A Dot-Com Melodrama With Real Money At Stake

Nobody's sure what will emerge from the current Napster controversy. But the firm's backers say they are unfazed.
Ed ZwirnOctober 27, 2000

If it had been the plot of a made-for-TV movie, critics would probably pan it as a cliché.

A geeky loner goes through high school obsessed with computers. The other kids poke fun at his “nappy” hair.

But his determination and dedication only increases with time. His daydream for a website gradually becomes a reality, leading him to drop out of college in his freshman year and enter his twenties as an upstart millionaire challenging the titans of the recording industry.

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But however much the Napster saga may seem the stuff of fantasy or melodrama, it is playing out on a real stage. And the players involved are risking lots of very real money.

The firm, founded May 1999 by 19-year-old Shawn “Napster” Fanning, received a major financial boost in May 2000, when it received $15 million of venture capital funding in a “Series C” round led by VC firm Hummer Winblad. Napster refuses to provide details on whatever Series “A” and “B” may have amounted to or, for that matter, exactly what the money is being spent on.

The Lions Share to Lawyers

But one thing seems certain: The lawyers must be getting the lion’s share.

Despite Napster’s insistence in referring to its product as a “file sharing technology,” the Recording Industry Association of America (RIAA) has been persistently challenging it in court as a “vehicle for copyright infringement.”

An attorney representing the RIAA says his organization plans to go after the maximum applicable “statutory damages” should its suit prove successful.

At a potential $100,000 a pop for each copyright infringement, this penalty could prove sufficient to strangle the Napster in its infancy (adolescence?).

Consider the following: In the less than 18 months it has been around, Napster has accumulated some 35 million members, Dan Beldy, a Hummer Winblad partner and an advisor to Napster, told a recent meeting of the New York Venture Group.

Indeed, random tests of the site by revealed about 10,000 users logged on at any given time, providing access to about 1.5 million files (i.e., recordings, possible copyright infringements). It would be frightening to extrapolate based upon the total number of files out there, but even applying the “ultimate sanction” to one million counts of infringement would produce the ludicrous figure of $100 billion.

Lawrence Welk, Anyone?

In addition, the tests apparently gave the lie to the stereotype of Napster as a toy for the “kids.” In addition to the currently hip selections one might expect if the service were only being utilized by the young, repeated use of its “find” function revealed hundreds of files each for such stalwarts as Lawrence Welk, Robert Goulet, Jim Nabors and The New Christy Minstrels.

Beldy, whose firm moved into key management (including CEO) and advisory positions at Napster at the same time they provided the funding, $13 million of which came from Hummer Winblad itself, spoke to the New York group just prior to the start of the so- called “subway series” between the Yankees and Mets.

“It’s two out, nobody on and the bottom of the ninth,” he said, characterizing the present situation. “It might not work out and we might lose all our money,” he told the assembled venture capitalists and onlookers, in a presentation short on specifics.

Indeed, the Hummer Winblad folks have been making themselves available for events such as the New York program, enabling them to both state the Napster case and do the chest thumping routine the VC crowd has come to expect from its stars.

But even discounting the bravado, Beldy’s statement may be far from an exaggeration.

A three-judge panel hearing in California’s Ninth Federal Court District met on Oct. 2 and is expected to rule any time now on the issue of whether Napster will be enjoined from conducting its principal “file sharing” activity.

Beyond that lies the copyright infringement case itself, and the question of whether to penalize Napster based upon one the three following possible criteria: 1) the infringement of profit, 2) losses to owners (the recording companies) or 3) the “statutory” penalty, which could range from $500 to $100,000 for each “copyright infringement.”

Russel J. Frackman of Los Angeles-based law firm Mitchell Silberberg & Knupp, is one of the phalanx of attorneys representing the music industry. He admits the intention is to go for the maximum “statutory penalty” in this case.

Asked about the possibility that others may spring up and use the relevant technology even if the industry group is successful at putting Napster out of business, Frackman said “Perhaps, or perhaps it will be an object lesson to others out there.”

Refusing to speculate about the legal costs involved, Frackman would only offer his “guess that it’s costing each party an equal amount because each party has an equal amount of lawyers.”

You Just Don’t Get It

But even if one could get a handle on the costs of defending Napster and the risks involved for Napster principals, one would still be left trying to calculate the possible upside.

With a business plan notable for the absence of specifics, even for dot-com land, and an uncertain future even if it survives the lawsuit, Napster promoters seem to be sure of only one thing: They have latched on to something big, and there has to be a way to make money off of it.

Napster CEO and Hummer Winblad partner Hank Barry, in one of the few specific pronouncements made by the group offered the music industry an olive branch by offering to change Napster to a subscription service and charge members $4.95 per month, remitting maybe $500 million to the industry by some yet- to-be-defined mechanism.

But whatever the business model for Napster (assuming there is a Napster) proves to be in the long run, the crowd of assembled venture capitalists at the New York Athletic Club seemed primed for what may prove to be one of the last huge gambles to come out of dot-com land.

One audience member, witnessing Beldy strip off his shirt to reveal a tee sporting the Napster logo, was heard to comment that the speech was short on specifics.

“You just don’t get it,” somebody else at the table said incredulously. “Whatever the court decides, that’s what Napster is going to be.”