Revelations from

ALL THE RAVE

The Rise and Fall
of Shawn Fanning’s Napster

By Joseph Menn

1. 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.
2. 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.
3. 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.
4. 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.
5. 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 site.
6. 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.
7. 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.
8. 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.
9. 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 place.
10. 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.