Napster

What did it do?

Napster was a peer-to-peer application launched in June 1999 by Shawn Fanning and Sean Parker that let users share MP3 music files with one another. Thanks to its easy interface and recordings that were hard to find anywhere else, it quickly went mainstream. The list of every shared song was kept in a central database hosted by Napster.

Why did it shut down?

In December 1999 A&M Records and other record labels, acting through the RIAA, sued Napster for contributory copyright infringement; Metallica and Dr. Dre filed separate suits. The injunction issued after a court ruling in February 2001 required Napster to monitor its network and restrict access to copyrighted content. In early July 2001 the company shut its network down completely and never reopened it. Its proposed USD 1 billion settlement with the labels was rejected, and it could not secure licences from the major labels to move to a paid model. When the bankruptcy court blocked a sale to Bertelsmann, its assets were sold at auction.

The story

The name Napster came from Nappy, a nickname Shawn Fanning had been given at school because of his hair. With the app he launched together with Sean Parker in June 1999, Fanning changed the way music moved around the internet within a few months. Unlike other sharing networks, Napster focused solely on MP3s, offered an easy interface and put content that could not be found elsewhere, such as old songs, unreleased recordings and live recordings, a few clicks away.

The spread was dizzying. When MP3 transfers came to account for as much as 61 per cent of external network traffic in university halls of residence, many institutions blocked Napster. In February 2001 the number of verified users worldwide reached 26.4 million; some unofficial estimates spoke of 80 million registered users. Radiohead's album Kid A spreading on Napster before its release was thought to have boosted sales, and some artists openly backed the platform.

The music industry, however, went on the counter-attack. In December 1999 A&M Records and other labels, acting through the RIAA, sued on grounds of contributory copyright infringement. In April 2000 Metallica filed a suit documenting around 335,000 people it had found sharing its songs; Dr. Dre brought a similar case. An injunction issued in July 2000 was temporarily stayed pending appeal, but after the ruling of February 2001 the court required Napster to monitor its network and block access to copyrighted content. The company's offer of a USD 1 billion settlement spread over five years was rejected.

In early July 2001 Napster shut down its entire network and never reopened it. In September 2001 it agreed to pay rights holders USD 26 million, but it could not obtain licences from the major labels for a paid version. In May 2002 it agreed to sell its assets to Bertelsmann for USD 85 million and filed for bankruptcy in June; the bankruptcy judge blocked the sale on conflict-of-interest grounds. In November 2002 the brand and logo were sold to Roxio for USD 5.3 million. In the years that followed, the Napster name was used for paid music services by Roxio, Best Buy, Rhapsody and other owners; these were not a continuation of the original company but reuses of the brand.

Napster's closure did not stop sharing; decentralised methods such as Gnutella and BitTorrent emerged. The lesson of the story for founders is that proving strong user demand and putting a business model on a legal footing are two separate jobs.

Lessons for founders

• If you are growing on content that rests on other people's rights, start licensing talks with the rights holders before the user explosion.
• In a product with high legal risk, architectural choices can place liability squarely on the company; design it together with legal counsel.
• User numbers alone are not bargaining power; despite 26 million users, the labels rejected a USD 1 billion offer.

Sources

1. Napster (Wikipedia)
2. Napster Suffers Setback in Appeals Court Ruling (The New York Times, 2001-02-13)
3. Metallica fingers 335,435 Napster users (CNET, 2000-05-02)

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