Microsoft May Supply Security for Napster

Beleaguered Napster, struggling to meet the demands of the courts and the music industry, is in talks with Microsoft about using the software giant’s technology to help build a secure, copyright-friendly version of its online song-swapping service.

Under legal attack by much of the music industry, Napster could use Microsoft’s copyright-protecting technology to entice the music industry to supply songs being denied. Napster has long facilitated unauthorized copying of songs, but the courts are forcing it to end that practice.

Each company could supply the other with a critical missing piece: Microsoft’s security technology has been endorsed by most of the major record labels, whereas Napster would give Microsoft its entry into the nascent market for subscription music services.

The two companies have been talking for weeks about a deal, sources close to Napster said. Initially, Napster officials suggested that Microsoft buy the company, according to two Napster insiders, but Microsoft rejected the overture. The discussions have since shifted toward Napster using Microsoft’s security technology. What Microsoft would get out of the deal is being hashed out, but could involve licensing fees or an equity stake in Napster.

A Napster spokeswoman confirmed that the company is in discussions with Microsoft, but added that Microsoft is just one of “a number of technology companies” that Napster is talking to “about how several of their products might be incorporated into the new Napster service.”

A Microsoft spokesman declined to comment, saying it was company policy not to discuss rumors and speculation. The chief executives of both companies--Hank Barry of Napster and Steve Ballmer of Microsoft--have spoken at least once in recent weeks, a Napster employee said.

With no revenue coming in from users or online advertisers, Napster is under several guns--legal, technological and financial, according to those inside and outside the company.

And as the company frantically works to stop piracy and to come up with a new system, consumers are quickly abandoning the service.

“If you look at the Napster system currently, it’s rapidly losing its old appeal,” said analyst Matt Bailey of Webnoize. The Cambridge, Mass.-based research firm found that the average number of songs offered by each user plummeted to 37 in April, from 220 in March.

“It is getting really difficult to find any material,” Bailey said. “Napster does seem to be in danger of really damaging their brand.”

Despite its troubles, Napster remains the dominant online music service, with close to 8 million daily users in April. But the average number of users on the system at any given time is down nearly 50% from its peak.

In response to the copyright-infringement lawsuit brought by the major record labels and music publishers, U.S. District Judge Marilyn Hall Patel ordered Napster to stop helping users make unauthorized copies of the labels’ and publishers’ songs. Last month, Patel blasted Napster for not doing enough to block users from copying those songs, prompting the company to step up its efforts to comply.

The company has licensed technology from Gracenote and Relatable to aid in its compliance efforts, and it has a deal with media conglomerate Bertelsmann to help develop a version of its system. Microsoft offers anti-piracy technology that all of the major record labels have embraced, either for downloading music or for music videos.

That credibility could help Napster as it tries to win the industry’s support for its fee-based version, which is due this summer. One of Napster’s biggest challenges is convincing the labels to drop their legal assault and let their songs be traded--for a fee--on the new Napster service.

Microsoft, meanwhile, is trying to gain a foothold in the emerging field of subscription music services. The major labels have announced subscription services with Yahoo and two of Microsoft’s archrivals, America Online and RealNetworks.

The Napster system supports Microsoft’s Windows Media format for digital music, but most of the files on the system are in the more popular MP3 format.