Napster Files for Bankruptcy

Napster has filed for Chapter 11 bankruptcy, just two weeks after its major creditor, the German media group Bertelsmann AG, had agreed to acquire the troubled Internet music service.

Bertelsmann is still keen to acquire Napster's brand, peer-to-peer technology, and customer file assets, believed to be worth between $8 million and $10 million, according to a Bertelsmann official, speaking on the condition of anonymity.

"Despite Napster's problems, we remain convinced that peer-to-peer technology has a future in the music industry," the official said.

On May 18, Bertelsmann offered to make $8 million available to pay Napster's other creditors. The German company also agreed to write off its $85 million loan to the Net music company.

The Bertelsmann official declined to comment on what the company plans to do with the Napster assets if the court approves the sale.

"It's too early to talk about this," the official said. "The court has to make the first move, but we are pretty confident that the plan put on the table by Napster will be approved."

Under Chapter 11 of the U.S. bankruptcy code, companies can reorganize and continue to do business.

New Tune for Site

Bertelsmann executives have said that they hope to turn Napster into a subscription service. The Internet music company has been testing software that would support subscription service since the start of the year.

Bertelsmann had said it planned to reinstate Konrad Hilbers as chief executive officer of the troubled song-swapping service. The buyout offer came just days after Hilbers and Napster founder Shawn Fanning quit the company, frustrated that they could not secure financing to keep the operation running. Bertelsmann said it wanted Hilbers as both CEO and chair, with Fanning as chief technology officer.

Once the high-flying darling of music swapping services, Napster had its wings clipped when it was hit by a lawsuit from the major record labels, represented by the Recording Industry Association of America (RIAA). The suit led to a court order requiring Napster to remain offline until it could ensure that no copyright-protected works would be traded on its service.

Napster once boasted that some 85 million users were swapping songs on its service; the service is now silent.

Napster has struggled to pay its mounting legal bills, while also trying to reemerge as a legitimate subscription-based file-swapping service. Bertelsmann seemed the most likely cash cow, as the media conglomerate had dropped out of the RIAA's suit in late 2000 to form an alliance with Napster, and has already shelled out upward of $100 million in loans to keep the company afloat.

In April, Bertelsmann executives told the press that it planned to buy Napster outright, but the bid fell through when some members of Napster's board shot the deal down.

Scarlet Pruitt of the IDG News Service contributed to this report.