Excerpt from the Los Angeles Times.
April 6, 2003
The Lowdown Download Blues
- That's What the Record Industry Was Singing When a Group
of Young Computer Wizards Turned the Internet Into a Pirate's
Market. Excerpted From a New Book About Napster
It was sheer anarchy. That's exactly what transpired in the late
1990s when teenage computer whiz and college dropout Shawn Fanning
created Napster--a system that connected computer owners and allowed
them to swap music files over the Internet. The $40-billion music
industry reeled as a generation of young computer users, completely
ignoring the notion of copyright, adopted a disturbing credo:
Why pay for music you can get for free? By May 2000, it was estimated
by the Internet research firm Webnoize that 73% of U.S. college
students were using Napster.
In these excerpts from the book "All the Rave: The Rise
and Fall of Shawn Fanning's Napster" (to be published April
15 by Crown Business), Times staff writer Joseph Menn chronicles
how a few unworldly kids almost caused the powerful music industry
to implode: Artists were caught between trying to maintain their
livelihoods while not appearing greedy to their fans, and at one
point, the German media conglomerate Bertelsmann AG antagonized
its peers by financing Napster at the same time its own BMG record
label was suing to shut down the online service.
In her ruling against Napster, the presiding judge noted that
technology had gotten ahead of the law. It also had gotten ahead
of reason: If Fanning and his young colleagues didn't understand
the full implications of what they had created, the professionals
in charge of Napster's business didn't care. The music industry
understood, but it had no idea how to stop the juggernaut.
As Napster is stymied (the site is in limbo as its new owners
attempt to develop a pay-for-play service), its legacy continues
to spiral outward: Pirate successors now combine for a bigger
reach than Napster had at its peak; Hollywood and Silicon Valley
are jousting on Capitol Hill over whether widespread anti-copying
mechanisms will be mandated in future computers; and sales of
blank CDs, often used to make custom discs of downloaded music,
now top sales of prerecorded CDs.
It all began with a poor Boston-area kid who came west to Silicon
Valley and started a revolution.
Shawn Fanning and Sean Parker packed their bags for California
in September 1999 because Napster's first equity investor, Yosi
Amram of Palo Alto, wanted to keep an eye on the company. Parker
took what he could carry from Virginia and went to the airport.
Fanning was to fly the same day from Boston, but he misplaced
his driver's license and couldn't make the flight.
When Parker arrived at the San Francisco airport and discovered
his partner wasn't there, he realized he was alone in a city where
he had no friends, no support network and no place to stay. Fanning
arrived a day or so later, exhausted. "I was in really bad
shape, just from programming for eight months," he said.
"I was going to a strange place. I didn't get a sense of
what I was getting into or really much of an understanding for
what it meant to start a company or raise money or any of those
They were relying on the experienced adults in the company, such
as Napster CEO Eileen Richardson. But Richardson hadn't done enough
homework. She said that her first question to Amram before she
signed on had been about copyright law. Anything as powerful as
Napster, which took away so much music without paying any money
to the labels, had to be illegal, she worried. Amram assured her
it wasn't, and he told her about a lawsuit-defense memo that had
been prepared for the company. That was enough to convince her.
She was foolish for not doing at least a modicum of due diligence
and speaking to a lawyer. But she thought people would just use
Napster to sample music, then purchase what they liked. CD burners
were rare at the time--they would soar in popularity later, precisely
because of Napster.
Richardson decided to move fast to raise more money. After word
about Napster had leaked out in June 1999, 100,000 users had downloaded
a test version. When college students returned for the fall term,
Napster had the potential to turn into the ultimate case of viral
marketing, with word of mouth spreading it faster than any advertising
could. But the usage was already straining Napster's capacity,
and the system kept crashing. If the positive buzz was replaced
by griping about the crashes, Napster could die before its first
By the end of their first week in Napster's San Mateo office,
Fanning and Parker had been surprised so many times by the chaos
that they began referring to the encounters as "What the
hell is going on?" moments. "We didn't have any real
world experience to process what was happening to us," Parker
said. "It really felt like we were in a movie."
Neither Bill Bales, VP of business development, nor Richardson
seemed to think that a business plan mattered much. Parker would
call strategy meetings and try to explain what he thought the
company's next steps should be. "I would put on a presentation
for Bill and Eileen, and halfway through, she would start screaming
and running around the office, saying, 'We have so much to do!'
Bill would say, 'That's brilliant! We're going to be a $10-billion
company!' And I would say, 'Wait, I'm not finished yet.'"
The executives thought that by just getting big quickly, they
could force the record industry to the negotiating table--how
to structure a legitimate and sustainable business was simply
not the focus. Once, John Fanning--Shawn's uncle and Napster's
then-largest shareholder--sent a deputy out from Massachusetts
for an inspection. When Tom Carmody was done, he called everyone
together. "A business is like a person," he said. "Napster
has a spirit. It has a body. But it doesn't have a brain."
Despite Richardson's presence and the increasing number of Silicon
Valley pedigrees, it sometimes appeared there were no grown-ups
in charge. One day, Bales took Fanning, Parker and engineer Jordan
Ritter to look at a house where they all might live. The real-estate
agent pulled Ritter aside and told him that his credit record
was the only one of the four that qualified, and Ritter balked
at signing the lease alone. There would be no MTV-style house
to throw parties in.
"Fun, early on, was going to 24 Hour Fitness at 2 in the
morning," Fanning said. "If I could get enough work
done during the day, I would reward myself by going to the gym."
Even when he had time to explore, he said, "it's really hard
to find a scene out here that's not a bunch of geeks." Instead,
after some long programming sessions, the young men blew off steam
with drinking games. Most pot smoking was done on the roof, but
once it went further, with Bales and Parker slipping into an office
and closing the door. A telltale odor seeped out. "The entire
office reeked," said Ritter, who admitted taking a hit himself.
After a second incident, both Ritter and Fanning, who as a rule
didn't partake, told Parker never to smoke dope in the building
in november 1999, webnoize said the record- ing Industry Assn.
of America intended to sue Napster. Wired magazine confirmed the
report, citing an association spokeswoman who said the trade group
had repeatedly sampled what was available for download on the
service and found that "virtually all file traffic is unauthorized."
The following month, the recording industry filed a lawsuit accusing
Napster of copyright infringement. It came armed with evidence,
showing how Napster was involved in every step of the process.
The suit attached a list of a couple hundred songs available on
the site, including cuts by Elvis Presley, the Beatles, Jimi Hendrix,
Bob Dylan and Bruce Springsteen. Since the statutory penalties
for copyright infringement maxed out at $100,000 per work infringed,
200 songs meant $20 million in potential damages. And those songs
on the sample list were just the tip of the iceberg.
As Napster was lining up support from rock bands, many of whom
thought free promotions were a good idea, so was the recording
association. It pressed its member labels to get artists to come
out against Napster, and some, such as Peter Gabriel, obliged.
"This is obviously a big business that was built by taking
stuff without the consent of the artists who created it,"
Gabriel said. Rapper Eminem was more blunt: "I've seen those
little sissies on TV, talking about [how] 'The working people
should just get music for free.' I've been a working person. I
never could afford a computer, but I always bought and supported
the artists that I liked."
The record industry's biggest public-relations victory came in
mid-April 2000, when the rock group Metallica filed suit against
Napster in federal court. Metallica accused the company not only
of copyright violations, but also of running afoul of the Racketeer
Influenced and Corrupt Organizations Act through its repeated
transgressions. Rap star Dr. Dre also sued and demanded that his
songs be removed.
A "Save Napster" hacking campaign started online, and
probably the biggest contributor was 16-year-old Robert Lyttle,
who broke into more than 200 Web sites and left a pro-Napster
diatribe on each. He also offered to patch the security hole he
had come through--for a fee. Among his victims were sites run
by NASA, the U.S. Army Materiel Command and the French Bibliotheque
Nationale. Lyttle sent messages to Fanning and Ritter and told
them what he had done for their cause. The two looked at each
other in horror. Fanning responded, typing: "Are you crazy?"
the record industry was generally hostile to Napster, but some
in the industry thought Napster had too much potential to be ignored.
Two of the biggest record industry doves were Ted Cohen and his
boss Jay Samit, an executive vice president at EMI and much more
of a technophile than an industry man. Cohen set up a meeting
between Napster and Samit for December 1999 to explore possible
alliances. Bales came down for the get-together on the top floor
of the historic Capitol Records tower in Hollywood. So, Samit
asked him, how does Napster work? What's the business model? Bales
explained that Napster didn't have a model yet--it was just letting
people get music for free. "I explained that that was illegal,"
Samit recalled. "He didn't have any clue." Bales said
he would get back to Samit once Napster worked out a business
plan. He never did.
Bales also met with Tom Gieselmann, an investor with Bertelsmann's
venture-capital arm. Gieselmann thought Napster had tremendous
potential, and he said he wanted to discuss investing. Meeting
Bales in San Francisco, Gieselmann promised to introduce Napster
to Bertelsmann CEO Thomas Middelhoff and others, and he began
quizzing Bales about Napster's closely guarded usage and file-swapping
numbers. "I had to give him something to make sure he stayed
interested," Bales said. Gieselmann started doing the math
on an envelope. His face turned pale. "He was like a ghost,"
Bales recalled. "You guys are destroying the record industry,"
Gieselmann told him. "You've distributed more music than
the whole record industry has since it came into existence."
Even then, many record executives didn't see how dire the situation
was. That changed the day after the Grammy Awards in February
2000. At a board meeting of the recording association at the Four
Seasons Hotel outside Beverly Hills, chief executive Hilary Rosen
decided to try a little show-and-tell. It had been a good year
for the industry, and people were feeling upbeat.
"You know about Napster," Rosen told them, "but
you need to understand it. This is going to be big, and the fact
that we sued them is going to make it bigger."
Staffers downloaded the software and registered in front of the
label bosses. Then Rosen asked the executives to start naming
songs. Not just big hits, but tracks deep into albums, new or
obscure. The record men took turns calling out more than 20 songs.
The staffers found them every time, and fast. Soon no one needed
any more convincing that the threat was serious. The capper came
when someone suggested a hunt for the 'N Sync song "Bye Bye
Bye." The cut had been on the radio just three days, and
the CD hadn't been released for sale yet. And there it was.
Maverick Records executive Ronnie Dashev had seen enough. "This
is too depressing," he said. "Let's move on to other
the venture capital firm hummer winblad, confident that Napster
would prevail in court, agreed to invest $13 million in the company
on May 21, 2000. Happier than he had been in many months, Fanning
didn't have to wait long to celebrate his new status as a legitimate
player in Silicon Valley. That very night, Ron Conway, an early
Napster investor, held one of his over-the-top charity-and-networking
bashes at his home, and Fanning and Parker were on the 300-person
guest list, right there with billionaire investor Warren Buffett.
Fanning almost felt as if he belonged with the others as they
drank champagne and munched on scallops wrapped in pancetta. Almost,
but not quite. "It was like a circus. I was very awkward
going there. I had no idea what I was supposed to wear,"
Fanning said. He was introduced to Netscape co-founder Marc Andreessen,
who asked how many users Napster had and offered words of encouragement.
"Controversy can be a good thing," he said, "as
long as you know how to navigate it."
"We thought we had been inducted into this inner circle,
where everyone you bumped into was worth $50 million," Parker
Meanwhile, Richardson had accomplished most of what she had set
out to do and was ready to step down. Hummer Winblad put in Hank
Barry as her temporary replacement. Barry was a corporate lawyer
only recently turned venture capitalist, with no real way of bonding
with the kids doing most of the actual work at Napster. Yet Barry
harbored a rebellious streak that was unusual for one in his position.
Not too many big-firm lawyers or venture capitalists had spent
seven years playing rock 'n' roll. With Napster, the Silicon Valley
lawyer turned private investor would be transformed magically
back into Hank the Cool Drummer, He Who Brings Music to the People.
What Barry said he saw in Napster was what everybody else saw--a
terrific application with an incredible rate of adoption, something
that had potential if you could make it work for everybody, including
the record industry. John Hummer, Barry's venture-firm partner
and fellow Napster director, called Edgar Bronfman Jr., CEO of
Seagram Co. Ltd., which owned the largest record firm, Universal
Music. Bronfman was confident that the music industry would win
in court, but he was still open to a potential settlement. "The
notion was that Napster was only the first--there will be others
to replace it," he said. "Here was an opportunity to
maintain a large customer base, potentially, and over time migrate
it into a commercially viable system."
Bronfman met with Barry, Hummer and others to discuss what Napster's
business model might be. The ideas came fast and furious, but
there was no technology available to make Napster legitimate,
and the company was reluctant to charge its users. Without charging
them, Bronfman said, there didn't seem to be any way that Napster
could make a profit even before it paid artists and the record
companies. Yet both sides realized the prospects for a deal were
best before the court ruled on the industry's lawsuit--especially
if the judge found that Napster was breaking the law, which would
give any new owners a massive liability headache. So Bronfman
arranged for a summit meeting to be held with other label executives
in the most conducive setting for deal making he could imagine--investment
banker Herb Allen's annual media-moguls-only conference in Sun
The two Napster directors met there with Bronfman, Bertelsmann's
Middelhoff, Sony Corp. co-CEO Nobuyuki Idei and Sony's U.S. chief,
Howard Stringer. The meeting went well, and Idei and Middelhoff
told Barry to keep dealing with Bronfman, who wanted to craft
an industrywide deal. "We were very close," Bronfman
said. A week later, Hummer changed direction. "He said he
had another offer . . . and that unless we wanted to buy Napster
for $2 billion, he would walk away," recalled Bronfman, who
told Hummer there was no way the record companies would pay that
kind of money. No deal was struck.
More than a few of Napster's employees and most of its fans would
have been disappointed by any compromise with the labels. The
service's popularity had always contained an element of perversity:
Napster offered an easy way to break the law. As Napster neared
the end of its rope in court, that perversion intensified. The
more endangered the company became, the more users flocked to
the service to get what they could while they still had the chance.
And that added to Napster's strategic dilemma. "Your biggest
problem," the recording association's Rosen told Barry, "is
that instead of a business, you created a movement. And it's impossible
to convert it."
All the online traffic, combined with the Robin Hood pose, made
Shawn Fanning an international celebrity. And he was beginning
to enjoy his relative wealth. He bought a BMW convertible and
spent thousands of dollars constructing a makeshift recording
studio to go with the gym and pool table in his plain but spacious
Mountain View home. And he didn't fend off all of the women who
sought him out.
strauss zelnick, ceo of bertelsmann's re- cord label BMG, was
at home when Bertelsmann e-commerce chief Andreas Schmidt called.
"We're investing in Napster," Schmidt said. "We're
dropping [out of] the suit and making the announcement tomorrow."
Zelnick couldn't believe it. He went into overdrive trying to
persuade Schmidt and Middelhoff to rethink their decision. Zelnick
argued that if Bertelsmann made a deal with someone violating
copyright protections, the company could be putting its own vast
treasure of copyrights at risk. Under the legal doctrine of unclean
hands, courts frequently dismiss claims of wrongdoing when the
complaining party has committed the same offense. And he said
that if Bertelsmann was still intent, it should simply wait for
Napster to go bankrupt, then buy its assets in court. Schmidt
countered that Napster wouldn't go bankrupt and might even soon
file for an IPO, that its legal fortunes had turned.
Like others before him, Middelhoff was seduced by Napster's technology
and incredible audience. But he was far less reckless. Unlike
Barry, he wasn't sure Napster was legally defensible. "It
is true that this private exchange of music via the Internet has
thus far infringed upon the copyrights of artists and record companies,"
he wrote to colleagues. Instead of a direct stock investment,
he was willing only to make Napster a loan as it worked up a new,
legal system. At Zelnick's insistence, BMG wasn't party to the
parent company's deal and would keep its part in the lawsuit alive.
It wasn't enough for Middlehoff to convince his own troops. He
also had to entice Fanning into staying as Napster's very public
face. Fanning was surprisingly hard to convince. "I had a
lot of concerns about it," he said. "There was this
whole notion of selling out to a label." Fanning called his
mother, telling her he was thinking of walking away from Napster
for good. She encouraged him to stick with what he had started.
Middelhoff treated Fanning to dinner at Manhattan's Post House,
where they had steaks and a $219 bottle of Phelps Insignia Cabernet.
"Four days before the deal was disclosed, Napster added sweeteners
for Fanning. The company raised his salary to $120,000, promised
a bonus of $60,000 and vested the remaining 993,000 of his 2.7
million shares. He began to focus on the bright side. "It
was a really good relationship in terms of deals and trying to
get licenses and security and stuff. Those were all new issues
for me that took a while to get comfortable with. Overall, it
was definitely the right choice," Fanning said not long after.
"We wouldn't be here if Bertelsmann had not decided to fund
Bertelsmann's largess didn't stop the legal process, which forced
Napster's shutdown in July 2001. Since its $85 million in loans
made it Napster's largest secured creditor, Bertelsmann then offered
to buy the firm's technology through a planned bankruptcy reorganization
Napster filed in June 2002. But a judge refused to approve the
sale, ruling that Bertelsmann might have been wielding too much
power over Napster during the negotiations. Instead, Napster's
system and Web site were sold at auction to Silicon Valley software
firm Roxio Inc.
On Feb. 19, 2003, renowned songwriters Jerry Leiber and Mike
Stoller and music publishers Frank Music Corp. and Peer International
Corp. sued Bertelsmann for $17 billion, accusing the company of
deliberately helping Napster users violate millions of copyrights.
The suit in New York federal court seeks class-action status for
about 160,000 songwriters and their publishers and is based largely
on evidence that emerged in Napster's bankruptcy proceedings,
including Thomas Middelhoff's memo concluding that Napster users
were breaking the law.
Raised in a blue-collar home outside Boston, Shawn came up with
the idea for Napster while a Northeastern University freshman,
then dropped out to work on the project. World famous by the end
of 2000, he stayed at the company even after the site shut down,
resigning in September 2002.
Shawn's uncle played an active role in his nephew's life, employing
Shawn at his struggling Internet chess firm. He incorporated Napster
and kept 70% of its stock, to Shawn's dismay. As Napster's first
chairman, he drove away cautious investors and plotted a collision
course with the record industry.
A friend of Shawn's from northern Virginia, Parker was more business-minded.
He drafted the first strategic plans and introduced Napster to
potential investors. Parker's cavalier e-mails about Napster users
exchanging pirated music help sink the company in court. He left
Napster in 2000 and founded a software firm.
Napster's first full-time CEO was an experienced venture capitalist
but had never led a company from the inside. Worse, she didn't
meet John Fanning or research the legal issues before signing
up. Richardson played dumb with the record labels and managed
to raise venture funding for the firm.
Napster's vice president of business development and one of its
first employees, Bales was a Silicon Valley veteran. But he behaved
erratically, clashing with his colleagues and allying himself
with John Fanning against Richardson. After launching another
file-sharing start-up that fizzled, Bales left California.
A longtime corporate lawyer, Barry became a venture capitalist
only the year before he recommended that his venture firm, Hummer
Winblad, invest in Napster. Believing Napster would win in court,
Barry replaced Richardson as CEO, taking a tough and unsuccessful
line in negotiating with the labels.
As CEO of German publishing conglomerate Bertelsmann AG, Middelhoff
pushed the conservative firm in new directions, including controversial
loans to Napster. He too failed to get a deal with the labels
and was thwarted in his attempt to buy Napster's technology last
year before resigning from Bertelsmann.
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