Napster buyout blocked; fire sale likely

A federal judge Tuesday blocked the $9 million sale of Napster to German media giant Bertelsmann, a decision likely to force the onetime file-swapping powerhouse out of business.

The surprise decision isn't likely to have much effect on the

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tumultuous online music world because Napster has not operated its file-swapping service for more than a year. But the ruling appears to close the book on a company that became a consumer favorite while being reviled by much of the entertainment industry.

By late afternoon, most of Napster's remaining 42 employees had been laid off, according to a source close to the company. A few employees are staying on to take the company through bankruptcy, but most key individuals--including company founder Shawn Fanning--will be gone.

"As a result of the record companies' and music publishers' opposition, Napster's creditors will be denied substantial repayment and the company will likely be forced into Chapter 7 liquidation," Napster CEO Konrad Hilbers said in a statement. "As with most start-up technology businesses, Napster's technology is of little value without the talented team that created it, so it is an occasion of loss on many levels."

Visitors to the Napster home page found a stark message: "Napster was here."

Bertelsmann's reaction was muted. The company had already made it clear that it was no longer enthusiastic about purchasing the assets, and previous reports had indicated that Napster would likely have been shuttered anyway.

"We accept the court's decision that the sale of Napster's assets to Bertelsmann has been denied and that the purchase will not proceed," the company said in its own statement.

The blockage of Napster's sale will have virtually no effect on the ongoing wars over music distribution online. File-swapping services remain as popular as they ever were in Napster's day, with leader Kazaa still attracting more than 2.5 million downloads of its software in a week, according to Download.com, a software aggregation site operated by CNET Networks, publisher of News.com.

Napster, then and now Jan. 1999 Shawn Fanning, 19, creates Napster, allowing Web surfers to open their hard drives to other people and swap MP3 files. In May, Napster Inc. is founded. Dec. 7 The record industry charges Napster with violating federal and state laws through copyright infringement. May 8, 2000 U.S. District Judge Marilyn Hall Patel orders Napster to stand trial for copyright infringement. June 13 The Recording Industry Association of America (RIAA) seeks a preliminary injunction against Napster, raising the possibility that the service will end. July 26 Patel orders Napster to halt the trading of copyrighted material. A few days later, an appellate court allows Napster to remain in operation while it prepares to hear an expedited appeal. Oct. 31 German media conglomerate Bertelsmann forms an alliance with Napster to develop a subscription service. March 6, 2001 Napster wins a small reprieve in court and remains in business as long as it is filtering out copyrighted material from its networks. Aug. 8 Napster Chief Executive Konrad Hilbers outlines the company's planned subscription service. Sept. 24 Napster agrees to pay $26 million to settle its ongoing legal disputes with music publishers and songwriters. March 8, 2002 Napster cuts 10 percent of its staff as the company returns to court to fight copyright battles. A subscription service is put on hold as the court case drags on. May 17 Bertelsmann agrees to buy Napster for $8 million and retains CEO Hilbers, who announced his resignation just days before, and founder Fanning. June 3 Napster files for Chapter 11 bankruptcy protection. Sept. 3 A federal judge blocks the sale of Napster to Bertelsmann.

The record industry has had other victories since the closure of Napster's service in July 2001, including recent successes in persuading the Napster-like Audiogalaxy to block swapping of copyrighted material and forcing the closure of China-based music download site Listen4ever.com.

Napster's unsuccessful bankruptcy fight may well be the music industry's last successful action against the company. The Recording Industry Association of America (RIAA) and the National Music Publishers Association (NMPA) sought to block Bertelsmann's purchase on several grounds. In arguments reminiscent of the copyright holders' original piracy claims in court, internal Napster e-mails between Hilbers and Bertelsmann were used against the company to argue that the proposed sale didn't meet legal guidelines.

However, if Napster's doors do remain shut forever, it will be a blow to those in the Net community who have argued that file-swapping technology could become a basic part of legitimate online distribution.

Other companies such as Centerspan, Kontiki and Red Swoosh are already pursuing that notion, building businesses on the idea of distributing content using customers' PCs as storage and delivery hubs. But for a few months early this year, it appeared that Napster and Bertelsmann together would test peer-to-peer delivery as a tool of the mainstream Internet.

Former Bertelsmann CEO Thomas Middelhoff repeatedly said that he was convinced Napster's file-swapping model, combined with digital copy-protection and permission from copyright holders, would ultimately be a core part of the German company's online strategy. While no explicit plans had been made, executives had also discussed the technology as a possibility for products beyond music.

With Middelhoff's departure, and a more bottom line-focused management now in charge, any Bertelsmann ambitions in that direction appear dead.

"We have set ourselves the goal of resolutely leading the division as a whole to profitability in its core markets and businesses, based on proven business models," Ewald Walgenbach, CEO of Bertelsmann's consumer commerce division, said in a statement describing the company's financial retrenchment Tuesday.

Analysts said that the business and technology model, as pursued by companies like Centerspan, would likely stay around for some time to come. Few if any of these copyright-friendly file-swapping companies would ever be likely to reach Napster's public profile, however.

Napster's "model has proven difficult, but some of the fundamental underlying technology may yet have value," said P.J. McNealy, research director with GartnerG2, a division of the Gartner research firm.