What Happened To Napster? Why Did It Fail?

Executive Summary:

Napster was a peer-to-peer file-sharing program that allowed its users to download and upload (predominantly music) files through software on their computers.

Napster initially failed because it got entangled in a long-lasting legal battle with the RIAA and various music artists. The ongoing legal battles led to a temporary shutdown in 2001.

What Was Napster?

Napster was a peer-to-peer (P2P) file-sharing program that allowed its users to download and upload files through desktop software.

Back in 1999, when Napster was first conceived, finding MP3s (the commonly used file format for music) was often resulting in broken links.

In order to circumvent copyright laws, files were not stored on Napster’s own servers but on the user’s machine.

The user’s PC would then connect to Napster’s so-called central index server to let it know what files it stores. Napster, in turn, would index those files on its quasi-search-engine and thereby make them discoverable. Effectively, users would download files from another user’s machine.

All one needed to use Napster was the desktop software as well as a working internet connection. Once the MP3 file was downloaded, users could listen to it on a music player of their choice.

While the majority of downloads on Napster were MP3 files, users were also able to exchange other files such as text documents.

These days, much like Spotify, Napster is a pure audio streaming platform in which users can download and listen to music. How that came to be will be the purpose of the next chapter.

What Happened To Napster?

Napster, currently headquartered in Seattle, Washington, was initially launched in 1999 by Shawn Fanning and Sean Parker.

Fanning and Parker met each other in a chat room when they were 14 and 15 years of age, respectively. Over the years, they remained in close contact while exchanging ideas about businesses they could work on.

In 1998, Fanning enrolled at Northeastern University where he pursued a degree in Computer Science. At university, he regularly overheard his roommate complaining about how tough it was to download music online.

These conversations eventually led him to draw up the initial architecture of what would turn into Napster.

Fanning got the name for Napster due to his hair. Back then, a bully from his high school used to make fun of the “nappy” texture of his hair.

Instead of shutting it down, Fanning eventually came to embrace his name – and even ended up using the username Napster in the Internet Relay Chats he was communicating in.

In the spring of 1999, Fanning tells a group of fellow coders, including Jordan Ritter who would go on to join the project, about an idea he’s working on.

Later that year, in the summertime, Fanning’s uncle John Fanning, a successful entrepreneur who pioneered online chess, incorporated Napster as a company. The problem: he did so without anyone’s approval.

During that same time period, Napster was finally launched into beta. In early interviews with the press, John Fanning was presenting himself as the CEO of the company.

In the meantime, Shawn Fanning and the rest of the team moved Napster’s headquarters from Boston to San Mateo, California, to be closer to the Valley. They had previously raised $50,000 in seed funding to be able to finance that move.

While the founding team was debating whether they should re-incorporate and hire a new CEO, Napster began taking off like a wildfire. Thousands of people, largely as a result of word-of-mouth, began using the software to exchange files (all while Napster remained in its beta phase).

A few weeks later, Ron Conway via his VC fund SV Angel, poured another $200,000 into the business to help them finance their rising employee and server cost.

Napster, in large parts, was enabled by the Digital Millenium Copyright Act of 1998 that allowed search engines to link to MP3 files and make them indexable. However, they were required to immediately remove links to copyrighted music following proper notification.

Unfortunately, Napster’s exponential growth also became its biggest detriment. At some point, there were just too many files to keep track of, thus making it impossible to properly remove them.

In December 1999, the Recording Industry Association of America (RIAA) filed a lawsuit against Napster, alleging the owners of distributing copyrighted material without approval.

By February of the next year, universities began shutting down access to the platform. Not only were they worried about legal ramifications but downloads on Napster, in some cases, accounted for over 60 percent of a school’s bandwidth (which severely slowed down network speed).

Then, in April, Metallica filed another lawsuit against Napster, stating that they violated copyright law by allowing the illegal exchange of the band’s music. Rap artist Dr. Dre followed it up with a lawsuit of his own just a few days later.

Furthermore, Metallica demanded Napster to delete more than 300,000 users on its platform as a result of that violation. The band had even provided Napster with a list of names and IP addresses. On the 10th of May, 2000, Napster eventually deleted 317,377 user accounts.

Interestingly enough, not all artists were campaigning against the platform. Chuck D, frontman of hip hop group Public Enemy or the rock band Limp Bizkit publicly came out in support of the company, stating that Napster helped them to increase awareness of their music.

In order to fight off these lawsuits and to keep the business running, Napster went out to raise its first public round of funding. On May 22nd, 2000, they announced a $15 million Series A from a group of venture capital firms led by Hummer Winblad Venture Partners.

Hank Barry, a former lawyer, and partner at Hummer, was appointed interim CEO of Napster to bring more legal expertise and legitimacy to the company.

A few weeks later, in June 2000, Napster hired David Boies, the attorney who has represented the United States government in its antitrust case against Microsoft in the early 1990s, to defend the company in its lawsuits.

Around the same time, Shawn Parker, one of Napster’s co-founders, had decided to depart the company due to the intense legal scrutiny it continued to face.

Interestingly enough, the ongoing lawsuits did not seem to affect its growth. PC Data Online had estimated that Napster had grown to become the world’s most-visited entertainment website.

Furthermore, a Napster fan going by the name of pimpshiz had hacked more than 50 media websites, such as Verizon’s wireless messaging service, under an effort that he labeled Save Napster Hack Attack.

In order to appease judges, Napster began to tout a significant change to its platform. It stated that it planned to charge users a monthly subscription fee in order to access the files. Music labels would then get a share of that income, depending on how often their files had been downloaded.

On Halloween of 2000, German media company Bertelsmann – which owns the label BMG and had been one of Napster’s greatest opponents – announced an alliance with them. Additionally, they received a $20 million loan from Bertelsmann to keep the business afloat and build up its membership-based service.

The plan was to use Bertelsmann’s reputation and network to strike deals with the remaining record labels. Such a move would legitimize Napster’s business as one of the first in the P2P filesharing space.

Unfortunately, Napster’s army of lawyers wasn’t enough to appease judges. In February 2001, the U.S. Federal appeals court confirmed its ruling from July 2000 that deemed its filesharing software to be engaging in the exchange of copyrighted materials and therefore violating copyright laws.

A few days later, the European Parliament put regulations in place that would stop Napster from exchanging files without the artist’s consent.

In an effort to keep its business afloat, Napster had proposed to offer $1 billion to the record industry if they were to drop their lawsuits. $150 million would be paid out to the five major labels and $50 million to smaller indie ones.

Unfortunately, the labels did not accept that offer, forcing Napster to remove all copyrighted material. They went ahead and hired 50 temps to form an editorial team that, with the help of software, would scour the platform off of any illegal files.

As a result, the average number of files shared per person dropped from 220 in February 2001 to just 21 in May of the same year. The song filtering system, as you might’ve guessed, didn’t sit particularly well with its user base. A month after the ruling, Napster had already lost a quarter of its 60 million users.

Over the course of the next few weeks, Napster’s executives (with the help of Bertelsmann) struck distribution deals with various music labels, including Warner Music Group and EMI Recorded Music.

Unfortunately, Napster wasn’t able to keep files off of the platform. As a result, on July 1st, 2001, it shut down access to the software. U.S. District Judge Marilyn Hall Patel, later that month, ordered the service to remain offline until it could figure out a way to keep the illegal files off.

Around the same time, Napster had also settled its lawsuit with Metallica. On the 20th of July, a U.S. federal appeals court ruled that Napster could resume its filesharing service, yet the company decided to remain offline until it figured out a new business model.

July was capped off by interim CEO Hank Barry announcing that he would depart from the company. His replacement became Konrad Hilbers, a former executive at Bertelsmann.

In the coming months, Napster continued to battle lawsuits while trying to legitimize its business. In October 2001, it had to lay off 15 percent of its workforce (equal to 16 employees) in an effort to keep the business afloat.

The ongoing negotiations with the remaining record labels furthermore led to the delay of the launch of its subscription-based product. In the meantime, Napster continued to lay off employees while sourcing more loans from Bertelsmann. Reports estimated that the German media company had issued more than $100 million in loans.

Then, on May 17th, 2002, Bertelsmann announced that it had acquired Napster. It would pay $9 million to Napster’s creditors to gain assets to its assets. The transaction, furthermore, allowed Napster to file for Chapter 11 bankruptcy protection.

Konrad Hilbers, who just a few days prior announced his resignation, as well as founder Shawn Fanning, decided to remain with the company.

In September 2002, a federal judge decided to block the acquisition, thereby forcing Napster to sell off the remainder of its assets. Two months later, in November, U.S.-based software maker Roxio announced that it would acquire those assets for $5 million as well as 100,000 warrants in Roxio stock.

Roxio, which became known as a creator of CD-burning technology, had big plans for Napster. In May 2003, it bought Pressplay, another online music service, for $12.5 million in cash and 3.9 million shares of its common stock. Roxio’s plan was to combine the two platforms into one music streaming powerhouse – all under the Napster brand.

That relaunch occurred a few months later in October 2003. Much like its biggest rival iTunes, the new Napster offered music downloads for 99 cents apiece. Alternatively, users could also subscribe for a monthly fee of $10 to access its 500,000-strong catalog of songs.

To promote the service, Roxio offered 14-day trials of Napster. Furthermore, it partnered with universities such as Penn State to give students unlimited access to the service. By February 2004, the revamped Napster had passed five million song sales.

In May 2005, Napster became the first American music store to launch in Europe when they debuted it in the United Kingdom. Roxio continued to double down on Napster. In August 2004, it sold its CD-burning business to Sonic for $80 million while changing its company name to Napster.

At the beginning of 2005, Napster began to heavily invest in various marketing efforts to promote its newest product. The service, dubbed Napster To Go, allowed users to download an unlimited number of music to compatible MP3 players.

Napster committed to spending over $30 million on various marketing-related efforts. It even ran a Super Bowl ad, although it wasn’t that well-received (have a look for yourself).

There was another huge problem that Napster faced with its new mobile technology. Apple, via its iPod, owned around two-thirds of the MP3 player market. Napster’s technology was not useable on the iPod, thus leaving it with a significantly smaller market.

Despite these hefty limitations, Napster continued to grow its subscriber base. The company had often partnered with device manufacturers which began to ship their products with Napster preinstalled on them. Likewise, agreements with local mobile carriers gave consumers free trials for a few months.

By January 2006, Napster had crossed the 500,000-subscriber-mark. In September, it launched its very own MP3 player in an effort to compete against the combination of iTunes and the iPod.

As an interesting side note: that very same month Vivendi’s Universal Music Group purchased BMG Music Publishing for about $2.1 billion. As part of the acquisition, Vivendi settled its litigation with BMG parent Bertelsmann regarding its initial involvement in Napster. While Vivendi initially demanded $17 billion as part of the lawsuit, the two parties ended up settling for $60 million.

Napster, despite more than $100 million in annual revenues, struggled to stay afloat. In 2016, the company had lost more than $40 million, which began eating into the cash that the company had left from its Sonic sale.

In particular, the fees that Napster had to pay to the record labels in order to be able to host their music were eating into their margins. It, therefore, came as a surprise when, in January 2007, Napster acquired AOL Music’s subscription service for $15 million in cash. The acquisition allowed them to add another 350,000 subscribers.

The company, furthermore, had to scale back its U.K. operations and relocate its European headquarters to Frankfurt, Germany. Eventually, the struggling Napster ended up finding a buyer once again.

In September 2008, Best Buy announced its acquisition of Napster for $121 million, double its valuation at that time. The two companies had previously worked together on in-shop promotions. Best Buy, furthermore, realized that CD sales wouldn’t last forever and wanted to beef up its digital music sales division.

Given Napster’s well-known brand and an existing subscriber base of 700,000 users, Best Buy decided to not rebrand the service. On top of that, Best Buy already had an existing marketing channel (i.e., its stores) with which it could cross-promote Napster.  

Interestingly enough, Napster’s primary struggles were grounded in the fact that people simply did not want to commit to a monthly subscription. Instead, ad-supported offerings like Spotify and Pandora were picking up users left and right.

As a result, Napster introduced a new pricing model in October 2009, putting them at half the price that Spotify and others were charging for their premium offerings.

Unfortunately, Napster had made another significant mistake. For the longest time, it dismissed the newly introduced iPhone as a “niche product” and did not develop any iOS (or Android) app. Meanwhile, Spotify had already introduced its very own iPhone app back in August 2009.

By January 2010, Napster’s struggles became evident to the public. It laid off a significant number of employees, including its CEO Chris Gorog who had joined Napster from Roxio as part of the acquisition in January 2005.

In September 2010, Napster finally admitted its mistake and launched an app for the iPhone, iPod, and iPad. Weeks prior, it had already launched on Android as well. But even the newly introduced apps weren’t able to turn the ship around.

In October 2011, competing on-demand music service Rhapsody acquired Napster from Best Buy for an undisclosed amount. Best Buy, in return, received a minority stake in Rhapsody. The deal allowed Rhapsody, which counted 800,000 users, to add another 400,000 subscribers from Napster (down from 800,000 when Best Buy bought the company in 2008).  

As part of the acquisition, Rhapsody closed two Napster offices in Los Angeles and San Diego. Additionally, more than 120 employees were released from their duties.

In December of the same year, Rhapsody shut down Napster’s U.S. business (to promote its own service). Meanwhile, its U.K. and German business were still owned and operated by Napster International, which was still owned by Best Buy.

A month later, in January 2012, Rhapsody went ahead and also acquired Napster International. But because it wasn’t operating outside the United States, it decided to continue running the business under the Napster brand.  

By the summer of 2013, Napster had expanded into 14 new European countries, including Austria, Belgium, Denmark, Finland, France, and more. In October, Spanish telecom company Telefonica made a strategic investment into its mother company Rhapsody while committing to push Napster in both Latin America and Spain.

In July 2014, the combined business of Rhapsody and Napster counted over 2 million subscribers. That number was dwarfed by Spotify, which had over 10 million subscribers at that point. A year later, that number grew to 3 million (while Spotify had just reached 20 million paying customers).

Despite the seemingly impossible challenge, Rhapsody decided to go all-in on the Napster brand. In April 2016, it renamed its U.S. business to Napster to form one global and unified brand. While it continued to add subscribers, it did so at a cost. In 2015 alone, the company posted a $35.5 million net loss.

Ironically enough, Metallica, which had become known for its vendetta against the company, had joined Napster in November 2016 when the band released its 10th studio album. In the interim, Napster was discovering other avenues to remain competitive.

In December, it announced a partnership with iHeart Radio in which it would white-label its music streaming platform. The partnership also gave Napster some additional exposure, naming it “iHeartRadio All Access powered by Napster”.

Yet again, these efforts weren’t enough. In May 2017, Rhapsody had to cut down a significant number of jobs, letting dozens of employees go as well as its CEO Mike Davis. Over the coming years, Napster continued to operate without much public attention.

Then, in August 2020, Rhapsody announced that Napster had been sold yet again, this time to virtual reality experience company MelodyVR for $70 million. Anthony Matchett, CEO of MelodyVR, gave some additional insight about the acquisition:

“MelodyVR’s acquisition of Napster will result in the development of the first-ever music entertainment platform which combines immersive visual content and music streaming.”

MelodyVR, just like Rhapsody years prior, decided to rebrand itself into Napster Group in December 2020. The combined business went public on the London Stock Exchange in February 2021.

For now, Napster aims to relaunch under a completely revamped platform later in 2021. The new service will be available on a bunch of different devices but primarily on Smartphones, Tablets, TVs, Computers, Consoles, and Car Stereos. Users will be able to stream video content online as well as enjoy immersive VR experiences.

Today, more than 200 people are employed by the Napster Group. The company remains to be headquartered in Seattle while operating additional offices in São Paulo, Munich, and Paris.

Why Did Napster Fail?

The primary reason why Napster had initially failed was its long-lasting legal battle with the RIAA. The association was able to obtain an injunction that forced Napster to eventually halt its service.

On top of that, Napster was facing legal scrutiny from other artists as well, including Metallica and Dr. Dre.

All of these legal battles added a lot of financial pressure, which in turn forced Napster to take out loans (from Bertelsmann) that went into the tens of millions.

The constant legal battles, furthermore, distracted its engineering and product teams from building a world-class product. Instead, other (admittedly illegal) file exchange tools like Gnutella or LimeWire began attracting Napster’s previous users.

Later on, when Roxio relaunched Napster as a subscription-based service, many of its intended customers still knew Napster as a free-for-all filesharing platform.

They were often the types that were simply not willing to pay for music in the first place. On top of that, the files were removed once a customer stopped paying for a subscription.

Back then, many people did not like the concept of renting out music but instead wanted to own it as long as they pleased.

On top of that, Apple was dominating the MP3 player market via its (now legendary) iPod. The hardware could then be directly integrated with iTunes, which made up for a much smoother user experience.

On the other hand, people using Napster had to figure out how to get their songs onto the music player of their choice.

While Napster continues to exist, its subscriber numbers and relevance are now dwarfed by the likes of Spotify and Apple Music, which have been dominating the music streaming market for the past decade.

Hi folks, my name is Viktor! By day, I lead a tech team of 10 for an e-commerce startup. At night, I work on expressing my weird thoughts through this blog. And if there's time, I cuddle my cat..