Napster CEO steps down; cost-cutting continues

By Ron Harris, The Associated Press
Wednesday May 15, 2002

xSAN FRANCISCO — Napster’s chief executive resigned Tuesday, after founders of the troubled song-swap company refused to be bought out by the German media conglomerate Bertelsmann AG. 

Further cost-cutting moves were also announced. The company is rapidly running out of cash and may soon file for bankruptcy protection, according to a source close to Napster who spoke on condition of anonymity. 

The resignation of Konrad Hilbers, a Bertelsmann veteran, comes amid a long hiatus for Napster, which has vowed to come back online as a subscription-based music download service. 

Napster has been offline since last summer, after it failed to meet guidelines handed down by a federal judge requiring it to keep all copyright music from being freely traded over its network. 

Since Napster’s service went dark last year, the five major record labels suing Napster — BMG, EMI, AOL Time Warner, Sony and Universal — all launched subscription services in response to the demand for music downloads that Napster created. 

Sony and Universal now offer fee-based downloads from their service pressplay. BMG, EMI and AOL Time Warner formed the joint venture Musicnet to offer a similar service in Napster’s absence. 

The five major labels have refused to settle their ongoing copyright infringement case against Napster and each of them — including Bertelsmann’s BMG Entertainment — remain plaintiffs in the case. 

Napster has had difficulty complying with U.S. District Judge Marilyn Hall Patel’s order to rid its network of pirated music. But the company, operating on a dwindling budget, has looked forward to relaunching its service. 

Hilbers took the helm of Napster last year. Napster’s future now appears in question as Hilbers’ departure represents a loss in confidence in the leadership of the Redwood City-based company. It turned down the buyout offer from Bertelsmann earlier this year. 

The German media conglomerate has extended about $85 million in loans to Napster, but the company has failed to generate revenue or launch a paid service. 

To further complicate matters for Napster, the company’s original investor, venture capital firm Hummer Winblad, and the uncle of Napster founder Shawn Fanning remain locked in a legal dispute over the division of funds from the sale of the company. 

In an internal memo to Napster employees sent by Hilbers and provided to The Associated Press by sources close to both companies, the chief executive bashed Napster’s board for refusing Bertelsmann’s offer. 

“I am convinced that not pursuing the offer is a mistake and it will lead the company to a place where I don’t want to lead it,” Hilbers said in the memo. 

Tuesday, Bertelsmann took another shot at Napster’s board for turning down the deal. 

“We regret that the Napster shareholders were unable to reach an agreement regarding the offer from Bertelsmann, however, we continue to believe in the value of peer-to-peer technology,” the company said. “We are hopeful that Napster’s brand and technology will be able to realize its potential as a compelling consumer proposition.” 

Napster said it would cut costs, but did not say how. The company laid off 30 employees on April 10. 

“We deeply regret that we have not yet been able to find a funding solution that would allow Napster to launch a service to benefit artists and consumers alike,” a Napster statement said. “We will be looking at additional steps in the coming week to further reduce expenses.” 

Analysts agreed Napster had potential, but several management miscues led the company down a path to failure. 

“It should have taken the deal from Bertelsmann, in hindsight,” said Sean Badding, an analyst from The Carmel Group. He said Napster’s brand name recognition still holds value and could be leveraged for profit by a future business. 

“If this does happen and Napster does file for bankruptcy, I think it would be one of the most compelling technologies to capture the American culture in recent times and then go on to failure,” Badding said. “From boom to bust, it had the most potential.” 

Phil Leigh, an analyst with Raymond James & Associates, said Napster’s rejection of the buyout came after Napster’s original investors sought immunity from damages in the record labels’ copyright infringement suit as part of the deal. 

Those were terms Bertelsmann would not go along with, Leigh said. 

“It looks like Napster is as dead as General Custer,” he added.