Napster runs the risk of offending the 38 million music lovers who have made its free file-sharing service so popular.

Napster's alliance with Bertelsmann could finally give the beleaguered music service something it's been lacking: a business model.

But as it works with the German media conglomerate on ways to turn itself into a viable online business, Napster runs the risk of offending the 38 million music lovers who have made its free file-sharing service so popular.

For Bertelsmann, last week's deal could give it a leadership position in digital music. For Napster, it means much more, for even if the start-up survives its legal woes, it's nearly impossible to form the requisite partnerships with other music companies while blacklisted by the major record labels.

Still, several analysts say it will be a major challenge for a reinvented Napster to compensate copyright holders without its loyal users fleeing to harder-to-use, but free services, such as Gnutella.

For now, the companies are not offering details of their strategy but it seems that the new Napster will be based on what's known as digital rights management technology (DRM) systems that encrypt media files with usage rules attached. Leading developers of such technology include IBM, InterTrust Technologies and Microsoft -- of those, IBM and InterTrust already have strategic relationships with units of Bertelsmann.

Typically, DRM systems use client software on each user's computer to store credit-card information as well as the rights to play certain tracks. Since usage rules are attached to the music, files can be transferred directly from user to user and yet are only playable if the computer has the rights.

From a business perspective, such systems have many attractive features. Trading only encrypted files allows Napster to distinguish between copyrighted and freely tradable material and track usage information: tasks that the company has said are impossible with its current system, which trades only unprotected MP3s.

Digital rights management systems are best known for their role in the pay-per-download offerings being released by the major labels. Although the notion of downloading tracks for a typically exorbitant fee has not gained much traction, DRM systems can also be used to implement more imaginative business models.

For example, Napster could trade files that could be listened to, free, for a week and then poof -- the files no longer play. Or, as Napster chief executive Hank Barry has suggested, Napster users could pay a monthly fee to trade music in BMG's catalogue. The encoded music files could contain information ensuring that Napster subscribers have access but outsiders don't. Or perhaps the new Napster could use a combination of the two approaches, where non-subscribers could preview music for a limited time but only subscribers have continued access.

Different music tracks could have different rules: New artists could specify that their music be freely available to everyone while Metallica could charge users every time they listen to a song. "The possibilities are endless," said Scott Burnett, business development executive for IBM Media and Entertainment Industry.

Using usage information, a monthly fee can be divvied up based on what bands are listened to the most. It also opens doors to other revenue streams for Napster since usage information can enable targeted offers of discounted concert tickets or new CDs.

Still, With Web site postings decrying the deal as a "sell out" to corporate interests, it seems that many Napsterites like free, unfettered sharing as much as music. A DRM-based Napster service with targeted advertising and marketing -- however attractive to businesses -- may seem intrusive and controlling to users.

Another issue, mentioned in dozens of Web postings, is that each user's contribution to the system should be taken into account as well. The users are responsible for encoding music from CDs and sharing on the system using bandwidth they pay for the benefit of the other subscribers. "Who reimburses the people who actually do all the work of encoding and storing and sharing?" one poster noted.

Other Napster fans pointed out that the quality of Napster music is "spotty as best". "I would be happy to pay a fee for Napster usage IF they could guarantee the quality of the music," one user wrote. But the quality of the music files depends on the hardware and software of its creators, the users, therefore, in file sharing systems, there is no quality control. Of course, BMG could feed high quality tracks into the system from a central server, but then it's not file sharing, so why call it Napster?

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