Appetite For Self-Destruction Part 4

One of Shawn's first important IRC contacts was another ambitious teenager, Sean Parker. Like Fanning, Parker grew up with computers. His mom was an infomercial media buyer. His dad was an oceanographer who'd grown up in the Cayman Islands and attended the Ma.s.sachusetts Inst.i.tute of Technology. He regaled Parker with stories of computers programmed with punch cards that took up entire rooms, and helped Sean learn to program on the family Atari 800 at an early age. Raised in Herndon, Virginia, outside Was.h.i.+ngton, DC, Parker had a supportive family and enough money to do the stuff he wanted to do. He was a decent computer programmer-he'd learned languages like Basic and C-but he was far more interested in building a business and making money. In high school, he bought model planes wholesale, then made a few hundred dollars marking up the prices and selling them. He had the gift of gab.

After Parker formed his own security company, Crosswalk, he started to talk with likeminded computer obsessives on IRC, and he soon met Shawn. "We were basically hackers," Parker says. "But we had much broader interests than just technology-we were interested in the consequences of it and building things that people actually wanted to use." But Parker spent only a small portion of his time on IRC. Mostly, he networked. His parents wanted him to go to college, but Parker took a year off to make contacts at business-oriented internet service provider UUNet. He was working there around the same time Shawn Fanning started his freshman year at Northeastern.

By January 1999, second semester, Shawn was working long hours on Napster code and very close to dropping out of college. His mother was disappointed, but John Fanning, by then saddled with tens of thousands of dollars in debt from his two failed businesses and legal fees, encouraged him. Uncle John incorporated Napster Inc. He took 70 percent of the business, giving Shawn 30 percent, despite Shawn's reluctance. That was a slightly better deal than most unknown musicians received when they signed to a major record label, but it was extremely bad business for nineteen-year-old Shawn. He agonized over it for years afterward, but always made the decision not to fight his uncle. As Shawn grew up, they developed a sort of love-hate relations.h.i.+p, squabbling and coming back together at unexpected times. Shawn followed a pattern that would soon be familiar to fellow Napster employees, throwing himself into work during times of stress. Shawn gave the first version of Napster to about thirty friends, mostly hacker types he'd met in the chat rooms, in June. Soon, almost fifteen thousand people had downloaded Napster from the internet. "I had to focus on functionality, to keep it real simple," Fanning later told Time Time. "With a few more months, I might have added a lot of stuff that would have screwed it up. But in the end, I just wanted to get the thing out."

Shawn's head was so filled with code that he didn't have the time or interest to focus on Napster as a business. His uncle took care of that. So did Sean Parker. Through Parker's friend Jonathon Perrelli, who was in charge of hiring for UUNet, he arranged a "practice meeting" with an early potential investor. Parker recalls little about this meeting, but the preparation sticks in his memory. The Fannings flew to his northern Virginia house. "I had been shopping the deal around northern Virginia in order to raise money. Shawn and I had made a lot of progress-building clients, building presentations, we had users, a company in place, all this work in place-and we had never met in person," Parker says. "They landed and took a cab to my house from Dulles Airport. The doorbell rings. I excitedly run to the door. It's Shawn and his uncle. [Shawn] said to me, 'You look exactly like what I expected.' And we immediately got down to running through our pitch." The centerpiece of the pitch was a growth chart with a steep upward bent.

A bit later, Parker lined up the company's first concrete investor-Ben Lilienthal, who had in early 1999 sold his web email service Nascent Technologies to the huge Boston internet holding company CMGI. The internet boom was on. Early investors were put off by debts from John Fanning's failed companies, but Shawn's idea for Napster was too tantalizing to ignore for very long. After talking with Parker, Lilienthal set up a meeting with the Fannings and one of his New York contacts, an "angel investor"-a term for venture capitalists who put in $1 million or less to help a company get started. Lilienthal and Jason Grosfeld flew out to visit the very first Napster office in an old hotel near John Fanning's house in Hull. The investors were shocked-they expected at least an Aeron chair, but all they found were open fast-food containers and Shawn hunched over his laptop on a card table. John Fanning wore shorts and tennis shoes. The investors tried to talk with Shawn, but John kept talking to them, boasting of the important people he knew in Silicon Valley. They were the first of many to realize the best possible way to deal with Napster was by maximizing contact with Shawn and minimizing contact with John. They brought up legal issues. The Fannings acknowledged they hadn't hired an attorney.

Nonetheless, weeks later, the two investors were ready to offer the three-man Napster crew a deal. Parker wrote up a business plan, in which Napster would try to get as much as 10 million users and try to sell them concert tickets and band merchandise. Lilienthal and Grosfeld hooked up a more powerful investor, Reston, Virginia, venture capital firm Draper Atlantic, and two of its executives agreed to meet Grosfeld, Lilienthal, the Fannings, and Parker at Grosfeld's apartment in downtown New York City. The Fannings showed up two hours late in a Z3 convertible with Shawn's Napster server in the backseat. The Draper executives made their offer-$500,000, with Lilienthal as CEO. Draper would take a minority stake in the company. John Fanning wanted more.

Negotiations heated up over the next few months, as both John Fanning and the Lilienthal group frantically researched the legal implications of Napster offering a ma.s.sive international free market for copyrighted music. But in the end, Fanning kept asking for more and more money-the price went up to $1 million at one point. They were two percentage points of Fanning equity away from a deal when Fanning started saying outrageous things like, "How much do you have?" The investors backed out. That was just the first of many serious investment deals, worth hundreds of thousands of dollars, that derailed at the last minute thanks to Uncle John. "John is a gamer. He carries that over into every aspect of his life," Parker says. "John treats people like objects on a chessboard-they move in completely logical ways. But that's just not the way most people are, especially sophisticated people. It's not that black and white. He would get caught up in the game of it all and rub a lot of people the wrong way."

Miraculously, Parker's contacts and John Fanning's machinations led to a bona fide investor. Yosi Amram was a Tel Avivborn Harvard Business School student who first encountered John as a chess opponent in the public games at Harvard Square. (At first, Amram says, he was the better chess player, but Fanning practiced for longer hours and caught up.) Amram was smart and cultured, and the style of chess he favored-blitz-was so fast it barely gave the players time to think about their next moves. Amram founded an internet start-up, Individual, with his savings. He set it up for a $200 million initial public offering in 1996, made a lunkheaded purchase of web-surfing software company Free-loader for $38 million, and ran Individual into the ground.

Still, Amram had a lot of money to invest in a start-up. He moved to Silicon Valley to be closer to the action and was soon approached by his old friend John Fanning. Amram didn't consult a lawyer. He didn't check out the legal implications. He made a quick decision-over a period of a few weeks, as he recalls-to invest $250,000 for 1.25 million shares. "This was kind of the height of the internet boom, so money was easy," Amram says. "Today, I would have probably spent more time and effort thinking about making a quarter-million investment." Amram had some conditions: He wanted to pick the CEO, he would serve on a three-member board, and the company would move to Northern California so he could be more involved in its operations.

Shawn Fanning and Sean Parker packed their stuff, boarded planes, and moved to Silicon Valley.

EILEEN R RICHARDSON CAME to Napster via a circuitous route. She was born to a poor family in Middletown, New York, with a father who built docks before quitting work for good due to disability, and a staunchly Catholic mother who emigrated from Ireland. Eileen's mother encouraged her to find a husband, and quick. She took the advice, marrying a West Point cadet at age twenty-one. "We got very, very poor, very quickly," Richardson says. "And I realized: I'm a Democrat and he's a Republican, and that didn't make it easy." They had two kids, and while her husband aspired to live in upstate New York, Eileen had broader ambitions. After moving around with him to various military bases after he graduated from West Point, she'd had enough. They divorced. She kept the kids. to Napster via a circuitous route. She was born to a poor family in Middletown, New York, with a father who built docks before quitting work for good due to disability, and a staunchly Catholic mother who emigrated from Ireland. Eileen's mother encouraged her to find a husband, and quick. She took the advice, marrying a West Point cadet at age twenty-one. "We got very, very poor, very quickly," Richardson says. "And I realized: I'm a Democrat and he's a Republican, and that didn't make it easy." They had two kids, and while her husband aspired to live in upstate New York, Eileen had broader ambitions. After moving around with him to various military bases after he graduated from West Point, she'd had enough. They divorced. She kept the kids.

Richardson moved to Boston and tried to figure out what to do. She stumbled onto a venture capital company, Atlas, which had been looking for a new employee for nine months. They loved her aggressive, fast-talking personality and agreed to give her a secretarial job and pay for her MBA education. "I did everything," Richardson says. She answered the phone, made coffee, did research, and got promoted-a lot. Within six years, she says, she'd landed deals with Firefly, a start-up with a model of recommending music to internet listeners based on their preferences, as well as Vermeer Technologies, developer of a publis.h.i.+ng tool that would become Microsoft's FrontPage. Suddenly other companies, like Forrester Research, heard about her and started trying to hire her away.

Richardson landed at JK&B Capital, a Chicago venture firm that gave her a partners.h.i.+p. Through a young salesman whom she would later hire as a Napster executive, Bill Bales, she snagged a deal with a web content-management company, Interwoven Inc. She convinced JK&B to invest $5.2 million, and it wound up gaining $438 million. Richardson was a first-cla.s.s networker. One of her contacts in the early 1990s was Yosi Amram. He met with her one day to discuss companies he was working with, like the tech start-up Xtime, then disguised as something called the Palo Alto Coffee Co. She mentioned she might be interested in working as an investor and executive for other companies, and Amram brought up Napster. Richardson went home and checked out the website. She was a music fan-any kind of house or club music, and alt-rockers like Nine Inch Nails-but couldn't hit the clubs due to her two young kids. So Napster made sense, immediately. "What I wanted to do with Napster was never, ever, steal music," she says. "The first idea of ninety-nine cents a song was mine! You could find and buy music for a dollar a song instead of seventeen bucks for sixteen songs that you hate. That was the idea." Amram told Richardson about John Fanning, and how he could be difficult, confounding otherwise easy negotiations and inserting himself into parts of the company where he had very little expertise. Amram promised he could handle Uncle John. Convinced, Richardson bought 333,000 shares from Fanning. She joined Amram and John Fanning on the Napster board.

Meanwhile, Shawn Fanning and Sean Parker were itching to move into real offices. For their first few months in California, they stayed at Russian chess master Roman Dzindzichashvili's house in Sausalito, taking care to be totally silent while he paraded children through the house for chess lessons conducted in his booming voice. "I kind of forgot about that phase," Shawn says today. "It was a really weird experience." Parker and Fanning would soon find an $1,800-a-month San Mateo apartment with a six-foot widescreen television. Like most men in their early twenties, they weren't exactly all-star housekeepers, and more than one visiting reporter observed empty pizza boxes and soda cans lying around the rented furniture. Shawn wasn't especially flamboyant, but he drove a custom Mazda RX-7 and politely shook hands and exchanged greetings with strangers who spotted him at the mall. He was also a gym rat, playing hoops a few times a week and working out frequently.

Napster moved to the top floor of an old bank building in San Mateo. Parker and Fanning were too young to rent cars and had no credit cards, but they were the heads of a company that would ultimately change the world. They were surrounded by executives who were even more enthusiastic than they were, like Richardson and her second-in-command, Bill Bales, newly installed as vice president of business development. "I would put on a presentation for Bill and Eileen, and halfway through, she would start screaming and running around the office, saying, 'We have so much to do!'" Parker told Joseph Menn in the definitive Napster biography, All the Rave All the Rave. "Bill would say, 'That's brilliant! We're going to be a $10 billion company!' And I would say, 'Wait, I'm not finished yet.'" At one point, on Richardson's invitation, former Warner Music high-tech executive Ted Cohen showed up to interview as the next CEO. He walked into the office to find a young man sleeping on the floor with his head on a motorcycle helmet. Cohen woke him up, introduced himself, and asked for Richardson. "Oh, I'm sure they'll be out soon," said the kid, and went back to sleep. That was Shawn Fanning.

It became fairly clear fairly quickly that Napster had no central business plan-other than the obvious, which amounted to "generate a huge user base by allowing fans to trade copyrighted music." The company's top executives disagreed on strategy. Some wanted to charge a monthly subscription fee, like the phone company. Others wanted to sell merchandise. Richardson kept advocating for her charge-by-the-song plan. She figured this would be great exposure for lesser-known artists. "John Fanning absolutely was completely thinking a different thing: 'We will take down the music industry and give away free stuff,'" she recalls. Fanning made comments to that effect in business magazines, which didn't exactly make RIAA people like Hilary Rosen and Frank Creighton very happy. It also didn't put them in the mood to make a deal with Napster.

A week after Creighton first talked to Richardson, she called back. This time, Richardson knew much more about the legal issues. She suggested Napster was totally legal given the US Supreme Court's groundbreaking 1984 decision legalizing Sony's Betamax for home-taping TV shows. She refused to shut down Napster per his request. Rosen got the message. On October 27, 1999, Rosen instructed the RIAA lawyers to draft a complaint.

Richardson recalls her two phone conversations with Creighton. For the first, he was cordial. For the second, she says, "The whole tone changed. It was like, 'Listen, you come talk to us, but I'm telling you right now, you really need to think about shutting things down before we talk.' Then the next conversation was with Hilary." Richardson told Rosen about the plan to charge for music and break new artists over an exciting new medium. Rosen responded: Take down all the signed artists from the site, and we'll talk. Richardson asked for a list. At this point, both women say, the conversation turned ugly.

Rosen remembers Richardson as "either a really bad manipulator or naive. Because she didn't get it. She really didn't get the piracy aspect of it for several days."

"It was her job to lobby for the record industry and here's this huge, looming thing-of course she's going to be a little stern," Richardson says. "I remember seeing someone [in the media] said, 'I'm a b.i.t.c.h to [Rosen].' But believe me, it was vice versa." The RIAA prepared for war. she's going to be a little stern," Richardson says. "I remember seeing someone [in the media] said, 'I'm a b.i.t.c.h to [Rosen].' But believe me, it was vice versa." The RIAA prepared for war.

For Shawn Fanning, the main challenge of running Napster was making sure the servers kept up with the demand. He had help-Jordan Ritter joined the company, as did Ali Aydar and longtime software pirate and IRC regular Jordan Mendelson. As of October 7, 1999, the company had 150,000 registered users, trading 3.5 million files-and was expanding by who-knows-how-much every day. (The numbers were a little skewed, since users could register multiple times, but Napster was unquestionably growing at an extraordinary rate.) Thanks to the efforts of Richardson and Yosi Amram, a new wave of venture capital came in, totaling $2 million, from angel investor Ron Conway as well as internet-boom stars like Excite founder Joe Kraus and Napster's own head of engineering, a new employee named Eddie Kessler.

A former engineer with Quote.com, Kessler hooked up with the Napster crew through a connection. He met one day with Aydar, Ritter, Shawn Fanning, and Sean Parker and came away unimpressed-good idea, he thought, but poor, unstable design. Richardson offered him a job. John Fanning called to tell Kessler he was certain Napster would soon be worth $10 billion. Kessler was hesitant, because he had a wife and four-year-old daughter and was worried about spending too much time in the office during a legendary period of Silicon Valley overworking. Richardson a.s.sured him he'd have to work late two days a week and only occasionally on weekends.

What finally sold Kessler was his own tour of the Napster software. He found music he hadn't heard since college, which was only available on hard-to-find vinyl singles. He signed on. The work was great. He liked most of the people, although some didn't like him-according to Menn's All the Rave All the Rave, a few employees complained that Kessler took credit for their work, and he often dragged his feet on deadlines for new versions of the software. In any case, the stress weighed on him. "One of the tragedies of this was I really didn't get to see my family for two years. I would call my home in the early evening and talk to my daughter and she would say, 'Are you going to be home for dinner?'" Kessler says. "I had a BlackBerry and two cell phones. We scheduled seven vacations over two years and all of them got canceled. Everything was clearly insane." Shawn Fanning, still not even twenty-one, with no family of his own, was more equipped for the long hours and endless stress of maintaining Napster. Many employees at Napster recognized Shawn as a compulsive workaholic. "There's no question it was exciting and stressful. We were always at capacity," he says. "Every time they put servers up, they filled with simultaneous users and we hit the capacity again."

The challenges were many and difficult. In November 1999, one of Napster's servers maxed out at a far-too-low 1,000 users. The team kept buying more servers, until somebody figured out the cap was a result of bad code. Once they fixed it, traffic quickly doubled on each server. The Napster crew danced to N.W.A. on company tables. Another time, Shawn found a bug that shrunk users' music files at the last minute, allowing them to share severely damaged songs. He personally worked on that one for two weeks, then came up with a patch for the client software. "One of the most stressful experiences ever," he says. On the rare occasions they took time off from work, Shawn and Parker blew off steam at Bay Area raves.

When the RIAA filed its copyright-infringement lawsuit on December 6, 1999, in US District Court in San Francisco, it surprised no one at Napster. Few of the company's starry-eyed employees thought Napster could possibly lose. When Ted Cohen was interviewing to be Napster's next CEO, he noticed whiteboards all over a Napster conference room. On one was scrawled the phrase: "How to Talk to the Press." Underneath, it said, "If they call to say, 'Don't you know this is illegal?,' say, 'We didn't know it was illegal-we think it's fair use.'" "It was all deflection points," says Cohen, who turned down the Napster job and later went to work as EMI Music's top high-tech executive. "It was basically to convince the press 'we're good guys.' A lot of it wasn't true." Still, the lawsuit had the immediate effect of generating stratospheric publicity for Napster and its young executives. Within a few months, the Los Angeles Times Los Angeles Times and the and the New York Times New York Times slotted Napster on the front page, and MTV crews showed up to interview Shawn Fanning and Parker. The two friends would turn on cable at night and, watching in a surreal daze, see themselves on MTV. The number of total system users grew from 50,000 when the RIAA filed suit to 150,000 by the end of the same month. Shawn Fanning, in his baseball cap, T-s.h.i.+rt, jeans, and blank, aw-shucks expression, was suddenly a rock star, though he didn't think so. "Rock stars and people that play music seriously-they know when they're successful, there's a certain fame a.s.sociated with that," he says. "When you're writing software, it's the last thing you expected. Long coding sessions don't go well with camera interviews, even back to back." But he had charisma, and Richardson smartly turned Shawn into the face of the company. slotted Napster on the front page, and MTV crews showed up to interview Shawn Fanning and Parker. The two friends would turn on cable at night and, watching in a surreal daze, see themselves on MTV. The number of total system users grew from 50,000 when the RIAA filed suit to 150,000 by the end of the same month. Shawn Fanning, in his baseball cap, T-s.h.i.+rt, jeans, and blank, aw-shucks expression, was suddenly a rock star, though he didn't think so. "Rock stars and people that play music seriously-they know when they're successful, there's a certain fame a.s.sociated with that," he says. "When you're writing software, it's the last thing you expected. Long coding sessions don't go well with camera interviews, even back to back." But he had charisma, and Richardson smartly turned Shawn into the face of the company.

Against his will, Fanning became a sort of folk hero. He took on the record labels, which didn't have the best public image. They were always landing in scandals, such as the Mob-connected independent radio promotion imbroglio of the 1980s. For years, label executives had reputations for taking advantage of artists, especially young and inexperienced ones-many of whom didn't even know the labels had been deducting archaic, LP-era "packaging rates" out of their CD royalties for years. But in earlier days, the top execs had been funny, fiery, talkative characters like Walter Yetnikoff of CBS or erudite, well-respected gentlemen like Mo Ostin of Warner Music. They had a knack for changing the agenda, behind the scenes and in the media, whenever an irritating subject like "how much artists get paid" came up. They also had a knack for making talented musicians very, very rich. But in 2000, Yetnikoff and Ostin were gone, replaced with less colorful corporate executives from Seagram and Sony who didn't crave the limelight.

In this new record business environment, Napster had the effect of empowering artists like the irrepressible Courtney Love of Hole. In January 2000, Love declared her Universal Music contract "unconscionable" and announced she wouldn't deliver the records she owed to the company's Geffen Records. Universal sued. She countersued.

This sort of thing happens all the time; usually, the cases are settled and everybody quietly goes home to count their money. Love did so, too, in 2002. But first, she delivered a famous speech at the Digital Hollywood conference, reprinted in Salon.com as "Courtney Love Does the Math." This is how she broke it down: A top band gets a million-dollar advance; the band spends half a million to record its alb.u.m, $100,000 on a manager, and $50,000 on lawyers and business managers. The four band members then get $180,000 after taxes, or $45,000 per person for a year. Then the band sells 1 million records, and receives no royalties after expenses. According to Love's math, the record label gets $4.4 million.

Yes, Napster users were engaging in theft. But their stick-it-to-the-man righteousness drew much of the public to their side, and major labels were taking the biggest public relations. .h.i.ts they'd ever absorbed. "It just grew and grew. Shawn becomes a cultural phenomenon. Presidential candidates are asked about it in debates," Hilary Rosen says. "The intensity with which the industry was under siege was huge."

Most Napster users were college students. Indiana University tried to ban the software on campus because it sucked up so much bandwidth, but a feisty computer science soph.o.m.ore, Chad Paulson, chastised the administration on free-speech grounds. IU backed down. Napster supporters reasoned: The record labels have screwed us for years! They charge $18 for two good songs! Backstreet Boys suck! They latched on to Fanning as a symbol, a rebellious David-vs.-Goliath type who invented the coolest slingshot ever.

To some, this spirit reeked of rock 'n' roll-or at least a more efficient way of selling records. At Universal Music, new-media chief Erin Yasgar wore a Napster T-s.h.i.+rt to staff meetings. "Some people got it and there were some laughs," she recalls. "Some people, not so much." Mark Ghuneim, Sony Music's senior vice president of online and emerging technology, spent the 2001 Super Bowl halftime show studying Napster-and noticing a ma.s.sive surge in tracks by performers Aerosmith, Britney Spears, and the Backstreet Boys. The next day, he walked into work to see about reissuing singles to take advantage of the popularity spike. It turned out to be impossible. Labels didn't put out singles anymore. And they couldn't make any new product available in fewer than twelve to fourteen days. That would have been too late. "Those opportunities met with failure," Ghuneim says, "because everybody was afraid it was going to start a precedent."

With or without major labels, several artists figured out how to harness the power of Napster on their own: In 2000, Radiohead promoted its experimental jazz-rock Kid A Kid A by secretly releasing tracks to the service, winding up with its first-ever No. 1 alb.u.m. Dispatch, a young reggae-rock band, flooded Napster with free recordings and, over time, grew its audience-to the point that the band would sell out multiple nights at Madison Square Garden in early 2007. "We were saying, 'It's a new form of radio where people can get music out there, and it doesn't have to have too many strings attached to it,'" recalls Pete Heimbold, the band's ba.s.sist. "What we found was it really didn't deter from kids coming to shows and buying CDs. In fact, I think it had the opposite effect-people heard songs off Napster and had a lot of merchandise and CDs." by secretly releasing tracks to the service, winding up with its first-ever No. 1 alb.u.m. Dispatch, a young reggae-rock band, flooded Napster with free recordings and, over time, grew its audience-to the point that the band would sell out multiple nights at Madison Square Garden in early 2007. "We were saying, 'It's a new form of radio where people can get music out there, and it doesn't have to have too many strings attached to it,'" recalls Pete Heimbold, the band's ba.s.sist. "What we found was it really didn't deter from kids coming to shows and buying CDs. In fact, I think it had the opposite effect-people heard songs off Napster and had a lot of merchandise and CDs."

"I hit a point where I was convinced that there was no next big thing in the music business except technology. It wasn't going to be a sound or a dropped D chord or a new way of looking or a style-it was going to be technology," adds Liz Brooks, a longtime A&R rep who worked at Virgin and Sony before quitting the business to be Napster's vice president of marketing. "Napster was like this cult piece of software-a lot of people in a certain age group were aware of it, and yet n.o.body else was aware of it." Some bands saw the same thing-Limp Bizkit headlined a Napster-sponsored concert tour in 2000. The Offspring, a Southern California punk band, supported Napster, and its manager, Jim Guerinot, filed an amicus brief in court on Napster's behalf.*

The record industry did its best to turn back the David-vs.-Goliath aspect of the story. This is theft theft, the RIAA kept reminding people. "If you can come up with another way of artists being paid for their work, I'm all for it," says Bill Allen, a Napster opponent who at the time was BMG's director of new technology. "But right now the system we have is copyright. It's only fair that artists get paid for their work." Eminem, the world's biggest rapper, declared: "If you can afford a computer, you can afford to pay $16 for my CD." Dr. Dre sued. So did Metallica, in April 2000, and drummer Lars Ulrich gave heartfelt interviews saying the metal band deserved to get paid for its music. Metallica had a point, but it grossly underestimated its own fans' newfound loyalties to Napster. Suddenly, Metallica, which had made a career of liberally allowing fans to tape its concerts, was Enemy Number One of the People. "Leave Napster alone," declared the online graffiti on Metallica's hacked official website. One Napster fan later created a viral cartoon, "Napster Bad!," depicting singer James Hetfield as a monosyllabic baboon. "Napster spun it cleverly, like 'Metallica is suing their fans,'" recalls Joel Amsterdam, then the band's publicist for Elektra Records. "That was unfortunate. [The band members] certainly hated that part of it."

In May 2000, on advice from his attorneys Howard King and Peter Paterno, Ulrich made the provocative move of calling a press conference at Napster's offices in San Mateo. He showed up in a limo with thirteen boxes full of paper listing the names of Napster users sharing Metallica songs. Napster's executives were prepared. They'd alerted a group of users, who a.s.sembled outside the company's offices to protest the press conference. They shouted "f.u.c.k you, Lars!" as he walked from the limo to the building. At Ulrich's side, King demanded that Napster ban all Metallica songs from its service. Afterward the attorney and the drummer rode up the elevator to the company's fourth-floor offices. Employees gathered around and declared themselves fans. Ulrich picked up on the fan-vs.-attorney dynamic and slowly grew less inflammatory and more conciliatory as the events of the day wore on. "I really don't want to sue you," he told the crowd. "All I want is for artists who want to get paid to get paid." Shawn Fanning, Sean Parker, and Ali Aydar were supposed to stay on the fifth floor, away from the circus, but they drifted down, incognito, to check it out. One overzealous Napster employee even approached Ulrich for his autograph. The showdown ended civilly, and Ulrich and King left the building after saying what they had to say. A few days later, Napster announced it would comply with Ulrich's request. The company blocked 317,377 users from a list it received from Metallica.

BY JULY 2000, 2000, almost almost 20 million 20 million users were on Napster. In September, Shawn Fanning introduced Britney Spears at MTV's Video Music Awards; he wore a Metallica T-s.h.i.+rt and joked to VJ Carson Daly about somebody sharing it with him. In October, he hit the cover of users were on Napster. In September, Shawn Fanning introduced Britney Spears at MTV's Video Music Awards; he wore a Metallica T-s.h.i.+rt and joked to VJ Carson Daly about somebody sharing it with him. In October, he hit the cover of Time Time in his trademark bowl-cup headphones. (In the company's crisp, clever logo, a rebellious cartoon cat wore the same headphones.) The same month, he was a presenter at the Rave Awards in San Francisco, sharing the stage with Courtney Love, who flirted with him in her outrageously exaggerated way, calling him "my future husband" and sitting in his lap. Eileen Richardson was constantly on the phone, talking to the likes of Fred Durst of Limp Bizkit, Chuck D. of Public Enemy, and Mike D. of the Beastie Boys, trying to make deals. Guy Oseary, who ran Madonna's label, Maverick, invited Richardson to the Material Girl's office in Los Angeles. As a pregnant Madonna lounged in the background, Oseary discussed a Maverick investment of $1 million. But no major artist ended up investing. "The RIAA went on the huge tour to everyone and opened up their laptops and said, 'Watch this' and 'This will be the end of you,'" Richardson says. in his trademark bowl-cup headphones. (In the company's crisp, clever logo, a rebellious cartoon cat wore the same headphones.) The same month, he was a presenter at the Rave Awards in San Francisco, sharing the stage with Courtney Love, who flirted with him in her outrageously exaggerated way, calling him "my future husband" and sitting in his lap. Eileen Richardson was constantly on the phone, talking to the likes of Fred Durst of Limp Bizkit, Chuck D. of Public Enemy, and Mike D. of the Beastie Boys, trying to make deals. Guy Oseary, who ran Madonna's label, Maverick, invited Richardson to the Material Girl's office in Los Angeles. As a pregnant Madonna lounged in the background, Oseary discussed a Maverick investment of $1 million. But no major artist ended up investing. "The RIAA went on the huge tour to everyone and opened up their laptops and said, 'Watch this' and 'This will be the end of you,'" Richardson says.

Richardson kept working her old venture capital contacts for more funding. At one point, she had what she describes as "three of the finest and best venture firms"-including Kleiner Perkins Caufield & Byers, where she was dealing with the influential former Intel sales giant John Doerr-lined up to contribute $85 million. "Well, that was not enough for John Fanning," she recalls. To this day, Richardson is convinced Doerr and his connections could have rescued Napster. Instead, she says, John Fanning blew up the deal and went to a smaller financing firm, Hummer Winblad, which quickly agreed to give Napster $65 million for a 20 percent share. Hummer then pushed to replace the excitable Richardson with corporate lawyer Hank Barry. Richardson, who never intended to stay more than six months, quit. Barry's first job at Napster was to deal with the RIAA lawsuit.

He had reason to be optimistic. In the late 1990s, issues involving MP3s, file sharing, and digital copyrights were part of a larger, unexplored legal terrain. A 1984 US Supreme Court precedent seemed perfect for Napster. In Sony Corp. of America vs. Universal City Studios Sony Corp. of America vs. Universal City Studios-widely known as the "Sony Betamax case"-the court ruled 54 that Sony could manufacture VCRs for people to record copyrighted TV shows for their own use. Napster figured the same logic would apply here. Napster itself wasn't actually infringing infringing anybody's copyrights. It was merely functional, a middleman, like the VCR. Napster couldn't possibly police the service for copyright violations, just as a telephone company like AT&T couldn't possibly be responsible for whatever illegal plans people made over the phone lines. There was also the Audio Home Recording Act, pa.s.sed by Congress in 1992, which allowed consumers to make taped copies of their own alb.u.ms-as long as they didn't sell them. Finally, there was the Digital Millennium Copyright Act of 1998, which gave "safe harbor" to internet service providers as long as they didn't actively encourage illegal behavior. "We felt that they had a pretty good case," Barry says. "When I took this to my partners, we said, 'Look, [Napster] could lose and we could lose all our money. Or they could win and it could be a chance for the first spectacular social networking company.'" anybody's copyrights. It was merely functional, a middleman, like the VCR. Napster couldn't possibly police the service for copyright violations, just as a telephone company like AT&T couldn't possibly be responsible for whatever illegal plans people made over the phone lines. There was also the Audio Home Recording Act, pa.s.sed by Congress in 1992, which allowed consumers to make taped copies of their own alb.u.ms-as long as they didn't sell them. Finally, there was the Digital Millennium Copyright Act of 1998, which gave "safe harbor" to internet service providers as long as they didn't actively encourage illegal behavior. "We felt that they had a pretty good case," Barry says. "When I took this to my partners, we said, 'Look, [Napster] could lose and we could lose all our money. Or they could win and it could be a chance for the first spectacular social networking company.'"

But if the RIAA lawyers could prove that Napster knew about its users pirating copyrighted music, they could easily show the judge that Napster was hardly an innocent middleman like a VCR manufacturer or an internet service provider. Napster employees were generally careful not to acknowledge its users pirated music-even though surveys showed almost every song shared over the system was copyrighted. When the RIAA attorneys asked for internal Napster doc.u.ments during a phase of the lawyers' investigation known as the discovery process, they received boxes and boxes. They pored over them for weeks. Finally, after a long day's work, attorney George Borkowski came across an internal email from Sean Parker to Shawn Fanning: "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)."

Borkowski had to blink at that last part. Exchanging pirated music? Exchanging pirated music? Parker admitted it, right there in an email, albeit one never intended for outside eyes. Borkowski and partner Russell Frackman, who had worked for years on RIAA piracy cases even though he was so low-tech he didn't even use email himself, couldn't believe it. They deposed Parker the next day. He squirmed. And just like that, the case was all but over. Parker admitted it, right there in an email, albeit one never intended for outside eyes. Borkowski and partner Russell Frackman, who had worked for years on RIAA piracy cases even though he was so low-tech he didn't even use email himself, couldn't believe it. They deposed Parker the next day. He squirmed. And just like that, the case was all but over.

Hank Barry still had a few cards left to play. He called litigator David Boies, who had represented the US Justice Department in its ant.i.trust trial against heavily favored Microsoft in what many called "the cyber trial of the century." At first, Boies didn't return Barry's call. But later that week he was eating dinner with his family, and three of his sons-two in their early thirties and one in his teens-told him how important the case would be and insisted he take it on. Boies did, but he immediately ran up against Marilyn Hall Patel, US District Judge in San Francisco.

On July 26, 2000, when Patel began the trial in a courtroom packed with hundreds of journalists and Napster supporters and opponents, David Boies tried to make the relevant arguments. He mentioned VCRs and the Audio Home Recording Act. Patel cut him off several times. She cited Parker's "exchanging pirated music" email. After both sides were through, Patel left the bench for half an hour. When she came back, she announced that she'd decided in favor of the recording industry. "Plaintiffs have shown persuasively," she wrote later in her opinion, "that they own the copyrights to more than 70 percent of the music available on the Napster system." Napster had to remove all copyrighted material from its service, essentially shutting down the whole thing, within two days. "Oh my G.o.d," Shawn Fanning said to himself, seated in the courtroom. "What in the world is going on here?"

There was a reprieve. Sitting on the three-judge Ninth Circuit Court of Appeals was Alex Kozinski, a President Reagan appointee who fancied himself a cutting-edge technology enthusiast. He wrote columns for the online magazine Slate.com. Kozinski convinced one of his fellow judges, Barry Silverman, to stay Patel's injunction against Napster and hear the case. Napster employees celebrated. "This is like the playoffs," John Hummer, ex-NBA-basketball-player-turned-venture-capitalist, said at the time. "They won the first game, and we won the second game. It's going to seven, and we're going to win it." But Hummer was missing one important piece of information. Kozinski wouldn't be on the Ninth Circuit panel that would rule on Napster's injunction.

UNBEKNOWNST TO MOST people outside Napster or the upper echelons of the record industry, in the days leading up to Judge Patel's decision, Hank Barry had been aggressively using all the wheeling-and-dealing skills he had. At this point, he wasn't sure whether Patel would rule for or against Napster, so he started meeting with the heads of major record labels to try to make a deal. His first call was to Edgar Bronfman Jr., who was, at least in public, one of Napster's strongest opponents. Bronfman, chief executive officer of the Seagram Co., which had purchased Universal Music a few years earlier, had given a speech earlier that year likening Napster to "both slavery and Soviet communism," according to people outside Napster or the upper echelons of the record industry, in the days leading up to Judge Patel's decision, Hank Barry had been aggressively using all the wheeling-and-dealing skills he had. At this point, he wasn't sure whether Patel would rule for or against Napster, so he started meeting with the heads of major record labels to try to make a deal. His first call was to Edgar Bronfman Jr., who was, at least in public, one of Napster's strongest opponents. Bronfman, chief executive officer of the Seagram Co., which had purchased Universal Music a few years earlier, had given a speech earlier that year likening Napster to "both slavery and Soviet communism," according to The Atlantic The Atlantic. The former songwriter was nonetheless crucial to Barry's purposes, as Universal had grown into the biggest worldwide record label, thanks to hits from Eminem, Dr. Dre, No Doubt, and others. But Bronfman also saw that the labels could make a lot of money if they had direct access to Napster's 22 million users-in addition to selling them music over the internet, they could also figure out what type of music they liked and target them with marketing pitches and sales. He agreed to meet with Barry.

Despite Bronfman's Soviet metaphor, he was not Napster's biggest opponent in the record industry. Neither were other international media moguls whose holdings included major record labels. Sony Corp. co-CEO n.o.buyuki Idei was willing to talk, even though he said in later interviews that j.a.panese law prohibited a service like Napster. So was Thomas Middelhoff, head of Bertelsmann, which owned BMG Entertainment. Most of the record industry's anti-Napster brigade was a step lower down the executive ladder: Sony Music's Tommy Mottola and Michele Anthony, Universal's Zach Horowitz and Doug Morris, and BMG's Strauss Zelnick, all of whom perceived online music sharing as theft, plain and simple, and had no interest whatsoever in jumping into bed with their sworn enemy. "It became clear that [Bronfman, Middelhoff, and Idei] had very little control over what their record companies ended up doing," says a record industry source. "They basically threw up their hands at their own [subordinate] executives."

Yet Bronfman recalls: "I very much wanted to make a deal with Napster. I thought it made sense for the industry." Bronfman and Barry talked several times-at Universal's office in Los Angeles, at the Seagram Building in New York, at an airport in San Francisco. Behind the scenes, Barry's boss at Hummer Winblad, John Hummer, told Barry to pursue a deal in which the labels would share 10 percent of Napster's future revenues. (Although the company had yet to make revenues from its business plan and was running mostly on venture capital, record company executives could see huge potential profits by selling advertising on the service or even charging users for downloading songs.) Bronfman told Barry to be more creative. The deal on the table, as Barry recalls, was for all five of the major labels to equally share a 60 percent stake in Napster, as well as 90 percent of the voting power over company decisions. "These were business meetings," Barry says. "These weren't like 'OK, you terrible guy.' These were like 'Let's look at the spreadsheets and make this work.'"

These discussions peaked on July 15, 2000, when Barry and Hummer met privately with record executives in Sun Valley, Idaho. Bronfman invited some of his colleagues-Sony's Idei, Bertelsmann's Middelhoff, head of Sony US Howard Stringer, and several aides-to the meeting at investment banker Herb Allen's annual conference of media power brokers. (Executives for Warner and EMI, the other two major labels, were embroiled in merger talks at the time, and Bronfman didn't think it made sense to include them-but they, too, authorized him to speak for their interests.) Middelhoff walked in and noticed immediately that none of the label executives, not even Bronfman, were sitting on the same side of the long table as Napster. He made a joke of squeezing himself into the remaining chair, between Hummer and Barry. After a few awkward seconds, Barry recalls, Bronfman then said, "Thomas, your seat's over here here"-and Middelhoff dutifully moved to the other side of the table.

By that time, label and Napster executives were even farther apart than they'd started out. As Bronfman recalls, Barry wanted something like a 5050 split of Napster's future equity, while the record industry wanted more than 90 percent. Although Bronfman recalls a nonetheless friendly, cordial relations.h.i.+p with the Napster people, particularly Barry, Middelhoff says he could tell from the minute he walked into the Sun Valley meeting that the Napster people and the label people didn't really like each other. Bronfman did all the talking. Major players like Idei, Stringer, and Middelhoff said little. Hummer and Barry made their points. After ten minutes, it was over. "This was an unbelievably brief meeting," Middelhoff says, still shocked at the disconnect between the importance of the subject and the length of the discussion. "John Hummer and Hank Barry were not ready to move any of their positions. Neither was Edgar Bronfman." But the meeting was long enough for Napster's business model to make a lasting positive impression on Middelhoff.

The meeting sealed the fate of the whole negotiation. Hummer went "radio-silent" for days, Bronfman remembers, and finally called back later in July with bizarre news. In Bronfman's version of the story, the venture capitalist told him he had another deal on the table-for $2 billion. He wanted to know if Universal Music had a compet.i.tive offer. "Please think about it," Hummer said. Bronfman was stunned. "I don't need to think about it, John," he replied, on the spot. "I'm not interested in $2 billion. Frankly, if you get 10 percent [of that], you should celebrate it. Come to think of it, if you get 1 percent, you should celebrate. Good luck." "There was obviously no deal," Bronfman says today. "He was bluffing." Even years later, it's difficult to unravel just where that alleged $2 billion offer came from. Bronfman recalls Hummer strongly implying the source was America Online. Bronfman also spoke with Yahoo!'s Jerry Yang, who said Hummer told him the offer came from AOL. But in an interview for this book, Hummer denies claiming he had such an offer. And George Vradenburg, AOL's general counsel at the time, acknowledges his company was very interested in making a deal for Napster, but no executive ever made an offer-and certainly didn't discuss a number as eye-popping as $2 billion. In any event, negotiations broke down. Days after Bronfman spoke with Hummer for the last time, Judge Patel's injunction came in. Soon after that, Barry proposed a 50 percent owners.h.i.+p split to Napster. But the deal with the labels was dead.

That was the last chance for the record industry as we know it to stave off certain ruin.

To an extent, the opposition from executives at the major labels was understandable. Napster was enabling and encouraging theft, no matter what the internet's "information wants to be free" contingent was saying at the time. The courts, beginning with Judge Marilyn Patel, would consistently rule that file-sharing services trading in illegal music were engaged in copyright infringement. But label chiefs were so bogged down in the file-sharing battleground that they refused to act on the digital future of the business. Many figured they would simply win in the courts and the CD-selling business would go back to normal. As a result, they wasted almost three critical years before agreeing to a functional, legal song-download service.

Several internet-savvy underlings at major labels saw exactly what was about to happen-Albhy Galuten of Universal Music and Mark Ghuneim of Sony Music, to name two. But the majority of executives preferred to cling to the old, suddenly inefficient model of making CDs and distributing them to record stores. In this world, the labels controlled-and profited from-everything. From Michael Jackson's Thriller Thriller to 'NSync's to 'NSync's No Strings Attached, No Strings Attached, the old system made them richer than ever. Also, these executives knew all too well that Napster wasn't the old system made them richer than ever. Also, these executives knew all too well that Napster wasn't theirs. theirs. The CD, at least, had come from Sony and Philips, two familiar companies with long-standing record industry relations.h.i.+ps. This new music distribution system belonged to a snot-nosed punk and his crazy uncle. The CD, at least, had come from Sony and Philips, two familiar companies with long-standing record industry relations.h.i.+ps. This new music distribution system belonged to a snot-nosed punk and his crazy uncle.

Executives also felt they couldn't plunge into a deal with Napster because of their contracts with thousands of artists, song publishers, and retail stores. Publishers, for example, had been getting rich for decades off the mechanical royalties (the seven or eight pennies that go to songwriters for every alb.u.m sold in a store) from Elvis Presley or Michael Jackson sales. They didn't want to lose their meal tickets, and might have made life difficult for the labels. And many top artists signed to labels had contracts that didn't cover digital music. Most would likely want to renegotiate, especially since their lawyers had dealt with mysterious packaging and new-technology deductions in CD contracts for the past fifteen or twenty years. "It was not what the perception is-it was not ignorance. It was not being caught and bit on the a.s.s by something that was coming. It wasn't any sort of arrogance of maintaining the old way and preventing new things from happening," says Al Smith, a Sony Music VP who became legendary to tech executives as a champion stonewaller. "It's that the whole nature of the copyright business creates issues that are impossible to overcome."

Difficult? Yes. But impossible? When CDs took off in the early 1980s, forever altering labels' contracts with artists, publishers, and retailers, executives had no problem forcing their clients into new deals. And, of course, labels would later jump into a new service with Apple Computer that overcame the very same hurdles Al Smith describes. But in the early 2000s, they simply failed to recognize that the new way of doing business was worth the effort. Had the labels made a deal with Napster, they would have found several immediate advantages: a built-in user base of 26.4 million people, as of February 2001, most of whom were loyal and pa.s.sionate about both music and the service itself; an efficient way of communicating with their customers, discerning their musical tastes, and aiming pitches for new alb.u.ms and singles; and the flexibility to set prices at a number of levels, with models ranging from pay-by-the-song to monthly subscriptions. "You can't compete with free," label executives complained at the time, but for many users, free free was not even the best part of the service. They used Napster to get music whenever they wanted, and could burn it to homemade CDs, play it on their computers, or transfer it to devices like the Rio or, eventually, the iPod. Had the labels charged money for Napster use, a large number of freeloaders would have probably dropped out of the service. But a number would have gladly paid for the privilege, as the huge numbers of iTunes Music Store customers proved a few years later. Yes, it's entirely possible that had the labels licensed Napster, pirate-dominated services like Kazaa and LimeWire would have popped up anyhow and undercut an official Napster store. But the Kazaa and LimeWire services were cluttered with spyware and confusing ads, and were never as clean or easy to use as the original version of Napster. was not even the best part of the service. They used Napster to get music whenever they wanted, and could burn it to homemade CDs, play it on their computers, or transfer it to devices like the Rio or, eventually, the iPod. Had the labels charged money for Napster use, a large number of freeloaders would have probably dropped out of the service. But a number would have gladly paid for the privilege, as the huge numbers of iTunes Music Store customers proved a few years later. Yes, it's entirely possible that had the labels licensed Napster, pirate-dominated services like Kazaa and LimeWire would have popped up anyhow and undercut an official Napster store. But the Kazaa and LimeWire services were cluttered with spyware and confusing ads, and were never as clean or easy to use as the original version of Napster.

Any commonsense calculation proves the point. Let's say record labels had jumped in when Napster's user base was at 26.4 million per month. Let's say, conservatively speaking, half don't want to pay and go to Kazaa or LimeWire or some other free service, leaving 13.2 million users. Let's say each uses the official Napster to buy 10 songs for $1 apiece every month. That's record business revenue of $132 million per month, or $15.84 billion a year. Sure, labels would have had to pay artist and publisher royalties out of that, but the overhead of trucks, warehouses, crates, and record stores suddenly gets cut dramatically. And remaining CDs suddenly get a powerful, internet-based marketing and promotional tool. In hindsight, after years of plummeting CD sales and industrywide layoffs and artist-roster cuts, it's clear that making Napster official circa 2001 would have been a huge positive for the record business.

In fairness to the labels, the people who ran Napster weren't exactly open-minded, either. They were rebels by nature. Although Shawn Fanning was an amiable character who would later jump into the digital-music business with major labels via his new company, Snocap, in 1999 and 2000 he wasn't in the position to make Napster deals. He left that function to people like his uncle John, who, as Eileen Richardson recalls, was p.r.o.ne to proclamations like: "We will take down the music industry! And give away free stuff!" Richardson herself was slow and combative in dealing with the RIAA's Frank Creighton and Hilary Rosen. And just as behind-the-scenes negotiations were heating up with the major labels in July 2000, John Hummer appeared in a Fortune Fortune article headlined "Big Man Against Big Music," declaring, "I am the record companies' worst nightmare." This countercultural bl.u.s.ter was fine for a pirate organization aiming for public attention and users, but it alienated potentially receptive music business partners like Bronfman and Idei. And it pushed less receptive partners even further into fight mode. article headlined "Big Man Against Big Music," declaring, "I am the record companies' worst nightmare." This countercultural bl.u.s.ter was fine for a pirate organization aiming for public attention and users, but it alienated potentially receptive music business partners like Bronfman and Idei. And it pushed less receptive partners even further into fight mode.

Because of this stubbornness-on both sides-the labels had come to the defining fork in the road, and they picked the wrong path. "I feel very strongly about that moment in time, and the labels clearly blew it," says Jeff Kwatinetz, chief executive officer of the Firm, a Los Angeles management company that represents hard-rock bands like Korn and Linkin Park as well as pop star Mandy Moore and rapper Ice Cube. "Something like thirty million-plus music fans were in one spot online. At the time, the idea of all the music you would want for $15 a month was an appealing thing and studies showed most users would've paid it. On top of that, if the site was marketed, in addition to the viral buzz, it goes to fifty to sixty to seventy million users. It's in the billions and billions of dollars that [labels] left on the table by suing Napster. Not to mention the possible advertising dollars that could have been generated.

"Clearly there was a deal to be done, but instead it became the moment that the record labels killed themselves," he continues. "Stealing music became more convenient, and the Napster audience was fragmented all over the internet."

During the Napster era, Hilary Rosen of the RIAA appeared in almost every news story as the anti-Napster, antipiracy spokesperson for the record industry. Aside from Metallica, the flame-haired, tough-talking Rosen was the lightning-rod face of the Napster opposition. Wired Wired t.i.tled a 2003 profile "Hating Hilary." It described a file-sharing debate at Oxford University at which Rosen represented the music industry's side of the issue-and had to contend with boos and hisses every time she spoke. Daughter of the first woman ever elected to the town council in West Orange, New Jersey, and an insurance broker, Rosen started her career as a bartender-turned-lobbyist in Was.h.i.+ngton, DC. Her mother provided a connection with thenNew Jersey governor Brendan Byrne, and Rosen found herself lobbying for music publishers. She became simultaneously loved and feared. "She can punch you in the face, and you're still smiling after she does it," John Podesta, chief of staff for the Clinton administration, said in the t.i.tled a 2003 profile "Hating Hilary." It described a file-sharing debate at Oxford University at which Rosen represented the music industry's side of the issue-and had to contend with boos and hisses every time she spoke. Daughter of the first woman ever elected to the town council in West Orange, New Jersey, and an insurance broker, Rosen started her career as a bartender-turned-lobbyist in Was.h.i.+ngton, DC. Her mother provided a connection with thenNew Jersey governor Brendan Byrne, and Rosen found herself lobbying for music publishers. She became simultaneously loved and feared. "She can punch you in the face, and you're still smiling after she does it," John Podesta, chief of staff for the Clinton administration, said in the Wired Wired piece. piece.

Rosen was publicly infamous among Napster supporters for absolutely refusing to budge from her file-sharing-equals-theft position. In private, however, she argued strenuously for a deal. "Hilary, just stop it," Doug Morris told Rosen at the time. "We have something internally that will solve it all." He was referring to Pressplay, a clunky, poorly reviewed online music store created by Sony and Universal that cost $14.95 a month for a limit of fifty songs. The other "official" service, MusicNet, was planning to use content from EMI, Warner, and BMG, but it never got off the ground despite intense, hard-sell content-licensing meetings between its parent company, RealNetworks, and label executives such as Al Smith of Sony Music. "I think Al Smith enjoyed our meetings because he liked the back and forth," says then-Real executive Alan Citron, who tried everything to get majors to jump aboard. "But it never felt productive. We were going through the motions and had little chance of anything happening."

Today, Rosen, now the political director for the Huffington Post and a familiar Democratic face on CNN, finds the labels' Napster-era foot dragging a tragedy. (Some of her critics left over from the Napster period call Rosen's public flip-flopping disingenuous, wondering how she can square her more liberal new position on file sharing with her unyielding conservatism at the time.) "I say this with the most affection possible-[label executives] had all the wrong reactions. I thought this was a revolution and we should ride the wave," she says. "But they just did not see a business model that was anything but cannibalizing in the worst sense. They needed to jump off a cliff, and they just couldn't."

THE J JULY 2000 2000 Sun Valley meeting did have one positive result: It introduced Thomas Middelhoff to Napster. Sun Valley meeting did have one positive result: It introduced Thomas Middelhoff to Napster.

With his small spectacles, slicked-back hair, striped ties, impeccable suits, and imposing height, Middelhoff looked the part of the successful German businessman. His career began at his family's textile firm, but he joined Bertelsmann as a management a.s.sistant in 1986. At the time, Bertelsmann was under the control of Reinhard Mohn, great-grandson of Carl Bertelsmann, who founded the company as a publisher of religious books in 1835. Mohn was conservative and careful, but he spent the 1960s and 1970s expanding the company, buying Bantam Books and Clive Davis's Arista Records.

Middelhoff rose quickly at Mohn's company, turning around a Berlin printing plant, then managing one of the company's primary factories in Gutersloh. He had a particular affection for new technology-he'd written his PhD thesis in 1983 on a German online service in the early days of CompuServe and Prodigy. As head of strategic planning and multimedia, he spent the 1990s plunging into the internet. One day, a young American internet entrepreneur, Steve Case, contacted him and asked for a meeting; Middelhoff went in thinking he'd disperse some words of media magnate wisdom for a while and leave. Instead, he was blown away by Case's new model and international business plan. He lobbied his bosses to put $100 million into Case's company, America Online. Bertelsmann's top executives thought Middelhoff was crazy, but authorized a $50 million investment nonetheless. In 2000, Bertelsmann sold a stake in AOL Europe for $8.5 billion. This turned Middelhoff into a sort of internet-age business hero-and gave him plenty of Bertelsmann investment money to play with.

Middelhoff may have worked for a conservative company, but he couldn't have been more radical when he first encountered John Hummer and Hank Barry at Sun Valley in 2000. He was impressed with Shawn Fanning's service. He immediately had visions of a peer-to-peer network in which customers would pay $4.95 a month and get unlimited content over the internet-a John Grisham novel (published by Bertelsmann's Random House) here, an Elvis Presley alb.u.m (owned by Bertelsmann's RCA Music) there. Middelhoff excitedly returned to Germany and authorized his head of e-commerce, Andreas Schmidt, to look into partnering with the company. Like Middelhoff, Schmidt was obsessed with investing in the new economy, but Schmidt took it to an extreme. "He was a charming guy," says Gerry Kearby, who ran Liquid Audio and spe