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Napster Files Bankruptcy Under Bertelsmann Deal

Napster Inc. said on Monday it filed for bankruptcy protection, as German media giant Bertelsmann AG prepares to take over what remains of the once dominant Internet music-swapping service.

Napster listed $7.9 million in assets and about $101 million of debts as of April 30, according to papers filed with its voluntary Chapter 11 petition at the U.S. Bankruptcy Court in Delaware.

The filing is part of a comeback plan for three-year-old Napster, which became one of the Internet’s hottest properties by allowing millions of people to swap music online for free.

Though Napster was wildly popular, attracting nearly 60 million users at its peak, the music quickly died as major record labels sued the company for music piracy. Napster, based in Redwood City, California, has been offline since July.

“It still holds a sense of promise of being a universal jukebox,” said Steve Jones, who heads the communications department at the University of Illinois at Chicago. “The name Napster can be revived, but it would take more than Bertelsmann alone to do it. It requires the agreement of major (record) labels to get Napster up and running the way it was.”

A federal appeals court in San Francisco dealt closely held Napster a fresh setback in March, ordering it to remain shut until it complies with an injunction to remove all copyrighted music. Napster failed to find enough backing to relaunch as a royalty-paying service.

“The extraordinary costs associated with developing the New Napster Pay Service and defending against the Prepetition Lawsuits have depleted (Napster’s) available cash reserves,” and could have forced Napster to close by June, Chief Financial Officer Carolyn Jensen said in a court filing.

Calls to Napster were not immediately returned.

Bertelsmann stepped in on May 17 with $8 million to buy Napster’s assets. Napster owes Bertelsmann $91 million, court papers show.


Under the Bertelsmann agreement, Napster was to voluntarily seek bankruptcy protection and emerge as a wholly owned unit of Europe’s second-largest media group. The agreement requires court approval. Bertelsmann declined to comment.

Napster said it is seeking approval for $5.125 million of debtor-in-possession financing from Bertelsmann, court papers show.

Konrad Hilbers, who joined Napster from Bertelsmann as chief executive in July 2001, resigned on May 14 after the company failed to find funding to relaunch its service. He returned three days later when Bertelsmann offered the buyout.

Shawn Fanning, who founded Napster as a college student in 1999, will be the company’s chief technology officer.

Napster now has about 18 employees, court papers show, down from about 100 earlier this year.

Jones said that despite the appeals court ruling, “there may (still) be a limited legal means for sharing music, because we all do it without the Internet.”

Napster listed The Association of Independent Music of London, which it said is owed $3.79 million, as its largest unsecured creditor, followed by the law firm of Boies, Schiller & Flexner LLP, with $2.14 million, court papers show.

The big recording labels that were arrayed against Napster include AOL Time Warner Inc.’s Warner Music, Bertelsmann’s BMG, EMI Group Plc, Sony Music and Vivendi Universal’s Universal Music.

Big labels first sued Napster for copyright infringement in December 1999.

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