Napster Fading Fast?

Andy Warhol's famous dictum—that eventually, everyone will enjoy 15 minutes of fame—could apply equally to Internet startups.

By the "15 minutes" standard, Napster has enjoyed nine lives. Not that long ago, the music file-sharing service was front-page news almost every day of the week. Castigated by the entertainment industry as a harbinger of new distribution models that threatened the very foundations of market capitalism, Napster has been under continuous legal attack for almost two years.

The agonizingly slow litigation process has eroded the startup's celebrity and diminished its value in the eyes of both the general public and potential business partners. So has infighting among shareholders. Former courtroom adversary Bertelsmann has called off buyout negotiations as the site's shareholders argue among themselves about the company's value and their percentage of ownership. The dispute reached crisis proportions the last week of March, when founder John Fanning sued to remove two members from Napster's board of directors, both of them partners at Silicon Valley venture capital firm Hummer Winblad Venture Partners, Napster's major backer.

Bertelsmann, the German media conglomerate that angered its music industry partners by making the first conciliatory moves in the copyright infringement case brought against Napster two years ago, had reportedly been ready to offer between $15 million and $30 million for the service. Napster had humble beginnings as a file-sharing program written by Fanning's nephew Shawn Fanning, who was a college student at the time. At its peak, the service claimed as many as 50 million users.

Hummer Winblad pumped $13.5 million into Napster as it was gaining momentum, and had hoped to recoup that investment via the buyout by Bertelsmann. Fanning's lawsuit to remove board members John Hummer and Hank Barry is intended to prevent that. Fanning has also moved to convert the VC firm's preferred shares to common stock, which would give other shareholders a bigger payout. Hummer and Barry claim that the stock conversion is illegal. The squabble apparently has spooked Bertelsmann, which has withdrawn its offer until the dispute is settled.

The ill-timed move by Fanning could backfire and leave him and his associates with a worthless commodity. Napster's market value has plummeted as its media importance has faded. "Napster is so yesterday," a young music fan told a San Francisco television journalist.

On Tuesday, March 26, US District Judge Marilyn Hall Patel gave Napster Inc. almost 10 months to prove its claim that the major record companies have misused their copyrights and impeded competition. By the high-tech clock, 10 months is an eternity. Judge Patel's ruling gives Napster until January 2003 to present its evidence. By then, the former media darling's value may rival Enron's.

In other file-sharing news, on March 19, a federal judge in Chicago temporarily halted copyright-infringement lawsuits brought by the music and movie industries against Madster (formerly known as Aimster), a Napster clone. The judge made the decision to halt the suits after two of the companies named as defendants in the suit—BuddyUSA, Inc. and AbovePeer, Inc.—filed for bankruptcy protection. Madster founder Johnny Deep accused the entertainment industry of foisting the suits on him to force him into bankruptcy, and said he would defend his service with the same arguments Napster is using—that the entertainment industry has consistently abused its copyrights and has violated US antitrust law. Recording Industry Association of America (RIAA) general counsel Matt Oppenheim predicted that Madster would meet the same ultimate fate that appears to await Napster.