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Napster Said Near Distribution Deal

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SAN FRANCISCO -- Napster, the former music industry bad-boy, is close to inking a distribution deal with three major record labels that are launching a music subscription service this summer, people familiar with the matter said Tuesday.

An agreement between Napster and the members of MusicNet, which could be announced as soon as Wednesday, would be the biggest step Napster has taken so far toward legitimacy.

MusicNet is a venture between record label owners AOL Time Warner Inc. (AOL), Bertelsmann AG and EMI Group, as well as Seattle-based RealNetworks Inc. (RNWK), whose software allows users to listen to music and watch video via streaming technology over the Internet.

Many details of the arrangement have yet to be worked out, and it remains unclear what mechanisms the companies would use to distribute music. If a deal is forged, it could provide MusicNet with a ready-made means of accessing avid music users and allow Napster access to a large bank of legal music files.

MusicNet's online subscription music service will let music fans listen to songs piped over the Internet for a yet to be determined fee. Napster has also said it hopes to roll out a new version of its service this summer that would ensure royalty payments to artists and labels.

Napster, which is still being sued by the music industry for copyright infringement, has been trying to purge copyright-protected music files from its system under a court injunction.

But a technical solution that satisfies the music industry's copyright-protection concerns has so far proved elusive.

Warner Music Group issued a statement Tuesday indicating that there could still be serious hitches in the deal.

"As previously announced, our content will not be available to Napster as part of the MusicNet service until we are reasonably satisfied that Napster is operating in a legal, noninfringing manner and has successfully deployed a technology that accurately tracks the identity of files on the service," Warner said in a statement.

EMI also said Napster's current technology wasn't quite ready for primetime, despite the pending deal.

"EMI has always said that we'd be prepared to consider licensing our music to Napster, but only when certain critical conditions are met particularly in the area of copyright. Those conditions have not yet been met," the label said in a statement.

Representatives of Napster and Bertelsmann had no immediate comment on news of the pending deal. Napster has said it planned to use software that maps songs based on their sound pattern.

Napster is still mired in a copyright-infringement suit filed by the Big Five record labels -- Warner, BMG, EMI, Universal and Sony (SNE).

A deal between MusicNet and Napster wasn't expected to affect that suit and all sides continue to work closely with a court-appointed technical adviser in bringing the file-sharing service into compliance with a pretrial injunction mandating that Napster halt trading of unauthorized music.

Bertelsmann has loaned Napster money and technical expertise to help it develop a legal version of its file-swapping service. In exchange, Bertelsmann has the right to take a majority stake in Napster if the new system wins approval in the industry.

While Warner, BMG and EMI seek online music solutions with the MusicNet alliance, Sony Corp. and French media conglomerate Vivendi Universal (V) formed a similar partnership called Duet, which promises to have thousands of songs on the Internet for subscription-based download by this summer.

Napster's attempts at screening for unauthorized songs has severely hampered usage on its service. A study released Tuesday by Webnoize, a digital media research group, showed the average number of files shared among Napster users fell from 220 in February to 21 in May - a drop of 90% in three months.

Many of those music fans have migrated to other, decentralized file-swapping systems such as Gnutella, where usage grew by nearly 5% in the last week alone, according to analyst Phil Leigh, who tracks digital music for Raymond James and Associates.

Copyright (c) 2001 Dow Jones & Company, Inc.