1) Napster's $1 billion offer really deserves to be laughed at.

Many people's initial reaction (including mine) to Napster's $1,000,000,000 settlement offer to the record industry was "Wow - that's a lot of money!". Sure, it sounds like a lot. But, upon closer examination of the industry and the offer, it looks less and less appealing. As the rest of the brain kicks in, though, questions start to arise: Where will Napster get the money? How do the record companies determine how to divide up the money? Is it a lump sum payment? What are the rest of the terms? The offer must be put in perspective.

Napster's offer wasn't a billion dollars per label. Or per year. It was a billion dollars, over five years. And how would it be divided up? $150 million/year would be given to the five major labels (Sony, Warner, EMI, Universal, and BMG) - which breaks down to $30 million each. Another $50 million would be divided up among independent labels according to popular demand - the dough would be split up in proportion to the number of times each labels' songs were downloaded. But with hundreds (thousands?) of independent labels in existence, it just doesn't add up for them to sign their music away - and the same goes for the majors.

The music industry is a $40B/year industry. $40 BILLION. Per YEAR. Which makes Napster's offer of $200M/year...pitiful. 0.5% of the industry's annual sales, to be exact. If someone asked you to give up your gravy train for half a percent, what would you say?

The other side of the equation is how much they could get through the courts. Under U.S. copyright law, a fine of up to $75,000 can be levied for EACH infringement. Multiply that by over one million different works that have been infringed on, and you've got $75 billion in fines waiting to be collected. Not that Napster could ever pay the fines - but it would be enough to crush them once and for all.

Of course, the billion-dollar offer rests on Napster's hopes that it can get enough users to pony up a couple bucks a month to access the system - and that remains to be seen.

Next: 2) The record companies will never agree to any settlement with Napster.

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