$8 million tranfusion keeps netco alive

Napster is back from the dead — again — thanks to an 11th-hour agreement with its longtime corporate patron Bertelsmann.

The German media giant will pay a paltry $8 million to assuage Napster’s creditors in a deal that is said to be the opening act of a Chapter-11 bankruptcy filing. Bertelsmann offered more than twice that much to acquire the battered netco earlier last week, but was rebuffed amid infighting on the Napster board.

Konrad Hilbers, who left his post as chief exec at Napster — reportedly in frustration with the boardroom wrangling — will reclaim the position as a Bertelsmann employee. And Shawn Fanning, the college dropout who developed the original Napster software, will return as well.

Also rejoining the company after resigning earlier this week are Jonathan Schwartz, general counsel, Claire Hough, VP of engineering, David Phillips, veep of Napster services and product management and Oliver Schusser, veepee of marketing.

“We’re happy to see Napster move forward with Konrad Hilbers at the helm,” said Joel Klein, chairman and chief exec of the conglom’s U.S. arm, Bertelsmann Inc. “We are very committed to providing artists the best possible distribution opportunities for their work, and to providing consumers more choice and control.”

But Shawn’s uncle, Napster boardmember John Fanning, may be giving up his seat after the Bertelsmann deal, sources close to the situation said. Fanning, who helped his nephew get the fledgeling company off the ground, was said to be one of the main instigators of dissent during the board’s discussions with the conglom.

In March, Fanning sued in Delaware court to eject two Napster board members — John Hummer and former Napster CEO Hank Barry, both of the Silicon Valley venture capital firm Hummer Winblad. On Tuesday, the court affirmed the board as it stands, Bertelsmann said.

The latest moves are a dramatic shift from just a few days ago, when Hilbers complained in an email announcing his resignation to employees that the board was taking the company “to a place where I don’t want to lead it.”

The status of those employees — roughly 70 at last count — is still unclear. Many were reportedly offered severance packages to depart the company when Hilbers ankled his post. Bertelsmann is said to be keen on keeping the management team intact, but hasn’t yet determined how many of the rank-and-file will be invited back.

Hilbers himself comes full-circle with the announcement of Friday’s deal: the exec left his post as exec VP and financial chief of Bertelsmann’s music unit, BMG Entertainment, shortly before signing on at Napster.

Both Napster and Bertelsmann declined to comment beyond the release.

Acquisition is the latest act in a long and tumultuous relationship between Napster and Bertelsmann, whose chief exec Thomas Middelhoff was branded both a genius and a nut when he struck a deal in the fall of 2000 to help Napster develop a legal alternative to its wildly popular free music-swapping service.

Since then, Bertelsmann has sunk more than $80 million into the development of a system that has yet to debut in anything more than a test form. Napster has been stymied in its attempts to sign licensing deals with any major label other than BMG.

Napster’s troubles were compounded by its protracted courtroom battles with the record labels — including BMG — over its free service. The ongoing legal action resulted in an injunction last July that effectively shut Napster down altogether.

The future of that suit is murky after Friday’s deal. Sources close to the situation said that liablity for Napster’s past copyright transgressions won’t transfer to Bertelsmann, since the conglom is only picking up the netco’s assets.

In the meantime, a host of new file-sharing services, including Kazaa, Morpheus and Limewire, have sprung up in Napster’s place, adding tens of thousands of new users each day. Though several of these new services have been sued by the industry as well, they have been far harder to stop because of their decentralized architectures and home bases on foreign soil.

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