Napster
From Invertopedia, the encyclopedia of how things fail
Napster was a free program, from Shawn Fanning and Sean Parker, that let people copy music files straight from each other's computers[1][2]. It started in June 1999[2] and reached 57 million users at its peak[1], but Napster said the record labels had refused its offers of a license[8]. The labels sued, an appeals court ruled against Napster in February 2001[9], and the service went offline in July 2001[3]. It filed for bankruptcy in June 2002 with $101 million of debt and $7.9 million of assets[4], and its name was sold for $5 million[7].
Contents
The bet
Napster's bet was that an audience this big would force the music business to deal. Its lawyers argued that copyright law allowed free song downloads and pointed to the Supreme Court's Sony Betamax ruling, which let VCRs be sold even though they could copy movies[8]. Napster said the labels had "repeatedly" refused its offers of a license[8].
When the courts went against it, Napster bet it could turn the free crowd into paying subscribers. It planned a "Napster II" at $2.95 to $9.95 a month, and offered the labels $1 billion over five years, money it did not have and was counting on subscriptions and its backer Bertelsmann to pay[9].
What happened
| Jun 1, 1999 | Napster begins operations, giving away software that lets people swap music stored on each other's computers.[2] |
|---|---|
| Dec 7, 1999 | The Recording Industry Association of America sues for copyright infringement, asking $100,000 for each song copied.[2] |
| May 21, 2000 | Venture firm Hummer Winblad invests $15 million.[2] |
| Jul 26, 2000 | Judge Marilyn Patel orders Napster to stop letting copyrighted songs be swapped. The order is put on hold while Napster appeals.[2][8] |
| Feb 12, 2001 | The Ninth Circuit rules that Napster users are infringing copyright and that Napster knowingly helps them. Napster offers the labels $1 billion, and they turn it down.[9] |
| Jul 2001 | The labels' lawsuits shut down Napster's live service. It never comes back.[3] |
| Jun 2002 | Napster files for Chapter 11 in Delaware, owing $101 million, about $91 million of it to Bertelsmann.[4] |
| Sep 2002 | A bankruptcy judge blocks Bertelsmann's $8 million purchase of what is left. All 42 employees are laid off.[3][5] |
| Nov 2002 | A Delaware bankruptcy court approves the sale of Napster's assets and name to Roxio for $5 million in cash.[7] |
The kill shot
Napster's product was other people's music, and it never had permission to hand it out. Because it ran the central index that made the swapping work, the courts found Napster itself responsible.
Not a single song was stored on Napster's servers; the software only connected users to each other[1]. That was not enough. The appeals court found that users were breaking copyright and that Napster knew it and helped them[9]. Inside the company, Sean Parker was pushed out after an email turned up in which he called the users pirates, something Napster's lawyers had always denied[1].
By the time Napster offered real money, it did not have the money and was counting on subscription fees and Bertelsmann's backing[9]. The labels turned down $1 billion[9], kept up their litigation[3], and in bankruptcy court objected to Bertelsmann's bid to buy what was left[5]. Meanwhile other peer-to-peer services such as Gnutella and Kazaa emerged to replace it[4].
Red flags ignored
- The founders' own words. An internal email called the users pirates, the very thing its lawyers were careful to deny.[1]
- Growth with no business. Napster's $1 billion offer depended on subscription money it did not yet have.[9]
- Institutions pulling the plug. By September 2000, a third of 50 universities surveyed had banned the service.[10]
- One backer holding the debt. About $91 million of Napster's $101 million in debts was owed to Bertelsmann.[4]
- A conflicted rescue. The bankruptcy judge found Napster's CEO, a Bertelsmann veteran, had conflicting loyalties in the sale to his old employer.[5]
The cost
Bertelsmann had put about $85 million into keeping Napster alive[5], and when Napster filed for bankruptcy it had $7.9 million of assets against $101 million of debt[4]. Every one of its 42 remaining employees, Fanning among them, got severance notices in September 2002[3]. The whole company, name and patents included, went for $5 million in cash[7].
The fight cost others too. Individual Napster users were sued as well, about 18,000 in all[1]. And 2000, Napster's big year, was the first year to show a dip in global record sales[1].
The inversion
If your product only works because you are using something you have no right to, get the rights before you get the users. A huge audience makes you a bigger target, not a stronger negotiator, and a court will not care how many people love you.
What survived
The name outlived the company. After it was sold, Napster came back in 2003 as a licensed pay service[6]. Best Buy bought it in 2008 for $121 million, when it had 700,000 paying users, and Rhapsody took it over in 2011[6]. In 2022 the brand was bought again, by a consortium with Hivemind among the lead buyers, to "bring the iconic music brand to web3"[11].
References
- ^ “Napster: the day the music was set free”. The Observer (The Guardian), February 24, 2013. Fanning and Parker, the 57 million peak, no songs on Napster's servers, Parker's ouster over the pirates email, the 18,000 users sued and the 2000 sales dip.
- ^ “Napster's High And Low Notes”. Bloomberg Businessweek, August 14, 2000 (Internet Archive copy). The June 1, 1999 start, the RIAA suit and damages, Hummer Winblad's $15 million and Judge Patel's order.
- ^ “Napster sale blocked”. The Register, September 4, 2002. Severance for all 42 employees including Fanning, and the July 2001 shutdown of the live service by the labels' litigation.
- ^ “Napster files for Chapter 11”. ComputerWire via The Register, June 4, 2002. The Chapter 11 filing in Delaware, the $7.9 million in assets and $101 million in debts, $91 million owed to Bertelsmann, and the rise of Gnutella and Kazaa.
- ^ “Bankruptcy judge blocks sale of Napster to investor”. Associated Press via Deseret News, September 4, 2002. Judge Walsh blocking the Bertelsmann sale, the CEO's conflicting loyalties, Bertelsmann's $85 million and $8 million offer, and the labels' objections.
- ^ “Rhapsody to Acquire Napster in Deal With Best Buy”. The New York Times, October 3, 2011. The 2003 relaunch as a licensed pay service, Best Buy's $121 million purchase and 700,000 paying users, and Rhapsody's 2011 deal.
- ^ “Napster's takeover by Roxio approved”. Out-Law News (Pinsent Masons), November 28, 2002. The Delaware court approving Roxio's $5 million cash purchase of Napster's assets, name and patents.
- ^ “Napster fires last written shot in court case”. IDG via CNN, September 15, 2000. Napster's legal arguments, the Sony Betamax ruling, Boies's statement on refused licenses, and the stay of Judge Patel's order pending appeal.
- ^ “Napster: Let's make a deal!”. Salon, February 21, 2001. The February 12, 2001 Ninth Circuit ruling, the $1 billion offer and its rejection, the money Napster did not have, and the Napster II plan and prices.
- ^ “Napster expelled by universities”. BBC News, September 26, 2000. The survey finding that a third of 50 universities had banned Napster.
- ^ “Napster joins Limewire and Winamp by jumping on the web3 bandwagon”. The Verge, May 18, 2022. The 2022 purchase of the Napster brand by a group led by Hivemind and Algorand.