co-founder

| Saturday, May 18, 2002

SAN JOSE, Calif. — In an abrupt shift that keeps Napster Inc. alive, German media giant Bertelsmann AG said Friday it would buy the troubled song-swapping service's assets in an $8 million deal that keeps co-founder Shawn Fanning.

The announcement came three days after Fanning and Napster's chief executive announced they were quitting the company that helped spark the digital music revolution — with Napster saying it could be forced to file for bankruptcy protection.

Bertelsmann said yesterday that it would use the $8 million — slightly more than half what it had previously offered to purchase the company — to pay Napster's creditors as part of a financial reorganization.

The buyout is the latest twist for a company that three years ago set of a frenzy of online song-swapping that attracted millions of users — as well as the ire of the recording industry, which sued for copyright infringement.

Napster never generated revenue and last year unplugged its service in anticipation of a fee-based system that has yet to launch.

Bertelsmann, which first partnered with Napster in October 2000, provided $85 million to the small start-up.

That deal was rejected by Napster's board Tuesday, resulting in an exodus of employees, including Fanning and chief executive Konrad Hilbers.

Now, Hilbers will be back atop the company and Fanning, who created the technology in his Northeastern University dorm room in 1999, returns as chief technology officer.

"We are very pleased to have reached an agreement with Napster's board of directors," said Joel Klein, CEO of Bertelsmann.

Neither Bertelsmann nor Napster would comment beyond a short news release yesterday.

"While this has been a very unusual week, I'm pleased that I and my colleagues can move forward and give our full attention to Napster's future," said Hilbers, who also will serve as Napster's chairman.

Fanning said Bertelsmann understands Napster's vision.

"I'm ready to work with the many talented people at Napster to complete the new service and get it off the ground," he said in the statement.

But the deal does not guarantee Napster's survival.

"Just because this deal is kind of back on, it doesn't save the service," said Stacey Herron, entertainment and media analyst for Jupiter Research. "It doesn't turn this into a thriving business that will suddenly have a multitude of users paying to subscribe."

It was not clear what role now will be played by John Fanning, Shawn Fanning's uncle, who incorporated the company and recently lost a lawsuit seeking to oust two board members who came from Napster's original investor, venture capital firm Hummer Winblad.

Sources close to the earlier negotiations said one reason for the impasse was that Hummer Winblad sought immunity from any damages Napster might incur if it loses the copyright infringement suit filed by the recording industry.

Napster has struggled ever since losing key court rulings, and the refusal of major record labels to license popular music works to the company have kept it wanting for crucial deals and partnerships vital to its proposed comeback.

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