The most important startup in early Internet history was also one of its most controversial.
FORTUNE — Like the birth of most great music movements — Elvis on Ed Sullivan, Patti Smith at CBGB — Napster was rebellious of convention, threatening to established norms, and, well, really loud. The tiny startup from Hull, Mass. launched in early-1999, grabbing the world’s attention almost immediately. At its core was a clever-if-crude piece of software — so-called peer-to-peer technology — that allowed computers to easily send each other files over a network. It would transform the Internet into a maelstrom, definitively proving the web’s power to create and obliterate value.
The company was famously co-founded by Shawn Fanning, a shy and earnest student at Northeastern University in Massachusetts; his uncle John Fanning, an entrepreneur who pioneered online chess; and Sean Parker, a friend Shawn had met on hacker message boards. The service became a phenomenon, shaping the cultural lexicon; “downloading” became a household term, and “sharing” became more than an elementary school lesson. And, of course, it brought the music industry to its knees, eventually leading to an unprecedented legal battle over intellectual property. At its peak, Napster had 70 million users — a feat considering consumers were only getting their feet wet with broadband Internet service. Even in the age of Google GOOG and Facebook FB , Napster is still enshrined in the Guinness Book of World Records as the fastest-growing business ever. (A recently release documentary Downloaded traces the company’s history; it will be available to stream online this month.)
In the history of the Internet, Napster’s story is foundational. Yes the company died. But don’t most pioneers traversing new frontiers? The truth is, even today, Napster’s mark is as visible as ever. Earlier this summer, Apple AAPL announced iTunes Radio, its own streaming music service, a faint echo of Napster’s one-time ambitions. Artists continue to spar with the likes of Pandora P and Spotify over royalty issues. And though Napster didn’t invent peer-to-peer networks, it introduced them into the mainstream. Now, some of the most disruptive startups, Airbnb to name one, run on peer-to-peer marketplaces.
Napster finally fizzled away in 2011. It was unceremoniously bought and folded into Rhapsody, a competing music subscription service. But Napster’s glory days were its first three years, before it filed for bankruptcy a decade ago. What follows here is the sometimes-bitter tale of Napster’s rise and fall, as recalled by many of the players who lived it. These are recollections; like all memories, they may be fallible at the margins. In fact, some recollections herein contradict each other. Shawn Fanning and Sean Parker did not respond to repeated requests to be interviewed. John Fanning declined to comment.
I. THE IDEA
So let’s step back to spring of 1999. Shawn Fanning is a teenager hanging out on the messaging service Internet Relay Chat. He’s on a channel called w00w00, a hacker network. Going by the online handle “Napster,” — a nickname he got from a trash talker making fun of his hair on the basketball court — he tells the group about a program he’s working on that will make it easier for people to swap music files. One person he turns to for help is Jordan Ritter, a 20-year-old security programmer who goes by the name “Nocarrier.”
Jordan Ritter (Napster founding architect): Interesting story there. The roots of Napster are actually in the computer security world. The underground. Myself and Matt Conover [another hacker on IRC] and a few other guys founded this group. And Fanning, er, Napster, was one of those people as well. Kind of a peripheral connection to the group. I’d never actually talked to him much before. Fanning started to solicit the group for help on this project he was working on, which I believe at the time was called Music Net.
As technologists, as hackers, we were sharing content, sharing data all the time. If we wanted music, we would go into some IRC channel, and hit up a bot there and download music from it. It was still kind of a pain in the ass to get that stuff. So Fanning had a youthful idea: Man, this sucks. I’m bored, and I want to make something that makes this easier.
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Ali Aydar (Napster senior director of technology): I have to admit, I didn’t get the gravity of Napster itself immediately. And what I mean by immediately, I mean when [Fanning] first described it to me. He kind of worked on me for 20 minutes, and after that it dawned on me how big this thing could be. And so that got me interested in helping him.
II. THE STARTUP
Soon after, Shawn’s software becomes the centerpiece of Napster Inc.. The company is operating out of headquarters in Hull, Mass., and there is tumult over ownership stakes from the very beginning.
Ritter: Towards the end of that summer, I remember [Shawn] getting online and saying, “Dude, my uncle just incorporated the company.”
As Napster looks for a CEO, Yosi Amram, an early investor, calls Eileen Richardson, a venture capitalist thinking about leaving the investment world, to tell her about the intriguing new piece of software. The company would soon give her the position.
Eileen Richardson: So I went home that night and downloaded it. And holy shit. I remember at that time, folks started saying that people didn’t want to download anything onto their computers anymore, because it was all getting to be web-based. But anybody would download that, easily. I just remember shaking, thinking: Oh my god, oh my god.
With a CEO in place, most of the team leaves New England and sojourns west to Silicon Valley (John Fanning stays back east). Ritter moves to California a few months later. The night he arrives, Fanning, Parker, and Aydar pick him up from the airport and drive directly to their very first company meeting.
Ritter: That car ride, the most important thing about that conversation was that Parker and [Shawn] Fanning were talking about reincorporating the company in order to get rid of John. The company had been incorporated as Napster Inc. They were plotting to reincorporate as Napster.com Inc., or something. Plotting is probably a strong term. It was an important topic of conversation. These two kids are 17 years old. And those conversations are very high level and pie in the sky and impractical. And it probably was.
Despite the early palace intrigue, the sense of excitement is palpable.
Ritter: I had never been to California before, except from when I was born. I left when I was age 2. I didn’t know about hills. The most hilly places I lived in were Massachusetts and Pennsylvania, but those hills are often dark and wooded and foresty. So I landed at night, and the hills were dotted with lights. It was this magical, wondrous looking thing. I had no context what was San Mateo vs. Redwood City versus San Francisco. I can’t conceive of the distance that we crossed. My tongue hanging out the window. Christmas trees. It looked like Christmas fucking trees. It was beautiful.
Aydar: Our first company meeting started at 11 p.m. one night. We were all young. We were single. We were excited about this thing. We could see the impact it was going to have once we got it built.
The company gets to work building out the rest of the management team. Their next executive hire is Eddie Kessler, a 40-year-old soft-spoken engineer with stints at Infoseek and Quote.com under his belt.
Eddie Kessler: Yosi arranged to have me come up to San Mateo, where he’d have me sit down with Shawn and Sean and Ali Aydar at a small table in this crappy office building. We talked about what they were doing. It was kind of interesting. I thought, these are young kids, they don’t know how to write software. I can give them some interesting pointers on how to do things.
Kessler signs up as vice president of engineering. Meanwhile, the team has concerns over the service’s legality.
Kessler: I spoke to John Fanning. He said that this was going to be a 10 billion dollar business — he was sure of it … he had commissioned a report from a lawyer, a constitutional lawyer that proved that Napster had a strong and defensible legal position. I said, “Really? Interesting.”
Richardson: Did I think it might be illegal? Yeah, of course. That’s the first thing I thought. This is too good to be true. You can’t be able to do this. But Yosi had done some legal work and had a legal opinion.
Aydar: [Shawn] felt pretty strongly that if he built something really good and really cool, that the artists and record labels would appreciate the distribution mechanism and the amount of data you could pull from it — understanding who’s listening to what, who’s engaged with what content. He wasn’t focused on the legality. He felt like once he built something really good, any issues would solve themselves.
Kessler: When I joined, I figured we’d know in three to six months, whether this was going to be a complete flop and we’d get sued out of business, or not be able to raise money, or whatever. And one of the funny things is, pretty much until I left the company, we always felt like within three to six months we’d know whether it would be wildly successful or it would go out.
As buzz spreads, legal action from the record industry becomes a more prescient concern. The company snags its own record exec as vice president of marketing: Elizabeth Brooks, a former artist and repertoire director at Work Group, a subsidiary of Sony Music.
Elizabeth Brooks: I cold-called Napster. I emailed a resume to email@example.com, and Eileen called me back. It literally took less than 24 hours.
People said, “You’re going to work at some dot-com?” People ask me all the time how my old colleagues at the record industry felt. I was following music, technology, and disruption. It was a startup that was building up its users and getting a lot of press. It was a smart business move, and the record industry is nothing if not pragmatic.
As user numbers skyrocket, the Internet age finds a reluctant and shy hero: Shawn Fanning.
Richardson: In the beginning there was a lot of, “We want to interview you. We want you to be on the front page of this or that,” [from the media]. And I always said, “You really need to talk to Shawn.” And he’d say, “I don’t wanna do it. I don’t wanna do it. I can’t do.” He was a 19-year-old kid! But I said, “You’ve got to be the face of us. Because it’s Napster, and it’s your story about your hair. That’s your story.
Laurence Pulgram (Napster’s eventual attorney): The first meeting I had with Shawn Fanning in San Francisco at our offices, he looked out the window, and he was wondering what the Transamerica pyramid tower was. He had never seen it before, had no idea about it. He knew software.
For a company that’s quickly taking over the Internet, Napster has set up shop in a meager office in San Mateo, Calif. — the fourth and sixth floors of a converted bank building. Napster becomes vintage Silicon Valley startup lore: youngsters working feverishly, staggering to deal with growth.
Ritter: It was shitty, sure. But that’s startups, man. And the office had a beautiful view. It was on the corner of 4th Avenue, overlooking the bay. You get to see the airplanes lining up as they’re coming in for landing at SFO. And the weather was nice in San Mateo. There was a deck, so on the other side of the office were the San Mateo hills, which were beautiful.
Richardson: The place was really tiny. To the point where, if you pushed someone’s chair back, you’d hit someone else’s chair.
Brooks: When we started, our engineers made as much as senior management. We all made the exact same salary. And our top engineers made as much as our CEO, at the beginning.
Pulgram: The team had incredible energy, powered by Red Bull — when it too was a nascent technology. People were coding all day and all night in a tiny office.
Brooks: When we outgrew the San Mateo office, prices had gone up even more. The price per square foot in the Valley was just ridiculous. It got to the point where it was pretty standard for landlords to ask for equity in addition to rent. It was unbelievable. We actually almost moved into a paintball arena. I actually thought it would have been kind of cool. It was painted all black inside, and we could form an indoor paintball club. [Laughs] Except it didn’t have enough windows, and we thought that everyone would go crazy.
Richardson: We put in some late, late hours. Initially, we had this little tiny office that had like five desks in it. It was like, Shawn, Parker, Bill Bales [an early employee], and me. We probably had three, or at least two different offices during that short amount of time.
As the company grows, the team moves into a slightly bigger office in Redwood City, Calif.
Brooks: There was this staircase that led to this mezzanine. And in the mezzanine there were two conference rooms and my office. Why I got the special office I will never know. But it gave me the opportunity to kind of watch how things were going, because at the top of the stairs I could see the entire office. I could gauge the mood, see if the engineers were happy, and occasionally sing a song or two.
At the time, Groove Armada had that song, “I See You Baby.” That was a big hit. If you don’t remember, it goes “I see you baby, shakin’ that ass, shakin’ that ass.” So one or the other of us — it would often be me — would just call out, “I see you baby!” And somebody would inevitably respond, “Shakin’ that ass, shakin’ that ass!”
Kessler: I was the adult supervision. Eileen and Bill weren’t even really “employees.” I was the only sort of adult employee.
Brooks: Our door was always open. There were a few startups on our floor, and we all kept our doors open and wandered in and out, talking to other companies that were on our floor.
The neighborly vibe helps when Napster begins to court investors for a second round of funding. Through the grapevine, noted Silicon Valley investor Ron Conway takes interest, and his firm SV Angel invests $200,000.
Ron Conway: We knew another company in the same building. I asked that entrepreneur, and he commented to me that the building is full of startups. And I asked him, “Are there any interesting startups in the building?” And he said, “Yep, there’s this service called Napster.”
Numbers continue to mushroom, and Napster experiences growing pains as it tries to scale.
Brooks: Shawn and I went up to the server room with a stopwatch and sat there counting files flying back and forth, and we realized the scope of the business because the number was just astronomical. Uncountable. Billions of songs a month, and this was early on. Realizing that you’re really in a game changing moment — that’s the happiest feeling anybody who’s committed to innovation can have.
Aydar: There was one particular night about three or four months in where we had a breakthrough that really solidified the scalability of the system. We were all in the office. It was the middle of the night, and we switched over the system to this new one that scaled. We got out the beers, and the music was loud. We were having a lot of fun. You could see the numbers. It was almost as if it was growing in real time. You could see it.
Kessler: It was very, very frenetic. Any direction you looked at, there were problems. From not enough hardware to not enough space and racks in data centers to the software crashing, servers crashing, the client software not working properly. Every direction you looked, there were issues. It was just a constant battle. We would buy twice as many servers, and we would wipe our brows and say, “Okay, now we’ve bought ourselves some time.” And then three or four hours later we were over capacity again. Then we’d work on algorithmic changes to speed up some things and say, “Whew, god, we made it 10 times faster, we’re good for two weeks.” And 24 hours later we were at maximum capacity. It was this fire hose.
Richardson: It was during this time when everyone [in Silicon Valley] is raising all this money and bringing in a brand expert for a million dollars. I just couldn’t understand it, why you would spend all that money. Everyone was like, “We’re going to change the name. No one’s ever going to understand the name ‘Napster.’ Let’s change it to ‘Rapster!’” Which makes no sense whatsoever. To this day, I almost never pull the CEO card. But in that case I said, “We are not changing the name. Because if you put your head down and get to work, everyone will know who we are.”
Kessler: Sometimes we would just order hundreds of servers at a time, just these stacks of servers. We had to drive them at high speeds down to our data center in San Jose. We had to get these things up as soon as possible, so we would race them down, and we’d have screwdrivers in the back of the car. We’d pull into AboveNet, which was one of our data centers, and get a cart and start stacking up boxes of servers. We’d rush them into a cage we had with a lock on it and start shoving these into racks, as quickly as we could.
While users flock to the software, the team tries to partner with the music labels and major entertainment organizations. One person they see early on is Jay Samit, an executive at EMI who was tasked with trying to develop a way to monetize musical distribution over the Internet.
Jay Samit: Shawn and Sean came in, and they didn’t have a model. Their model was: Somebody other than them makes money. Somebody has to pay. I said, “Come back, and tell me how someone is going to get paid.” And they never came back.
Brooks: There were a few people that got it and a couple that actually did something about it. Most of the meetings were quite frank. Most people were not hostile. Business is business, and we were running a business and so were they. And they were pretty frank about how no way, no how were they going to scare off traditional retail. They thought, We do a deal with Napster, we won’t be able to distribute to Tower Records anymore. Now you can see that worrying about alienating Tower Records was a shortsighted concern.
Conway: The day after we invested, Eileen Richardson and I flew down to L.A. and met with Jeff Berg, who was then the head of ICM [International Creative Management], and I think Mo Ostin [then-head of DreamWorks records] was in the room too. And we said, “Hey, we’ve got 100,000 downloads here. We need to work together to commercialize this business, because the genie’s outside of the bottle.”
Amid the frustrations, the overnight success also affords the team a few perks, like newfound celebrity status.
Brooks: When I coined our tag phrase, “Thanks for sharing,” and we made up a bunch of Napster t-shirts. Those went over really well. Literally, if you were one of our guy engineers and you went out to a bar in Silicon Valley, apparently it was a little bit of catnip. Somebody said, half-joking, “Oh, you know, we should make more t-shirts for the engineers that say, ‘Fuck me. I work at Napster.’” And there are a few of those floating around.
Conway: I had a reception at our home where Larry Page and Sergey Brin [co-founders of Google] said to me, “Wow, we’ll never be as famous as that Fanning guy standing over there.”
III. THE LAWSUITS
By December 1999, Napster mania is full blown. Frustrated, the Recording Industry Association of America (RIAA) enlists Russell Frackman, already the music industry’s go-to litigator, having won a copyright infringement case five years earlier that deemed selling pirated music at swap meets illegal.
Russell Frackman (lead attorney for the RIAA): I remember after that case, my then-contact at the RIAA said to me, “This case is going to be very important on the Internet.” And I didn’t have a clue what he meant, frankly, at the time.
Hilary Rosen (then-chair of the RIAA): When it had gotten much bigger and then-management was much more adversarial, we had no choice but to file litigation. Once, I brought a computer into a meeting of the RIAA board, which was all of the heads of the record labels across the country at the time. And we basically played Name That Tune with the heads of the record companies, who were naming some of their current and new releases, some of which hadn’t been released commercially.
Richardson: Then I got to talk to Hilary. That was fun. I was in my car. I was heading back to the office from a meeting, on Fourth Street in San Mateo, not far from the office. We’re both strong personalities, so it’s going to get a little heated. She said, “You’re letting people download …” I said, “You don’t understand the technology. That is not what we’re doing.” She said, “You’re infringing on copyrights.” I said, “Well, I’d like to know which ones. Who, what, when, where, how?” And that’s when she said, “Open up Billboard magazine! The top 200 are right there!” Really meanly. And I said, “I’m sorry. I don’t subscribe to Billboard magazine.”
On behalf of the five major music labels, the RIAA files suit against Napster on December 6, 1999.
Frackman: It was either on or right around D-Day — no, not D-Day — Pearl Harbor day.
Rosen: It became clear that guys who were in the digital music space, who were trying to do it the legitimate way — getting licenses, paying royalties, all of that — were starting to resent the volume of attention Napster was getting. So then I realized I wasn’t just making an effort for the creative community, but that really the only way the startup community would have a shot is if everybody had a level playing field. So I gave our guys the go-ahead.
The case reunites Frackman with an old colleague.
Jeff Knowles (attorney representing the song publishers): I met Russ quite a number of years earlier, because when I was an associate at this firm, one of the first cases that I worked on was the Milli Vanilli lip-synching scandal in the early ‘90s. Russ was involved in that case, so we worked together on that.
I can remember having seven or eight people in my office just looking at the software operating. A lot of times, there would be a whole group of people from outside — New York or elsewhere or L.A. or San Francisco — they would all gather in my office, and we would do the whole demonstration of the software, so that was fun. And at the time there were millions of parody videos on the Internet, and we’d watch those, the latest parodies. We had a lot of attention focused on computer screens those days.
Back at Napster, the team receives word of the lawsuit.
Kessler: People were sort of stunned initially. On the technical side, we had so much to do that we just had to get back to work.
Aydar: Management portrayed it more as a negotiation tactic, more than any major threat. It wasn’t anything we were going to be able to control. In my mind, I was just sticking to Shawn’s original vision of, “Let’s build a really good product that would be valuable to everybody.” And it might take some time for everybody to see the value in it, but once everybody sees it, then any issues would go away.
Richardson: We got sued several times. The songwriters sued us too. They sued me personally, by sending something to my home address. And that scared the shit out of me. I had finally made enough money to buy a really nice home in Palo Alto, and all of a sudden, boom. All of it could be gone.
Pulgram (Napster’s attorney): The first job was: keep Napster open. The RIAA had sought a temporary restraining order, wanting the judge to shut down the company immediately. Our strategy at the outset was to get breathing room to prepare a defense. Get breathing room to get some funding. A key and early purely procedural victory was to get the preliminary injunction hearing essentially put off for seven months — to get funding, to get a chance to prepare the defense.
Napster gets the hearing postponed until that summer, when it will have to fight against a preliminary injunction — or an official judge’s order — in this case to halt Napster’s service. Meanwhile, the company courts investors to help it fund its legal battle.
Brooks: We were doing the rounds of the Sand Hill Road VCs, and we had a presentation to make with Kleiner Perkins. Neither of us had ever met John Doerr and the meeting was with him and a couple of the associates. And we were told, in no uncertain terms, not to expect anything good: We would be faced by an absolute poker face. He would probably sit in a corner of a room, not react, and we would never know what he was thinking. He was unlikely to ask a lot of questions, and that we shouldn’t take any of that basically as either a good sign or bad sign.
It all sounded incredibly intimidating, especially for me because it was the first time I’d ever done a financial road show in my career. And I believe it was very early in the morning, like 7:30 in the morning. We walk in and he’s at the table — and he’s a huge music fan. He’d been a DJ, I believe, in college as well, just as I had. So immediately we got into a conversation about music, and the passion people feel about music. And he was animated and participatory and so excited about Napster. It was an amazing meeting. And when we left, he hugged us both. It was not what we’d been led to expect from a Kleiner Perkins meeting.
After meeting with top tier venture firms, small San Francisco-based firm Hummer Winblad — led by John Hummer, a 6’10” former NBA center for the Seattle SuperSonics — emerges as the surprise frontrunner, but not without a few roadblocks.
Conway: The Webby award was the award to win at the time, and the ceremony was in the Masonic Auditorium in San Francisco. One year Napster swept the Webby — they got like 3 Webby’s. And Sean Parker and Shawn Fanning walk out of the ceremony ecstatic. Going into the night they thought we were getting funded by Hummer Winblad, and during the ceremony Hummer Winblad pulled out of the financing. And this is when the company was out of money. They had spent all of the angel money. So I corralled them and we stood in the corner of this huge party and tried to figure out how to put the financing back together. And we were successful. That was a Thursday night, and by Monday Hummer Winblad had reengaged and funded the company. Otherwise the company would have gone out of business that weekend. But no one knew it. And Hummer Winblad didn’t know it either. We didn’t tell them how out of money we were.
After much debate, Hummer Winblad officially comes aboard. With anticipation to the lawsuit building, Napster becomes even more high profile.
Brooks: The press could say anything they wanted about us. We thought, just say “free music” and print the URL.
Richardson: One of my friends says it was like doing three years of work in nine or ten months. It was insane. You did not know if Howard Stern was going to call. I mean, one time it was, “Howard Stern is on the phone, he’s looking for Shawn.” Then the next second, a friend of mine — who’s a respected venture capitalist — calls and says, “Eileen, I just heard that the CIA is coming. They’re going to confiscate all your laptops,” And I’m just like, “What? This is insane.” In one hour, you get both of those calls.
Musical artists become divided over Napster. Leading the two camps are the anti-Napster Lars Ulrich, drummer for heavy metal band Metallica (who also sued Napster separately) and pro-Napster Chuck D, frontman of hip hop group Public Enemy. The two even debate the topic face-to-face on Charlie Rose’s talk show in May 2000.
Chuck D: I applauded what Shawn Fanning was doing 185%. It was a cause. I thought he was the one-man Beatles. I thought what he had done with Napster was one of the most revolutionary things ever done in music, period. ‘Til this day. And I wanted to support that. I wanted to be somewhere around that.
To me, I thought that artists had no clue what the fuck was going on. I’m not saying that about Lars. I think Lars very clearly knew what was going on. But many other artists didn’t give a fuck [to find out]. They were in a haze.
Richardson: It was really cool meeting the artists who got it. But I also had to sit across a stage from Jimmy Page [guitarist from Led Zeppelin], who hated my guts, at some conference in New York City. It was me, Jimmy Page, Chris Robinson [singer from the Black Crowes], and another Internet CEO. The organizers came into the green room and said, “Internet CEOs, get out. The stars are coming in.” And we had to sit outside in a hallway on boxes.
Rosen: I was always getting calls and compliments and thanks from artists — even artists that went out in the press and said, “Oh yeah, I think Napster is so cool.” Tom Petty’s people were calling to get his music offline, then he was quoted in Billboard or something saying how great he thought Napster was. But that’s how it works. We expected that.
On May 24, 2000, the House Small Business Committee meets to discuss the popularity of online music services. Chuck D is one artist who speaks in support of Napster. He even writes an op-ed in the New York Times declaring Napster “a new kind of radio.”
Chuck D: My job was to try to keep their name out there. I wanted them to be such a big, major part of the industry. I wanted them to be the new industry. I was just down with that revolution. And it is a revolution. Just, at the end of the day, these same lawyers and accountants are meddling in that shit.
Soon changes abound at the company. Eileen Richardson — who says it was her intention only to serve as CEO for a few months anyway — resigns, though some attribute it to pressure from Hummer Winblad. Hank Barry, a partner at Hummer and a lawyer by trade, becomes Napster’s new interim CEO.
Hank Barry: A lot of people comment that it was unusual that I was a lawyer and I had this operation or role as the CEO. But it’s also true that the legal controversy around the company was their biggest operational issue. So my main goal going in was to try to help them both to operationally get the business to a businesslike setting and negotiate with the record companies, while at the same time defending the litigation.
Richardson: I was leaving anyway, but it could have been on better terms. I was kind of glad to wash my hands at that point. There’s nothing else I can do but tell you how I feel.
Brooks: The management style was much more hands off when Hummer came in and Hank became the CEO. A lot of Hank’s attention was on the legal actions. He wasn’t there a lot of the time. A lot of the employees didn’t really get a chance to know him at all. And that’s a really strange feeling, especially when you’re used to a really effusive, bubbly CEO. And that switchover, it wasn’t really a friendly switchover.
I think people felt really out of touch. Decisions were being made at the management level that the rest of the company didn’t know much about. And that made people feel disenfranchised, and it also made people feel scared, because they did not know. There were people who would say to me, “Wow, all I know about what’s going on in the lawsuit is all I read in the news.”
Kessler: When Hank Barry came on board, he, for whatever reason sort of treated some information on sort of an as needed basis, so there were a bunch of things that only executives would be involved in and not the whole company. So it was interesting to be privy to some but not necessarily all of the goings on.
In the case’s discovery process, when each side gathers evidence, an early internal email written by Sean Parker catches the eyes of attorneys: “Users will understand that they are improving their experience by providing information about their tastes without linking that information to a name or address or other sensitive data that might endanger them, especially since they are exchanging pirated music.” (Provided to Fortune by Frackman.)
Frackman: Buried in those documents was this email. And I believe that was the email that we blew up for this hearing, and provided to Judge Patel [the case’s eventual judge].
Knowles: I remember thinking, “How many cases do you have an email that’s essentially a confession?”
Pulgram: That was an awfully dark day. Because you see the way that 18-year-olds writing about this piece of software was going to play out. The way it was going to be scraped off the page and into the record. No good could come out of those statements no matter how early and anticipatory they were.
As the court date nears, the Napster team prepares for depositions — out of court testimonies from each of the witnesses, including former employees.
Richardson: They were two full, solid days. I remember doing really well the first day. And [Pulgram] was like, “Wow you’re amazing.” Because I’ve got a big mouth, and he thought I’d be saying a lot of stuff or whatever. It’s hard to go through those. Imagine eight hours of all that legal, formal bullcrap. But then by the second day, I started getting really comfortable and making jokes. And he goes, “Can I talk to…I’m going to talk to my client right now.” And we stand outside and he says, “What the hell are you doing?” And I say, “What do you mean?” He says, “Answer the question: Yes. No.”
Brooks: I remember I had just gotten a puppy. And this puppy went everywhere with me. It had abandonment issues. So I would fly back from LA to my rented apartment in San Mateo, and I go to the depositions. And I would sneak this puppy into these law offices.
Pulgram: It was a lot of long weekends in hot office buildings with air conditioners not functioning on Sundays spent getting ready for stuff. When you go back and look at the fact that your talking about 19, 20, 21-year-olds, carrying the torch and being scrutinized for what they said in dorm room write ups, you get a sense of what the company was up against. However smart those guys were, it’s a little different than preparing a 30 to 40-something seasoned CEO. [Parker leaves the company soon after his RIAA deposition.]
Napster ups the ante by adding star litigator David Boies — already famous for pummeling Microsoft in an antitrust case — as the company’s lead attorney.
Barry: David Boies wasn’t at the office when we first called his law firm. His kids told him that he needed to take the case. There was a sense that this was going to be a protracted legal battle. I thought going in these were going to be important legal questions that generally take a long time to sort out. So I was trying to build a legal team that could scale and be around for a long time.
On June 26, 2000, the case goes to San Francisco district court, presided over by Judge Marilyn Patel. There is a circus atmosphere at the courthouse.
Knowles: Judge Patel had a courtroom that was really quite small — her regular courtroom. And it was clear that there was going to be huge attendance and media coverage, so there was an overflow courtroom with a feed. I don’t remember if there was video and audio, or just audio. There was huge anticipation for this.
After hearing arguments, Judge Patel takes a short recess and returns to the courtroom. She rules in favor of the record companies, forcing Napster to take down all copyright infringing material from the service. The ruling surprises everyone — not because of the decision itself, but how quickly she comes to it.
Knowles: She disappeared for a while and then she came back and said she was going to rule. And everybody was like, “Really? You’re going to rule?”
Frackman: I was caught by surprise because afterward she turned to me and said, “Mr. Frackman, when do you suggest that this injunction become effective?” And I started to walk from the counsel table, and I was looking up, as it turned out, at the clock, trying to stall for time. And Judge Patel said to me, “Well I see you’re looking up at the clock, and not at the calendar.” And I replied to her, “Yes your honor, I think it should become effective immediately.”
Rosen: I remember being surprised by how many cameras were there. And I think CNN took it live. I was surprised by that. That was before I was in cable news. [Rosen has been on CNN as a pundit.] I don’t know what they cut away from. But they took the verdict and our press conference live as soon was we got out of the courthouse.
Knowles: The group of lawyers and clients from our side went to the Jardinier, a restaurant in the Civic Center that had a piano in it. My colleague Julie Greer, who was a musician in a former life, was there too. I told her Cary Sherman, the head of the RIAA, is a pretty accomplished pianist. I said, “You guys should play and sing.” She said, “No way!” I said, “Here, have a martini. Let’s do it.”
Julie Greer: We did a couple of jazz standards. One of them was a Billie Holiday song, “God Bless the Child.” I think I sang two and then the restaurant guys made us stand down. We were distracting the patrons.
Brooks: Info@napster.com and firstname.lastname@example.org both came to me, which caused a lot of havoc with my laptop and killed one of my Blackberries. I literally saw it fizzle in front of my eyes. It was the day the injunction came down, and I foolishly had forgotten to not forward those mailboxes to my Blackberry. This was the first Blackberry, the little thing that looks like a pager. We got something like 10,000 emails in a minute. I was meeting with Hank Barry and another investor. And there’s my Blackberry sitting on the table between us, and it started to do that little hop-vibrate thing across the table that the old Blackberries did. And it hopped and it hopped and it buzzed and it buzzed, and all of a sudden it basically flipped over on it’s back and gave up the go. And it never worked again. It was a hilarious moment in device history.
Napster’s legal team quickly gets to work on an appeal to the Ninth Circuit of the Supreme Court, asking for a chance to overturn Judge Patel’s decision. The company meanwhile talks about next steps.
Kessler: I remember discussing with some of my fellow employees, maybe we should go into used CD swapping, basically building an online market for used CDs, things like that.
Barry: I was at the venture firm office, and we were having a conference call with David Boies and others about how to shut down the company. I think Eddie was on the phone. The lawyers were in a conference room. We were going back and forth about how mechanically to do things, and one of the lawyers said, “Hey, wait a minute. There’s no reason for this phone call to continue.”
Pulgram: Someone runs in with a copy of the Ninth Circuit’s order, staying the injunction, stopping the shutdown, and keeping jobs of all those people who were working, keeping the company alive. It was as ecstatic and relief filled a moment that I’ve had practicing law for 25 years.
Aydar: It was euphoric when we got the stay. Shawn was really excited. He practically tackled me, he was so excited. It was a big deal. We thought that we turned a corner there. But it didn’t turn out that way.
Barry: I left the venture firm and drove down to the company. I got there and there was somebody from Fortune there–somebody already scheduled to be there, who was writing an article, and just happened to be there that day.
Ritter: The stay was exuberance. It was rejoicing. It was dancing. There was actual nerd dancing. It was a great deal of wiping the brows.
I was not that happy. And I didn’t fully understand why. So I smiled and I high-fived and did whatever. But it was different for me than I think for most others. It didn’t seem like it was over. Someone fired a bullet at us, and missed. They still had ammunition. They were still accumulating guns, metaphorically speaking.
Meanwhile, the music industry reacts.
Frackman: The way I used to describe it to people was that I had barely put my tooshie down on the chair when the Ninth Circuit granted the stay.
The appeal means the company has another six months to keep operating and bolster its defense. User numbers balloon as media attention reaches a fever pitch.
Kessler: Those were crazy times. Basically, it went from thinking we were going to shut down immediately — that we were going to have to find jobs for the employees — to the realization that we weren’t going to have to shut down, at least right away. We had this incredible amount of publicity. From a technical side, that got us refocused on getting the service running.
To drum up goodwill, in July 2000 Napster throws a free concert tour with rap-rock band Limp Bizkit as headliner — a rare occurrence of successful “dealings” with the music industry.
Brooks: I had one conversation with Jimmy Iovine [founder of Interscope Records, Limp Bizkit’s then-label]. He didn’t explicitly endorse it. I said, “You’ve got to be thrilled that this tour is happening a few months before this major album release.” He laughed and he didn’t say anything. The attitude from the label was: We don’t know that you’re doing this.
Barry: We were in the process of talking to everyone–Universal Music, et cetera. We had lots of meeting principally with Edgar Broffman [then-head of Vivendi], who had sort of taken the lead on behalf of the labels.
Pulgram: I think Hank was always trying to get to a deal, and the record companies were never willing to entertain one that was realistic from the prospects of the company.
Rosen: By the time the litigation was filed and Hummer Winblad brought in Hank, it was almost too late from that moment. But Hank gave it a valiant try to come up with a licensing structure. But he came close. He came close.
On July 12, 2000, the Senate Judiciary Committee holds a hearing to discuss intellectual property rights and the Internet. Senator Orrin Hatch presides, and representatives from all sides attend, including several musicians.
Barry: Manus Cooney [then chief counsel for the senate judiciary committee, and later a Napster employee] and he said, “We want you to come and appear at this hearing.” And I thought, “Oh my gosh, this is not good.” So I said, “Who else is going to be on it?” And he mentioned Roger McGuinn from the Byrds, and I always wanted to meet Roger.
For both Napster and the record industry, the stress of the lawsuit takes its toll.
Brooks: We were really becoming a company of litigation, and not an innovative, disruptive technology company, which is what we wanted to be, and what we were born as. This is the part where I get sad.
Frackman: It was the only time I’d ever traveled with my wife and we had separate rooms. I had my own room because I had boxes and boxes full of stuff. Every evening, I would continue to refer to materials.
Knowles: I remember sitting there at my computer and realizing I’d exchanged literally hundreds of emails in a day with all these other lawyers for one case. It was all just very intense.
Kessler: I’d never worked at a company where every day on the radio on the way in, on this 45 minute drive in, I’d be hearing about Napster the whole way up. And then every other day there’s an article about your company on the front page of the New York Times. This was very usual. And I now work at Google, so I’m now getting a little bit more used to it. But back then it was really odd for me.
To deal with the overwhelming press scrutiny, Napster brings in Ricki Seidman, a consultant with TDS Communications, who previously served as White House deputy communications director for the Clinton administration.
Ricki Seidman: One of the most interesting things to me, looking at it from 30,000 feet even at that time, was that the intense pressure on Shawn Fanning and Hank was, at points, at least as much as the president might get on a day-by-day basis.
By the end of summer 2000, morale is waning at the company, and the team does what it can to lift spirits.
Brooks: During the Limp Bizkit tour, we threw a picnic in the back parking lot, rented an old school bus and just carted our employees to see the band in San Jose. They got to meet the band backstage. Depending on the age of the employee, either the employee was excited about it or their kids were. I had been there a while and had really begun to see the change. Somebody came up to me and told me my title should be chief morale officer.
Aydar: It was one of those things that was very slow and happened over time. The longer it went, the more it became apparent that, yeah, this might not work out. It was hard to keep up spirits.
Kessler: Sometimes my 3-year-old daughter would come up to the office. We had a full drum set that Hank [who was a former musician himself] had donated and brought in. And so Emily — that was my daughter’s name — would sometimes go up there and she would sit at the drums, and beat on the drums and have the greatest time.
As the possibility of actually shutting down sinks in, the team realizes another unsettling outcome: What if we actually win the lawsuit? Their idea is to turn the business into a paid subscription model.
Brooks: When we bought Macster — Napster for the Mac — their interface was so much better than ours. We had just never put our energies into creating that better, gooier user interface. Everybody really wanted to.
Our idea was, if we want to survive, we have to keep as much of our user base as possible. In order to do that, we needed them to keep the client [software application] on their desktop, so we could turn this back into a music distribution business. What really bothered us was we were trying to win this battle and we had absolutely no plan for what we were going to do if we did.
Aydar: All the while, the licenses from the labels hadn’t been procured. And management was assuring us that those licenses would be procured and they would be in place in time, and the only thing to hold it up was our ability to build a service. So we built a service. And it didn’t launch. People felt like we had worked really hard. We had done our part to get everything in line. I don’t blame management for not being able to get the licenses. It was not a time where the labels were willing to give licenses to a service called Napster.
On October 2, 2000, Napster and the record industry argue over an appeal in front of a three-judge Ninth Circuit panel. Coincidentally, one of the judges on the panel had ruled in Frackman’s favor during his swap meet case five years before.
Frackman: Lawsuits always take twists and turn, or frequently do, and this was one of them. In a sense I had been preparing for this case for basically my whole career.
Conway: After the first Ninth Circuit court hearing, here in San Francisco, there was a massive press conference, and lots of people speaking at the mic. And Shawn Fanning is very, very shy — never wanted to get near the mic. So I kind of stood in the back with him listening to everybody. And the reporters obviously really just wanted to hear Shawn fanning. But he was in the back and happy to be in the shadows. And he was very proud of himself because he wore a suit for one of the very first times, and he had to borrow a suit. And we were laughing because the pants were too long and were dragging on the pavement. So it shows that in the middle of all this hoopla — and there had to be a hundred cameras there — Shawn was unaffected enough to be proud of the fact that he put on a suit.
In a stunning move on Halloween 2000, German media company Bertelsmann — which owns the record label BMG, and had been one of the Napster’s great adversaries — announces an alliance with the company, giving them reportedly a $20 million loan.
Rosen: The rest of the companies were pissed. Bertelsmann called me before the announcement and said they were doing it. And I think Middelhoff was looking to do two things. I do think he thought he was going to get them legal, as it were. But I also think he thought he would make a lot of money from it. And I knew that the minute Bertelsmann did that, that the other companies would never license it.
I remember Thomas Middelhoff called me up and told me what he was doing, and then Strauss Zelnick [then Chief Operating Officer of BMG] called me up and said, “I cannot fucking believe that Bertelsmann is doing this.”
Thomas Middelhoff (then-CEO of Bertelsmann): The reaction was surprising. Because we thought — and I especially thought — that I could convince the other record labels to join us, because we were open to such a venture between Bertelsmann and the other major labels in the music business. But their perspective was: This is a power game — especially Universal’s position. It was, “We are the biggest record company in the world. We have to own the biggest part of it, and not Bertelsmann.” And surprisingly enough, in the end, we couldn’t come to terms with the other major music labels.
In February, Napster and Bertelsmann make headlines again by holding a press conference in which they offer the record industry $1 billion dollars to settle the case. The music labels balk at the offer.
Barry: In private, the record labels were looking at [our proposals] and having quite civil discussions. But in public their statements were, “Well, Napster doesn’t have any business model. Napster doesn’t know what it’s doing,” And so when we got to February, we said, “Let’s have a press conference and let’s just go through all of the modeling that we were showing to the record labels in a way that people would understand that we were doing things in a very serious, businesslike way.” I was not a fan of the billion dollar offer. I was afraid of exactly what happened: that it became the focus of attention.
Rosen: I think it was Grammy week, so we were all in LA. Look, a billion dollars was significant. At the time it was a $35 billion industry — a billion dollars was somethin’. But I think that Bertelsmann had so burned bridges at the time and people didn’t trust their negotiators that I don’t think it was ever taken seriously.
On February 12, 2001, the Ninth Circuit rules. The panel upholds most of Judge Patel’s decision, siding with the record companies. Frackman is at RIAA headquarters in Washington, DC, to hear the decision with his clients. Julie Greer (the young lawyer who sang at the restaurant the night of the first ruling) is tasked with picking up the written decision from the courthouse and relaying the news to the rest of the music industry’s team.
Greer: When I got there in a cab, there were reporters lined up with cameras et cetera. So I dressed down because I didn’t want anyone to know I was a lawyer. I wore jeans and a t-shirt. I didn’t want to get mobbed by reporters when I came out. I just wanted to be under the radar.
Knowles: Our opposing counsel [Pulgram] was down there doing the same thing. So [Greer] just sat there on a bench at the courthouse flipping to the end of the decision, with her opposing counsel right next to her doing the exact same thing. Both of them on their cell phones, with several people on their side of the case going, “What’s the decision?”
Frackman: There was a whole pile of us in the conference room as the opinion was being I guess in those days faxed through to the RIAA offices and being distributed. And the television was also on. And I can’t remember whether we saw the opinion first or we heard the news on the TV that we had won. The reaction was: Break out the champagne.
Rosen: I remember we very quickly arranged a press availability. I think we went over to the Four Seasons.
For Napster, the mood is somber.
Brooks: I think for most of us it was obvious we were going to lose on some level, just because copyright law was so woefully inadequate in terms of addressing the Internet. Simply in terms of that, no judge was just going to let us do what we were doing without some kind of, at the very least, firm slap on the wrist. It just wasn’t going to happen, because then it was just going to become the Wild West.
The case finally over, it had been fraught with emotion the entire way.
Rosen: I remember being outside a courtroom in San Francisco, and Shawn Fanning and I were both in a hallway. And you couldn’t help but admired him from afar, and liked him, and even liked the way he handled himself during the whole huge amount of publicity that rained down on him. We had both been interviewed by Charlie Rose the week before, and Charlie had told me what a nice person he was. And we found ourselves awkwardly together at one point in the hallway outside the courtroom and started talking. Our conversation was basically, “How did it come to this?” And we were both sort of lamenting what felt like the inevitable future of this great technology. I could definitely feel his sadness, and I knew he felt mine. It was sort of a private depression among us.
Frackman: I don’t know whether this is apocryphal or not, but after the second preliminary injunction hearing, when David Boies got on a plane to go back home, he was greeted with a round of applause. Other than from my own clients, I don’t think I was ever greeted with a round of applause based on anything that happened in a lawsuit.
Knowles: It had been very hard fought, adversarial. It wasn’t like it is now where people would be more likely to come to the table, and their might be some deals and there might be some posturing, but people know the lay of the land. This was a brand new thing, and there was a lot of emotion around it.
Frackman: My son was in high school then, and he was in a technology club. He asked me if I would talk to the club — a group of high school kids. Not the most receptive audience. As it turned out, it was an interesting talk. They were not combative, but they were not happy. And as I finished speaking, I said, “Come on up if you have any questions.” And I saw this high school kid kind of shuffling up toward me with his head down. And he looked at me, and I remember this, he said, “The end of Napster is the end of the world.”
IV. THE SHUTDOWN
When Judge Patel initially ruled against Napster, she didn’t explicitly order a shutdown. Instead, she ordered that all copyright-infringing files be taken down from the service — a herculean task that would leave the service barren. In a last ditch effort, Napster tries to take down all infringing material in hopes of keeping users around long enough to transition them into a paid subscription model.
Kessler: We met with the technical team and they basically said [taking down all infringing files] is not possible. We can’t do this. Then I went home and did some thinking, and I wrote some notes on a napkin and said, “No I think there may be a way here.”
We built an editorial system where we could enter manually alterations. We hired probably 50 temps to come in and search for all these filenames and song titles from a list that the RIAA and labels had given us. So they would type these queries into the system, and if they found them, they would enter whatever variation in names they found into the system. Then we included those [to the RIAA’s black list] as well.
The team works with Gracenote — a metadata company with a database full of artists’ names and common misspellings — to purge Napster’s index of filenames.
Stephen White (then-contract worker at Gracenote, now President): The band Aha was a big one. They had a lot of different spellings — capping the “A,” or adding a hyphen or a space.
Even with the new filtering efforts, clever users still manage to get infringing files onto the system.
Barry: Rather that put the company in a position where people could be at risk, we stopped the sharing.
Kessler: If the requirements are that there can be absolutely no infringing content ever, I can get it as close as possible, but I can’t guarantee that there isn’t one piece of infringing content. We said, we basically don’t have a choice, and we shut down. It was really a tough decision, and a tough day.
On July 1, 2001, Napster shuts down its service.
Aydar: By the time we ultimately turned everything off, we had not only been beaten down and demoralized — and our integrity had been questioned in a public court regarding the filters and their efficacy. So by the time we shut it off, it was like, “good riddance. Shut it off.
I don’t remember the particular day we shut it off. I know I’m the one that shut it off. To be honest with you, I don’t remember. Maybe it’s just one of those things you block out. I don’t actually remember doing it, though I know I did do it. I’ve been told I did it.
Kessler: We had a set of servers that would redirect traffic from the Windows and Mac applications to a specific backend service that would run the Napster back-end. What we did basically was take those front-end servers offline, so the clients could no longer connect up to the back-end. We then powered down all the back end servers. We did it from the office, then later went to the data center to make sure everything was turned off.
Turned out, we found out accidentally sometime later that one of the servers that had been turned off had accidentally been turned back on. So there were a few users that had found a way to — not using our normal software — access that server.
When we decided to shut down it was the end of an era. We had a company meeting and people asked questions. They were frustrated; they were bummed. But I think in general they respected that we had done the right thing.
Without its product, the company is a carcass. By 2002, Napster is on the brink. It is up for bankruptcy and goes on sale for liquidation. Hank Barry is replaced as CEO by Bertelsmann employee Konrad Hilbers, and Middelhoff is replaced by Gunther Thielen, another longtime employee for the German company. Bertelsmann, in fact, emerges as a potential Napster buyer, but that acquisition deal crumbles and is blocked by the courts, citing conflicts of interest.
One by one, each original executive leaves until only Shawn Fanning remains. He finally leaves in 2002 to found Snocap, a legitimate digital content registry. Roxio, a small computer hardware company, eventually buys the company’s assets, and re-launches as a tepid subscription service. Ownership changes hands twice more after that — first the electronics retailer Best Buy purchases the company, then finally, in 2012, Rhapsody. Last January, the digital music competitor bought the brand, absorbed its 8 million users, and finally silenced the once-boisterous blare of the company, by then just an echo.
Over a decade later, the players in this story still carry around the weight of the experience. Asking what went wrong is an exercise that falls somewhere between prudent and masochistic, but some at the company think the problem stemmed from hiring.
Sean Parker (Napster co-founder): [Speaking at Le Web conference in Paris in 2011] We hired all the wrong people. We hired the people that were really not competent executives. But I was too young and naïve to distinguish between a competent, seasoned executive, and someone who just had a whole bunch more experience than I did and was able to communicate in a polished way, and impressed me. And Shawn Fanning and I were both easily impressed at that moment in time. And as a result, we hired a lot of really crazy people.
Ritter: At a meta level, if we had better people involved from the beginning, we would have had a different outcome. If there had been less turmoil and drama and tragedy, the company would have been better able to focus on its external enemies. Unfortunately, it had a lot of internal strife — outside the engineering culture, which drove everything. You would think the truly fastest growing Internet startup in the world would attract the best people. But it did not. It attracted the worst people.
Since the original service’s shutdown, the technology world has made a few inroads with the music industry. On April 23, 2003, Apple launched the iTunes Music Store. On July 14, 2011, the on-demand music service Spotify opened for business in the United States. But many still lament the loss of Napster’s unbridled possibility, while others are just happy to have been a part of it.
Rosen: This word “innovation” is thrown about a lot. And that’s because folks who work in technology are used to obsolescence. But you don’t tend to feel that the best Bob Dylan song will ever be obsolete. Or that you’re going to get the Bob Dylan 2.0. There are certain timeless things that you want to keep going. Steve Jobs used that analogy with me once. And of course it was a Bob Dylan reference.
Pulgram: The opportunity to take the power of this and harness it was one of the great lost opportunities for the music industry. That early energy, that value of the user generated nature of this, that charisma was something they were ultimately set on destroying. The alternatives haven’t played out nearly as well.
Frackman: It gave me a videotape of myself arguing in the Ninth Circuit, which I have never looked at. But I intend to pass it onto my grandchildren when I have them.
Chuck D: Lars brought his two sons out to a concert we played in Aspen. We talked. It was a good talk.
Ritter: The saddest thing was not being able to use Napster. Why? Because of principle. Because it would be. Fucking. Stupid. I was not going to be the guy — and no one on my team would be the guy — that sunk the company for potentially infringing. There’s a whole avenue of legal shit that could be foisted on us, and was, for using it.
Aydar: The early days are where the fond memories are. Work was fun for us. It’s hard to look beyond the work because it was fun for us. It’s hard to replicate. You’ve got some skills and talent. You’re making an impact with these people who are your friends.
Ritter: I’ve often likened it to that epic bender in college. You go out and rage and you party and there’s all this crazy shit that you’re seeing. People doing crazy shit, and you’re a rock star for a night. And then you come home. And you wake up at 1 o’clock in the afternoon the next day. And you slap your forehead with this killer headache. And you groan, oh what just happened? And the experience alone is the value for me.
Richardson: I remember talking to Shawn Fanning later. After everything, after they’d gone bankrupt. And I said, “God, just maybe if we had done some stuff differently, we could have made it.” And he said, “Eileen, we didn’t stand a chance. There was no way on earth that the RIAA was not going to make an example out of us. They had to.”
Rosen: I guess I would be surprised if the overarching sentiment for a retrospective of Napster wouldn’t be regret, from all sides. Many would argue nothing has been as cool since, right?