ALL THE RAVE
The Rise and Fall
of Shawn Fanning’s Napster
By Joseph Menn
- From the outset, Shawn Fanning’s invention was co-opted
by his more ambitious uncle John Fanning, who astounded his
nephew by keeping 70% of the firm at its incorporation. John
Fanning had a history of business failures and nasty litigation
and a pattern of mixing business and personal funds.
- John Fanning’s presence alone scared off investors who
might have righted Napster’s course. But the leadership
problem was compounded by the addition of director Yosi Amram
and vice president Bill Bales, who shared John Fanning’s
background of investor confrontations and police run-ins.
- Napster passed up deals with several professionals who wanted
to make peace with the record industry or license Napster’s
software to others, which would have freed the company from
potential liability while allowing the revolutionary technology
to flourish. John Fanning wouldn’t let go of what he predicted
would be worth $1 billion if the company rode things out.
- Napster never developed anything resembling a serious business
plan, partially to avoid reaping profits that could have hurt
it in court. Instead, internal documents show, it planned to
extort money from the record labels and cut a deal from a position
of illegally obtained strength in numbers.
- As John Fanning and the venture capitalists succeeding him
atop Napster used the company for self-dealing, the talented
young engineers under them enjoyed a rebellious culture of sex,
drugs, rock-and-roll, and hacking—even turning a blind
eye when a volunteer illegally defaced a Napster enemy’s
- Before the federal court injunction that crippled it, Napster
was negotiating with the record industry. Those talks only fell
apart, Edgar Bronfman Jr. says, because legendary Intel Corp.
co-founder Andy Grove convinced Napster’s venture-capitalist
backers to stand firm.
- Media giant Bertelsmann AG’s stunning attempt to bail
Napster out was made with one eye on the bankruptcy laws, which
the German firm incorrectly believed it could use to walk off
with Napster’s assets while avoiding liability for what
then-CEO Thomas Middelhoff admitted was illegal behavior. Bertelsmann’s
missteps left it open to a just-filed multibillion dollar lawsuit
by songwriters and music publishers.
- Plans to sell Napster to Bertelsmann collapsed as Napster’s
insiders turned on each other. At one point, John Fanning returned
to the scene after two years to lead a bizarre coup attempt
that would have ousted the venture firm then in control. Shawn
Fanning and his fellow hackers quit in protest after the big
investors balked at the sale.
- Such peer-to-peer successors as Kazaa studied Napster’s
history and learned to decentralize their systems and move overseas,
thwarting litigation against them. But the movie industry has
failed to learn from the record labels’ mistakes and are
likewise raging against piracy while offering little in its
- Napster’s multiple missteps, driven by the greed and
ineptitude of its leaders, triggered a backlash in Congress
that is whittling away the rights of consumers while giving
more power to the entertainment industry. Peer-to-peer technology,
on the other hand, is being embraced by firms large and small.