Future looks bleak for one-time Internet star

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Posted 8:10AM on 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 buyout 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 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, who had served as the company's lead engineer but left the day Bertelsmann signed an agreement to infuse Napster with cash. 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 profits 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 that 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. Ritter said in a telephone interview Wednesday that he had departed over the "continued misdirection of the company." He said he became increasingly disillusioned with Napster's prospects after Fanning's uncle, John, came on board and incorporated the company. "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. More recently, John Fanning attempted with a lawsuit 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. Napster said in a statement Tuesday that it would seek to cut expenses in the coming days. Employees filed out with boxes of personal belongings, frustrated with having not seen the new subscription Napster service to completion. 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 sought relief in the courts. 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 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.