Born as the brainchild of teenager Shawn Fanning, who mixed his passions for music and the Internet, Napster attracted billions of downloads and a flurry of lawsuits before taking its swan song Monday in a Delaware bankruptcy court.
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The once wildly popular song-swapping service sparked an ongoing legal battle between the music industry and Web devotees over the still-thorny issue of how music would be distributed over the Internet. On Monday, California-based Napster filed for Chapter 11 protection from creditors to meet the terms of a takeover it agreed to last month with German-based music giant Bertelsmann AG.
Bertelsmann will buy most of Napster’s remaining assets for $8 million. Napster had about $7.9 million in assets and $101 million in liabilities, according to court filings.
Still, a number of industry observers think Napster stands a chance at reviving itself as a paid music service, in spite of daunting obstacles. “I think it would make sense that Napster could re-emerge at some point, if for no other reason than it has built up name recognition,” said Michael Goodman, senior analyst at the Yankee Group in Boston.
The major record labels have launched their own paid music sites to take on such Napster-type swapping services as LimeWire and Kazaa.
Sony Music Entertainment and Universal Music Group, for instance, have stakes in Pressplay, while AOL Time Warner Inc., EMI Recorded Music and Bertelsmann own pieces of MusicNet.
But these services have not gained traction because neither has robust music listings–essentially the libraries of all five recording labels–and the purchased music cannot be moved to various devices. For example, users who download from these sites cannot transfer the songs from a PC to an MP3 player.
“Consumers are used to buying music once, not renting it, and moving it around to other devices, and we haven’t seen that from the major services,” said P.J. McNealy, research director of GartnerG2, a market research firm in Stamford, Conn.
Napster, too, would need to address these issues in any new paid service it launches.
“The question is, how irritated are the record labels with Bertelsmann, which invested in Napster and kept it alive,” said Mark Radcliffe, a partner with the law firm Gray Cary Ware & Freidenrich in Palo Alto, Calif.
Legal battles ongoing
Bankruptcy documents indicate Bertelsmann loaned Napster $91 million. With that financial help, Napster has been trying to build a subscription music service. Those efforts have been hurt by the ongoing legal battles the company faces, according to court documents.
Monday’s bankruptcy filing serves as a cautionary tale to those building businesses in digital entertainment, observers said.
“This should be a warning to investors not to make the same mistake in other media,” said Bruce Lehman, president of the International Intellectual Property Institute in Washington. “As long as part of your business model is being able to clear the rights of your content, you’re on the right track. But if you don’t have that, you’re either going to have to hire a lot of lawyers to defend yourself–probably unsuccessfully as we’ve seen in the Napster case–or try to operate outside the reach of U.S. law, where you’re going to have to be a fugitive. And the fugitive [route] does not imply an easy out.”
Will other record labels be willing to strike deals to make their music available to Napster, perhaps in exchange for the Bertelsmann library of music?
They may have no choice, said the Yankee Group’s Goodman, if they want to avoid antitrust hassles with the U.S. Department of Justice. The record labels already are drawing antitrust scrutiny for their rollouts of Pressplay and MusicNet.
Meanwhile, as major labels hesitate to license their music to Internet services, piracy still flourishes, said George Nichols, stock analyst with Morningstar Inc. in Chicago.
“There will always be an underground for pirated music, and the Recording Industry Association of America will continue to chase it down,” said McNealy, of GartnerG2. “It’s a never-ending battle.”
Humble beginnings
Napster was far from a financial monster when Fanning started it in May 1999. A freshman dropout of Boston’s Northeastern University, Fanning was trying to trade songs with a friend through the Internet. “Napster” was the nickname Fanning used in Web chat rooms.
At its zenith, Napster was nothing short of a phenomenon, attracting 60 million users at one point last year. They traded MP3s, a compression format that turns music on a compact disc into a digital file. The free service’s popularity swept through college campuses, the workplace and home computers with high-speed connections.
Successful artists, including U2, Moby and Chuck D of Public Enemy, praised Napster as a tool to bring music to the masses–and offer musicians a free, worldwide promotional tool. But the record industry reviled it, as did the hard rock group Metallica–ironically Fanning’s favorite band. Both sued Napster for copyright infringement.
Many Napster fans saw the end coming in February 2001, when a federal appeals court ordered it to stop the distribution of copyrighted music.
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Like crazed shoppers at a liquidation sale, they flooded Napster’s servers–downloading as many as 130 million songs a day.
“It’s a tragedy that something that millions and millions of people found to be enormously useful has been killed by something that serves the interests of so few,” said John Perry Barlow, co-founder of the Electronic Frontier Foundation, an Internet civil liberties group in San Francisco. “A lot of great music got out because of Napster, and a lot of people got introduced to some great music.”
As a former lyricist for the Grateful Dead, Barlow was close to a band that built a rabid following on free music.
“We made ourselves economically on the strength of giving away our work,” Barlow said. “You can give a song perfect protection, but that doesn’t mean anyone will hear it. If you give it away, it’s the vector of viral marketing.”