Just days after a California court ruled that favorite Internet music-swapping service Napster was engaging in the illegal transfer of copyrighted material, the company has come up with a high-price-tag offer of settlement designed to entice its record label foes into allowing the songs to play on. The Recording Industry Association of America, on behalf of five major record labels, brought suit against Napster charging the company with mass copyright violations for allowing users to download copies of files of recorded music by popular artists.

The five-year, $1 billion pay out of extra revenue to the big five record labels and their musicians will begin, in Napster's plan, this summer, and will result in a paid service which will legitimately license music from the labels and pay out $150 million a year from the fees the company will charge users to download MP3-encoded music files from its servers. The royalty pie will be divided among the labels on a percentage basis, according to the files downloaded. Another $50 million will be set aside under the plan to be paid to independent artists and labels, based on numbers of downloads of their works.

Napster envisions a two-tiered subscription plan, with the basic service charges running between $2.95 to $4.95 a month, and a premium service that will cost between $5.95 and $9.95 a month. The difference between the two packages will be in the number of files a member is allowed to download, with basic membership entitling a user to download a yet-unspecified limited number of files, while the premium service would not have restrictions on download numbers. Other features of the premium service that would not be available to the basic tier would be the ability to burn CDs with the downloaded files and to be able to transfer the files to portable players.

Executives from the big five record labels, EMI, Warner Music, Vivendi Universal, Sony and Bertelsmann Music Group, who are involved in the RIAA lawsuit, are against Napster, are less than impressed. Many doubt the ability of Napster to reinvent itself as a commercial business, warning that the company's 55 million users will desert the service in droves when the music downloads are no longer free.

AOL Time Warners' CEO Dick Parsons sees the move as an acknowledgement by Napster that it's beaten. "The good news is Napster now acknowledges that you can't have a legitimate service without getting licenses from the music companies. The less good news is we aren't terribly impressed with what we've seen. This business plan is predicated on technology that doesn't currently exist." Others criticized Napster CEO Hank Barry and Bertelsmann eCommerce Group CEO Andrea Schmidt for unveiling the plan to the media, rather than offer it in private to the labels first.

It was revealed this week that the author of the original July 2000 ruling against Napster, U.S. District Judge Marilyn Hall Patel, had appointed in December a mediator for talks between Napster and the record labels. named Eugene Lynch, a retired federal judge, was appointed by Patel to aid discussion between the parties, but the judge had ordered the appointment kept confidential until now. Little progress has been made by the mediation attempt, those familiar with the case report. The two parties have met with Mr. Lynch once and have another meeting scheduled. Sources close to the mediation meetings say that the talks are intended to help negotiate terms of an injunction and potential damages to be borne by Napster, not to help Napster stay alive or to secure licensing from the record companies.

While Napster and partner Bertelsmann work to re-invent the service with a new business model, the record industry, buoyed by the triumph in the court case, have been taking legal action against some of Napster's rival services. Filing approximately 60 legal documents against so-called "Open Napster" servers, the RIAA continues its fight against the unauthorized downloads of copyrighted music material. Open Napster servers are web servers that offer a Napster-like interface for the download of music without being associated with Napster itself. A popular freeware program, "Napigator," can be downloaded from the Internet and used to locate open web servers containing MP3 files. The RIAA notified websites' Internet Service Providers (ISPs) under the Digital Millennial Copyright Act, 1998 legislation that holds ISPs liable for members' copyright violations if they do not block access when notified of infringement.

The move against the Open Napster servers has been expected in the wake of the legal ruling against Napster, observers say. The RIAA will likely be forced into a cat-and-mouse game of chasing open servers across the Internet, since open servers require only a good Internet connection and a copious amount of file storage space. However, the reach of such small outlets is minimal, as compared to Napster's 55 million and growing membership, and is only a small annoyance to the record companies.

The lack of enthusiasm for the new Napster business plan and the legal action against Napster's rivals make it clear to most observers that the record industry sees little to gain by the prospect of a viable Napster, regardless of revenues. The promised payout is, according to some analysts, approximately what the drop-off suffered by the labels in the CD singles market caused by Napster, but doesn't address losses in the album categories. Although some observers fault the industry for failing to exploit Napster and its users, others say that the record industry's own plans to introduce online music are proceeding, and a settlement that leaves a viable Napster can only harm the labels' own market for downloadable music.