Since May, when Hank Barry took over the reins at Napster, the attorney-turned-CEO has expressed his interest in cutting deals with the record labels that were busy suing his company; but settlement talks repeatedly fell through while RIAA executives and Barry sparred venomously in press conferences. But Barry finally got what he wanted. Bertelsmann, owners of BMG -- one of the five major record labels suing Napster -- has signed an agreement with the file-sharing company to form a membership-based music service.

Napster will receive a loan from Bertelsmann -- but BMG won't drop its lawsuit against Napster until the company builds a working pay-for-music system. Bertelsmann will also post its catalog to the new Napster-built service; in addition, Bertelsmann has the option to purchase a portion of the San Mateo, Calif., company.

This news sent shock waves through the industry: By breaking ranks with its industry colleagues, Bertelsmann's BMG has become the first major record label to embrace the changing times. And by acknowledging that file-swapping will not go away, the company has given Napster the whiff of legitimacy it may need to survive. Bertelsmann is even encouraging other record labels to join the partnership and contribute to the new membership-based service.

Meanwhile, Napster and Bertelsmann decided -- wisely, perhaps -- not to mess with a service that is already popular. The deal will protect Napster as 32 million users know it -- instead of changing the Napster file-sharing service, the new membership-based BMG system will simply be an "add-on" option for Napster users, letting Napster users access the "official" catalogue of high-quality MP3s for a monthly fee. Asked in a press conference Tuesday morning if Napster will continue letting users upload music and trade it for free, Hank Barry said "absolutely."

"What we understand clearly is that we need to have a free promotional component, and a component that has some dues associated with it," he said. "Bertelsmann will let Napster be Napster," he added.

Still, several questions need to be answered before music-lovers can hail or hate the new incarnation. Take pricing. Previously Barry has said that he was trying to build a membership service in which users paid $4.95 a month for all the music they wanted. Now, he's backpedaling fast. "Don't hold us to anything," he said at the conference. And Bertelsmann is doing the same: "We haven't figured out exactly how it looks," said Andreas Schmidt, president of Bertelsmann's e-commerce group. "This is a process that's evolving."

Although past studies have shown that a majority of Napster users are willing to pay for the service, it's not clear just how much they would pay -- a service that costs, say, $19.95 a month may not be as appealing as one with a $4.95 all-you-can eat fee. And although BMG has the fourth-largest catalog of music in the world (by its calculations), a BMG-only service may be of dubious appeal: Music fans, after all, tend to buy music not by label but by musician. A subscription system may need to be more comprehensive -- including music from all the major labels -- to truly seduce cash from the wallets of music lovers.

Today's announcement also didn't address issues of music security: What's to stop users from downloading an MP3 from the BMG-Napster subscription area, then uploading it to the free section of Napster? With the Secure Digital Music Initiative in disarray, it's unclear how Bertelsmann will be able to protect its own music.

And finally, despite the positive omens, Tuesday's development does not signal the end of the Napster lawsuit; instead, it merely underlines the confusion that is still raging behind the doors of record labels around the world. RIAA president Hilary Rosen, for example, issued a schizophrenic statement calling Tuesday's deal "a welcome development," only to then stress that it "does not bring an end to the court case." "There are multiple plaintiffs in addition to BMG," she said. "The courts need to make clear that, contrary to what Napster has been claiming, companies like Napster do need to get permission before they launch businesses built on other people's creative property."

Will Sony and the others fall in line with Bertelsmann? Or will they bristle at the idea and try to bankrupt Napster -- perhaps hurting their rival BMG in the process? Will users flee a subscription-based Napster for FreeNet or Mojo Nation or Gnutella? Is this too little, too late?

Barry remains hopeful. "We now have a baseline to work from," he bragged. "We're very optimistic."

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