Napster

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NAPSTER

Napster achieved widespread celebrity as a peer-to-peer file-sharing service that allowed people to trade compressed MP3 computer files for a wide range of popular music. Napster's browser software, which was installed on more than 40 percent of the world's personal computers in early 2001, enabled users to locate, share, and swap compressed MP3 music files. Users simply sent in a request for a song. Napster software then checked its database and located the MP3 file with the song on another user's hard drive. The MP3 file containing the song was then sent from one user to the other.

Napster's file-sharing system can be credited, at the very least, with motivating the major record labels that effectively control the distribution of popular music to find alternatives to their hard copy, full-price music distribution system. Napster's popularity made the recording industry realize that it would need to find a way to distribute music to consumers in other formats, notably online over the Internet, while still protecting its intellectual property.

Napster's wildly popular service was also credited with boosting the sales of a wide range of computer gear, including CD burners, portable MP3 players, and personal computers equipped with fancy speakers. By 2001 CD burners had become standard equipment on 70 percent of all computers sold, according to The Washington Post. Napster was also a factor in the growth of broadband services, such as cable and DSL Internet service, which grew by 150 percent in 2000. A broadband connection made it possible to download songs much faster than with a dial-up modem. The Consumer Electronics Association, in support of Napster, argued that closing Napster would discourage innovation in the marketplace.

NAPSTER SOFTWARE DEVELOPED BY SHAWN FANNING

Before the advent of Napster it was very difficult to locate and copy music files on the Internet. MP3 technology, which made it possible to compress audio tracks on CD into digital computer files that were small enough to copy and download, was invented in 1987. While MP3 files existed on the Internet, there was no central directory, and copying the files—once they were located—was a cumbersome process.

In early 1999 Shawn Fanning, a student at Northeastern University, dropped out of school to complete work on a software program that would simplify the process of finding and downloading MP3 files on the Internet. His program combined the instant messaging capability of Internet Relay Chat; the file sharing capability of Windows; and the search capabilities of Internet search engines. Contributing ideas to the development of Fanning's software were Internet friends Sean Parker and Jordan Ritter.

When it was introduced in mid-1999, Napster software could be downloaded for free from Napster's Web site. The software would automatically search hard drives where MP3 files were located and add them to a centralized database of available music. Napster's Web site also featured chat rooms where people could discuss music, thus helping to create a community of users.

Fanning initially distributed his software to 30 computer and music friends and asked them not to share it. Within a week, however, the popular software had been downloaded by 15,000 people. In August 1999 Fanning announced that the number of users quintupled in one week on the file-sharing service. It was the beginning of a landslide of music fans coming to Napster to download music whenever they wanted to, at no charge. While consumers may have thought they had wrested control of the music's distribution from the record labels, two groups would rise up to oppose Napster's song-swapping service. One group included artists whose copyrighted songs were being downloaded. They felt they were entitled to some form of compensation, according to existing copyright laws. The second group consisted of the major record labels and the recording industry, as represented by the Recording Industry Association of America (RIAA).

RECORD INDUSTRY OPPOSES THE CONTROVERSIAL SERVICE, 1999-2001

In December 1999 the major record labels—including Universal (a subsidiary of Vivendi), Sony Music, Warner Music, EMI Group, and BMG Entertainment (the music division of Bertelsmann AG)—together with the RIAA, brought a lawsuit against Napster claiming copyright infringement. The RIAA listed among its concerns the non-payment of royalties and the loss of revenue through lost sales of CDs. The RIAA claimed that the loss of financial incentives would prevent musicians from creating new songs.

Napster's position was that it only provided the software for people to share music files. No copyrighted material ever appeared on Napster's computers. Rather, the MP3 files were swapped directly from one user's computer to another. Napster also argued that the added exposure of certain songs would actually increase CD sales for some artists.

While the lawsuit worked its way through the courts, Napster was the fastest-growing home application for the first half of 2000, according to Media Metrix (now Jupiter Media Metrix). The number of Napster users grew from just over 1 million users daily in January 2000 to 6.7 million in August 2000.

In April 2000 heavy metal rock group Metallica and rap artist Dr. Dre filed separate lawsuits against Napster for copyright infringement. In May federal Judge Marilyn Hall Patel ruled that Napster was not entitled to "safe harbor" under the Digital Millennium Copyright Act. In July Judge Patel granted the RIAA's request for a preliminary injunction against Napster and ordered Napster to shut down. Two days later, the 9th Circuit Court of Appeals stayed Judge Patel's injunction, allowing Napster to stay in business. After hearing oral arguments in October, the appeals court would not issue a ruling until February 2001.

Meanwhile, Napster gained support from an unexpected quarter. Breaking ranks with the other major record labels, Bertelsmann AG formed an alliance with Napster in Octboer 2000 and became its chief financial backer. Under the alliance Bertelsmann agreed to help Napster develop a legitimate version of its service, such as a subscription or fee-based service. Once a new version of Napster was developed, BMG Entertainment would drop its copyright infringement suit against Napster and make its recording catalog available to the service. At the time Napster had about 38 million users. Commenting on the alliance, Bertelsmann chairman and CEO Thomas Middelhoff said, "Napster has pointed the way for a new direction for music distribution. We believe it will form the basis of important and exciting new business models for the future of the music industry." Some analysts believed the alliance would accelerate the recording industry's acceptance of legitimate file-sharing services.

In January 2001 Napster added a link to CDNow, which was owned by Bertelsmann, in part to blunt criticism that MP3 downloading was hurting CD sales. Napster also added instant messaging and message boards to promote the use of Napster as a community to discuss music as well as to share files.

According to a report from PC Pitstop, Napster's integrated browser and communication tool was installed on 38 percent of all personal computers worldwide in March 2001. That marked a decline from February, when it was to be found on 40.5 percent of all PCs, the highest level of penetration achieved by Napster. A year previously, in April 2000, Napster software was to be found on nearly 15 percent of all PCs worldwide. The study found that the leading alternatives to Napster in 2001 were AudioGalaxy and BearShare.

On February 12, 2001, the appeals court ruled that Napster must halt the trading of copyrighted songs. A week later Napster announced it was willing to pay $1 billion to license the content of copyrighted songs, an offer that was dismissed by the RIAA. The appeals court sent the injunction for revision back to Judge Patel, who had ruled that Napster might be liable for knowingly encouraging and assisting large-scale copyright infringement by its users. The appeals court also asked the record labels to provide Napster with a list of songs that must be removed from its directory.

In March Judge Patel issued a preliminary injunction against Napster that required it to block copyrighted song files. Napster complied with the order by barring the trading of copyrighted songs on its service. Over the next several months the service experienced a sharp drop in usage, from an estimated 2.79 billion songs downloaded in February 2001 to 360 million in May. Later, on July 2, Napster voluntarily suspended file-sharing and shut down to fix technical problems related to its latest filter upgrade. At the time it shut down, Napster's usage had declined from an average of 220 songs shared per user in February 2001 to an average of 1.5 songs per user. Former Napster users were simply going to other song-swapping services.

At first Napster attempted to filter copyrighted songs by blocking them based on song titles. However, misspellings and other errors meant that many copyrighted songs were not being blocked. Following criticism of the blocking system by the recording industry, Napster upgraded its efforts to screen copyrighted songs by using digital fingerprints. Each downloadable song was given a unique fingerprint when it was added to Napster's database. If Napster's software did not find the fingerprint, the song could not be downloaded. Napster claimed that its new filtering system was "99 percent" effective in blocking the downloading of copyrighted songs for which it did not have permission to use, but technical problems with the filtering upgrade caused the service to shut down on July 2, 2001.

Meanwhile, there were other developments in the online distribution of music. In April 2001 the music industry announced a new music subscription venture called MusicNet. Participating companies included RealNetworks Inc., AOL Time Warner Music, EMI Group PLC, and Bertelsmann AG's BMG division. MusicNet was created as an intermediary to license the music of AOL Time Warner Music, EMI, and BMG, using RealNetworks' secure technology. America Online and RealNetworks were MusicNet's first two licensing affiliates. Duet, formed by Vivendi Universal and Sony Music, was another recording industry service that was created as an alternative to Napster.

In June, Napster became the third distribution partner for MusicNet. The three participating major labels agreed to permit their content to be carried on Napster, once the music-swapping service found a way not to infringe on copyrighted material. Napster said that MusicNet would be one of several options offered by Napster once it launched its new fee-based service. At the time Napster had more than 70 million users.

Also in June, Napster signed a worldwide licensing agreement with the United Kingdom's Association of Independent Music (AIM) and the Independent Music Companies Association (IMPALA). The agreement authorized Napster's use of hundreds of thousands of songs belonging to more than 150 independent record labels in the United Kingdom and Europe. Prior to Napster's July 2 shutdown, it had permission to share more than 800,000 titles with its users.

In mid-July Napster settled the suits brought against it by rock group Metallica and rap artist Dr. Dre. The settlement gave the artists final say over which song files could be traded over the Napster system. However, the RIAA vowed to continue its legal battle with Napster until it fully complied with copyright laws.

ONCE A MAVERICK, NAPSTER'S FUTURE TIED TO RECORD INDUSTRY

In July 2001 Napster named a new CEO, Konrad Hilbers, an executive with Bertelsmann AG. Hilbers replaced Hank Barry, who was Napster's interim CEO since May 2000. Hilbers was formerly executive vice president and chief administrative officer at BMG Entertainment. He also had experience managing the AOL, Netscape, and Compuserve brands in Europe from 1996 to 2000.

Hilbers' immediate challenge was to rebuild Napster as a fee-based service. A report from Jupiter Media Metrix found that worldwide use of Napster fell 65 percent between February 2001 and June 2001, in terms of number of minutes online. Napster's significant brand recognition made it likely that once the company developed its fee-based service, it would recapture many of its lost users. In August Hilbers said the song swap service would cost about $5 a month when it was ready to go live. Recording industry attorneys requested an October 1 hearing for a final judgment from U.S. District Judge Marilyn Hall Patel. Meanwhile, Napster's future hung in the balance.