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who would become Bertelsmann customers. “They aren’t customers,” Zelnick replied. “It’s free. And they have zero revenue. I don’t like investing in companies with zero revenue.” Schmidt: “They’re going to pay.” Zelnick: “For them to pay, you need all our competitors too. Thomas, give me two weeks, and I’ll try to bring in two other companies. If we take all the credit for this first, you’re not going to get Edgar to play or Warner to play.”

Zelnick ran through the numbers with Middelhoff, arguing that converting free users to paying users was incredibly difficult. Say 20 percent of Napster’s users weren’t kids without credit cards and could afford the service. That’s 6 million people. A good conversion rate is 2 percent, he said. “Let’s call it 10 percent. That’s six hundred thousand consumers paying $10 a month. That’s only $72 million a year in revenue.” Not very exciting, Zelnick said, certainly not worth an investment of tens of millions. But looked at another way, the bet was a modest one. Bertelsmann’s loan was a small piece of its $1.6 billion in annual profit.

The talks resumed for even higher stakes. At one meeting with Middelhoff in Miami, Barry passed around a half-dozen copies of the Time issue with Shawn on the cover. Always conscious of his own treatment by the media, Middelhoff paid attention. Bertelsmann ultimately pledged to lend Napster $60 million at just 6.1 percent interest to develop a royalty-friendly system, with the understanding that other labels would soon join in and take some of the equity that Bertelsmann could claim if it converted its loan and took 58 percent ownership. If Bertelsmann failed to convince another big label to settle in the next two years, then the loan could convert into just 35 percent of Napster’s stock.

Like Yosi Amram, Ron Conway, and Hank Barry before him, Middelhoff was seduced by Napster’s technology and incredible audience. But he wasn’t as blinded. Unlike Barry, he didn’t believe Napster was legally defensible. “It is true that this private exchange of music via the Internet has thus far infringed upon the copyrights of artists and record companies,” he wrote to colleagues. And instead of a direct stock investment like those of his Napster predecessors, he was willing only to extend the loan. The reasoning was spelled out in a September 2000 briefing for Bertelsmann executives by a consulting firm. In a slide identifying the

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