Meeting began at 7:15 at the Palo Alto Art Center. Peter Allen began by giving some background on Napster. It was incorporated in May 1999. By September 1999 it had 1 million users. Napster was sued for copyright infringement in by RIAA in December 1999. In October 2000 Napster got $60 million in financing from Bertelsmann. March 2001 was the peak of service, with 2 million users on line at once and with 550 new connections each second. Users were sharing 385 million music files, requiring 175 Linux servers using 250 MBPS. This was very expensive, especially since none of the servers were providing content - all were just searching. There were 90 million registered users as of June 2001, making 550 new connections each second.
A participant said he met a Croatian who said there were many Croatians using Napster, and all of them just exchanged Croatian folk songs. Downloading music files on dial-up modems takes a long time, so broadband is the best way to go.
Files were large, about 3 - 8 meg; average file size was 5 meg. As of March 2001 Napster was blocking specific songs as requested by RIAA and various artists. To get around this blockage people would slightly modify song or artist names to defeat the blocking. Napster had to have dozens of people working to beat the evasions by renaming content and artists.
Peak of service March 5 and 6, 2001 when there were fears Napster would be closed or otherwise limited. It took until April 2001 before the number of engineers exceeded number of lawyers at Napster. . New service was started from scratch in February 2001, using encryption, high security, and an easy to use interface. The idea was to charge for downloading specific songs rather than be free, so the service and Interface had to be good. On July 2, 2001 file sharing was turned off voluntarily. Napster hit the iceberg on May 14, 2002, and the CEO resigned.
The new Napster model was to store licensed songs on Napster servers and sell access to them for a monthly fee. Once anyone downloaded song files those song would be available for copying to another device, and to any of the peers, yet the content would still be licensed and secure.
The original system was set up so that Napster was used to identify where a song was located. A request for an item went via Napster to the PC that had the item. Then the requester would download the song directly from the other PC. No songs went through Napster. The new system had separate data bases for members, content, and traffic between artists and consumers. It included customer support, artist support, a user database, a content database, digital rights management, and certificate authority in addition to the original Napster web pages, servers and active database.
The setup allowed unknown artists to get on-line and be noticed for very little. It made it easy for new artists to become popular and listed to without needing expensive promotions. Examples of new artists and groups doing this successfully were given. Normally music would be out of print in a year, and unavailable in 3 years. Napster allowed people to find this old content and download it when it wasn't otherwise distributed or available. Lots of old music was rediscovered and made popular this away.
By 2002 Napster was the 3rd most popular brand in the world after Coke and Mercedes. All three were used and known everywhere, but it took many years and lots of promotions to get Coke and Mercedes as well known as Napster was in just a few years with no marketing expenses. .
Digital rights management software was used secure client protection and antitheft anti-hacking measures. The artists, who were paid directly from the subscriptions to Napster, retained property rights. They had detailed information as to what songs were on specific systems, popularity of individual artists and songs, what content was most listened to, where particular songs were most popular, etc. Songs have acoustic fingerprints that can be identified and tracked to be sure that only the proper, authorized songs were shared and that only paying customers copied them. Passwords were obfuscated, and code was obfuscated to improve security. The file transfer also was encrypted. Libraries with data were constantly replaced with new encryption systems. This new service was built in only 11 months, remarkably fast for such complex software.
Financing for Napster was 20 million shares, $17 million equity, and $85 million in debt to Bertelsmann. There were 4 board members, John Fanning, Hummer & Barry representing venture capitalists, and Konrad Hilbers. The fatal condition for decision making was having a 4 member board that was tied on key ownership issues.
Gifts that Napster had were brand recognition, a viral market, a well defined P2P system, successful top quality technology, dedicated visionaries, faithful financial backers, and the system scaled well. Curses that Napster had were the huge legal issues, an untested financial model, incessant attention being paid by outsiders and opponents, it depended on other's content, the organization suffered a lack of focus, and the ownership was complex. After declaring bankruptcy and setting up the demonstration displays, Napster requested permission to enter into negotiations with Banks 4 and 5 in Palo Alto. The Courts blocked sale of Napster to Bertelsmann. This created a problem since Bertelsmann was the logical buyer and had the biggest investment. The major problem was that Napster violated existing business models and lawyers couldn't handle the novelty of the new business model and of the peer to peer distribution system.
Napster wanted to operate legally and make money fully honestly. Later services like Kaaza aren't directly involved in the file transfers, they just make transfers possible. Unfortunately the lawsuits and legal problems kept that from happening.
Napster's rise and fall have been used as a case study in almost every business school and many engineering schools. How will this model win long term considering the opposition? That isn't clear. Roxio bought the technology rights and will have a chance to make it work and pay. It's more likely to happen elsewhere than here because of all the legal roadblocks in the U. S.
The meeting adjourned at 8:50 PM.
Submitted by Bob Moss