Last week’s announcement by German media giant Bertelsmann AG that it would partner with Napster Inc. ignited something of a firestorm in local music industry circles.

Many industry executives cautiously celebrated what they viewed as Napster finally being reined in by the music industry.

But Michael Greene, president and CEO of the National Recording Academy, was fuming.

“I hate it that this Napster bunch of thieves are now asking forgiveness for building the business,” Greene said. “That’s the part of it that really irks me. Instead of treating these people like the thieves they are, we are now basically going into business with the enemy.”

On the other side of the debate is Phil Hwang, one of the estimated 38 million Napster users worldwide. The 25-year-old software development professional from West L.A. said he has downloaded an estimated 550 songs from Napster.

If Napster doesn’t remain a free application, Hwang plans to find another Web location to get free downloads rather than paying for music.

“What I would pay for is some value-added services,” Hwang said, suggesting that a file-sharing application that would put selected songs on a CD might be enough to separate him from a couple of bucks a month.

Even though billions of dollars of revenue could hang in the balance, no one seemed quite sure what will happen next as Napster and Bertelsmann merge and try to develop a workable system for selling music over the Internet an effort that has thus far failed miserably.

“If anyone tells you they know what’s going to happen, they’re either lying or delusional,” said Jeremy Helfgot, 26, of Hollywood.

Helfgot is a former manager of special projects at mp3.com, a precursor of sorts to Napster with its own legal problems, and a member of the online community Pho, a loose coalition of L.A. folks interested in digital music.

One thing on which record labels and artists appear to concur is that establishing some type of subscription-based Internet music service is a critical first step toward satisfying consumer desire to download digital music while protecting the labels’ copyrights and musicians’ intellectual property.

Launched in spring 1999, Napster’s popularity quickly exploded, and the company today claims to be the world’s leading file-sharing community.

That practice prompted the Recording Industry Association of America and the big five record companies, including Bertelsmann division BMG Entertainment, to sue Napster for copyright infringement.

As part of their partnership, Bertelsmann’s newly formed BeCG division and Napster have developed a business model calling for a secure membership-based service that will preserve the Napster file-sharing concept while collecting payments for downloads. Those payments, in turn, are to be distributed to artists, songwriters, record companies and music publishers.

Bertelsmann and Napster also plan to solicit the participation of the rest of the recording industry. But it’s unclear at this point how many of those firms might be interested.

Currently, Universal Music Group is trying to deliver digital music through two channels. The company sells downloads from its Web site and it is testing a free subscription service at www.farmclub.com. The latter option provides only streaming feeds of music that must be played on RealPlayer software and cannot be saved on a hard drive.

Local singer-songwriter Noah Stone, a Pho member and director of the nonprofit Artists Against Piracy, said such technological limits further reduce the appeal of subscription file-sharing applications.

“If you’re paying to download something on a 56k modem and it doesn’t work, you’re going to be (angry),” Stone said.

Stone also fears that coalitions between file-sharing companies and the record labels could mutate into Internet record clubs. Record labels could then compel their artists to participate in such clubs, Stone said, even though artists’ royalties on clubs sales are discounted 50 percent.

Attorney Donald Passman, author of “All You Need to Know About the Music Business,” said Stone’s assessment might not be too far off. Passman anticipates that other major labels will pursue their own distribution routes for digital music created by their respective artists.

“My guess is it’ll be like any other new industry where you have competing media, and they’ll be whittled down according to what people prefer,” Passman said.

Other major labels are playing the matter close to their collective CD jackets. Greene said executives at those labels are reluctant to criticize their brother Bertelsmann.

“They’re terrified because they’re afraid if they come out and say it’s a bad idea, they could find themselves wanting to get on board six months from now,” Greene said.

Because Napster remains up and running at this point, the RIAA and record companies will continue to pursue the federal lawsuit. Meanwhile, Bertelsmann has pledged to withdraw from the suit once a fee-for-sharing model is developed.

Whether that model will end Napster’s legal woes is anyone’s guess.

“It’s not a simple question because (the labels) all have different ideas about what they want to do and how they want to do it,” Passman said.

Hwang said, if the RIAA wins the lawsuit or a fee-based model replaces the current Napster service, free downloading of digital music will likely survive somewhere or mutate into something else.

“The court can shut down a company, but you can’t stop the technology. It’s always going to be there,” he said.