Napster's chief executive officer, Hank Barry, yesterday conceded that the song swapping website's $1bn peace offer to the record industry was heading for the scrapheap.
"I don't want to totally close the door [on a settlement], but I felt like previously we had some good traction to have an agreement and I don't feel that way any more," Mr Barry said.
Napster's five-year revenue-sharing offer was backed by Bertelsmann but rejected by most other record companies, many of which have plans for their own download sites.
Internet research firm Jupiter MMXI said yesterday that plan to turn Napster into a subscription-based service could generate as much as $300m a month.
Its survey of Napster users found that half of the 60m total have sufficient disposable income to pay between $2.95 and $9.95 a month for the service.
"Napster have got it half right with their planned subscription model, which will appeal to much of their existing audience," said Jupiter MMXI music analyst Mark Mulligan.
He added that a lower quality, free service should be offered alongside paid-for one.
Napster had hoped to use revenue generated by subscriptions to pay a licensing fee to record companies.
The paid-for Napster service was announced last month but will not be available until July while the company resolves security issues and battles against legal action brought by the recording industry.
On February 12, a three-judge panel in the United States ruled that Napster was infringing musical copyrights and should stop its music swapping service. A hearing to determine the precise terms of the injunction opened in San Francisco last night.
Napster and Bertelsmann, which invested $60m in the song swapping service last year, would attempt to delay the closure of the service until July, Mr Mulligan predicted.
"It's in their interests to drag this court ruling on as long as possible. Napster mustn't lose their customers between now and July."
If the free service is shut in the next few weeks, Napster users are likely to turn to alternative illicit services such as Gnutella and Freenet. If the ruling is delayed until the subscription service is ready, Napster is more likely to convert free users into paying ones.
Last week, Vivendi Universal-owned Universal Music and Sony announced a plan to buy up licensing rights to half of the world's copyrighted music and offer it on a shared website.
Universal balked at signing an agreement similar to Bertelsmann's, saying Napster would receive too generous a share of subscription fees.
