Napster’s prospects dim as execs depart Music sharing company uncertain about new subscription service

By Ron Harris The Associated Press
Thursday May 16, 2002


SAN FRANCISCO — At its peak, Napster boasted some 60 million users and seemed at once to symbolize both the excitement of the digital revolution and the worst nightmares of the established recording industry. 

That was two years ago. The Internet file-swapping service now says it may have to file for bankruptcy protection. 

It wasn’t just the legal full-court press by a music industry bent on curbing music piracy that appears to be sealing Napster’s fate. There was also acrimonious company infighting. 

All of this before Napster ever got a chance to generate revenue. 

On Tuesday, there was an exodus of several key executives from the Redwood City-based company, including co-founder Shawn Fanning and CEO Konrad Hilbers. 

Napster’s board of directors had recently rejected a buyout offer of approximately $15 million from Bertelsmann AG, the small company’s deep-pocketed backer that had poured $85 million into Napster to keep it afloat and provided Hilbers to oversee it. 

Some analysts say it was chiefly the recording industry’s lawsuit that buried Napster, the threat of millions of dollars in damages from the copyright infringement suit bringing ruin. 

“Although Napster’s board was directly responsible for rejecting the Bertelsmann buy-out offer, the record label litigants are the ones truly responsible, for refusing to relent from their demands for potentially crushing damages,” said Aram Sinnreich, a senior analyst with Jupiter Research. 

Born in 1999 in a college dorm room at Northeastern University, Napster was concocted as the easiest way to transmit and share MP3 digital music files over a network. College freshman Shawn Fanning and the program’s co-creator, Sean Parker, developed a system in which networked users using the same software application could search each other’s hard drives for MP3 songs and transfer them directly. 

Another Napster co-founder enlisted by Fanning was Jordan Ritter. The two met as part of the ad hoc software security group called “w00w00.” 

Ritter said Fanning was single-minded in his first attempts to make Napster functional. 

“Shawn is the kind of guy who stays up 50 hours straight just to make something work and prove someone wrong,” Ritter said Wednesday, as he reflected on Napster’s beginnings. 

Once Fanning’s uncle, John, came on board and incorporated the company, Ritter said he became increasingly disillusioned with the prospect that Napster would succeed. 

“Never at any point in time did that company have a management team in place that could turn the company into a business,” Ritter said. 

Ritter moved to California with Fanning to set up Napster and served as the company’s lead engineer. He left the day Bertelsmann signed an agreement to infuse Napster with cash, for reasons Ritter described as the “continued misdirection of the company.” 

The trouble came when Napster started distributing the program for free and millions of users began trading copyright music with abandon, developing digital music troves on their hard drives. 

The record industry saw the activity as lost profit and moved quickly to shut Napster down. 

Some top artists, including rapper Chuck D. and the rock band Limp Bizkit, attempted to rally around the service, and Napster partnered with them to sponsor music tours and launch other Internet music Web sites. 

But the heavy metal band Metallica led the charge against Napster, hand delivering boxes full of Napster user names to the company’s front door and demanding the music fans be blocked from downloading the band’s songs. 

Napster attempted to comply with demands from bands and federal judges to change its system and allow only authorized music to be traded. But it failed and the company eventually went offline last year as it attempted to retool for a fee-based relaunch. 

Deals to license material from all five major labels never materialized and, to date, even BMG Entertainment, Bertelsmann’s music arm, remains a plaintiff in the suit against Napster. 

Napster board member John Fanning filed suit to unseat two other board members, venture capitalist John Hummer and former Napster CEO Hank Barry. 

But on Tuesday, a chancery court in Delaware ruled against the elder Fanning. 

Sources close to the failed sale negotiations between Napster and Bertelsmann said one reason for the eventual impasse is that Napster’s original investor, venture capital firm Hummer Winblad, sought immunity from any damages that Napster might incur if it lost the copyright infringement suit. 

Shawn Fanning was not speaking to the media about the company’s downfall, a Napster spokeswoman said Wednesday. 

Napster said in a statement released Tuesday that it would seek to cut expenses in the coming days. Employees filed out with boxes of personal belongings Tuesday, frustrated with having not seen the new subscription Napster service to completion. 

“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,” the company said. 

Other file-sharing programs and networks such as Kazaa and Gnutella have stepped in to fill the gap and offer services similar to Napster. They, too, have drawn the ire of entertainment companies, which have turned to the courts for resolution. 

Redshift Research reported that Kazaa had an average of 1.4 million users logged on to the system during April. Gnutella had roughly 280,000 users online at any given time last month, the firm reported. 

Ritter said in a telephone interview that the future of Napster-like business models is murky at best. 

“Is there a clear laid-out future for the marriage of technology and business? No,” he said.