Napster's offer of $1bn over five years to the recording industry for a licence to distribute copyrighted material online, which was made late on Tuesday, has already been rejected by music industry hard-liners.

Under the proposed deal, Napster said it would pay $150m per year to major record companies and $50m per year to independent labels and artists.

The MP3 file-sharing network has already said it would convert to a subscription-based model later in the year before being instructed by a court ruling that it could not distribute music known to be in breach of copyright.

Napster has been allowed to keep operating while the trial judge rewrites the final opinion. The case is regarded as a landmark ruling that will set a precedent for possible future legal spats between internet firms and copyright holders in other industries.

Napster's offer, however, has been made to an industry not known for seeing the other guy's point of view, and one that is hawkish in its mood after beating Napster in court and rejecting all previous settlement offers.

At the very least, early indications suggest that music groups want much more money up front and additional royalty fees included in any settlement.

Richard Parsons, co-chief operating officer at media giant AOL Time Warner, told the New York Times that the figure "does not strike me as being in the ballpark".

Yesterday, Parsons told Los Angeles entertainment lawyers for the Grammy awards that a settlement on any basis that allowed song swaps to continue without royalty payments was "an intolerable outcome".

He suggested that music, film, book, television and other media companies should band together to face down internet copyright pirates, and even compared their position to those of US revolutionaries.

"Benjamin Franklin observed that either he and his colleagues hang together or they would most certainly hang separately," he said. "Today, we face a similar choice. If some of us compromise on copyright, and others ignore the wishes of consumers for transparency, we'll deserve the chaos that ensues."