Shawn Fanning's New Tune
The creator of Napster has a plan to help file-sharing networks go legit and make money for the music labels.
By John Heilemann

(Business 2.0) – Shawn Fanning is back--back in the news, back in business, back in the thick of the digital-music wars he unleashed six years ago with Napster. On this winter day, he's down in Austin for the South by Southwest festival, decked out the way you remember him: the Red Sox cap, the Billabong T-shirt, the hepcat skateboarder shoes. He's just as articulate and ambitious as he was in the old days too. What's different now is that he's no longer seen as a renegade techno-anarchist. With his just-out-of-stealth-mode startup, Snocap, Fanning is working the system, plotting to transform peer-to-peer file-sharing networks into profit centers. It's enough, he says, to make some former allies ask, "Are you moving to the dark side?"

If forging a truce between the record labels and peer-to-peer services is dark, then Fanning is guilty as charged. His aim with Snocap is not to sell tunes directly to consumers but to create a central global clearinghouse for digital music--a back-end system equipped with technology to monitor, authorize, and monetize the swapping of copyrighted tracks. In doing so, Fanning hopes "to open up the market in a disruptive way," seeding an array of new P2P services that will provide "the deep libraries people have gotten used to, but where rights-holders are respected."

Fanning plans to get Snocap up and running before the end of the year. The system (assuming it works as advertised) strikes me as clever and sensible, though not without hurdles to clear, both strategic and operational. The biggest unknown facing Snocap, however, is whether the warring factions of the digital-music fracas are ready to embrace détente--or would rather go on indefinitely beating each other senseless. Strangely, perhaps naively, I think sanity just might prevail.

That Fanning clearly believes this too is a testament to the sheer resiliency of youth. Having lived through the madness that was Napster's rise and fall, he considered shrinking off into anonymous coding--or, at least, taking a really long vacation. Instead, one week after the original Napster went under in 2002, Fanning started planning Snocap. "Looking at the music business and what Napster had started," he explains, "I couldn't see how anything could move forward, how the deadlock could be broken, without this clearinghouse. And I couldn't see any companies out there poised to play that role."

The system devised by Fanning and his fellow engineers, many of them ex-Napsterites, is designed to be a neutral middleman. Labels would register their catalogs with Snocap, using its central database as a platform for managing the distribution of their content, setting licensing and copy protection terms. The file-sharing services Snocap signs up, in turn, would use its software to identify tracks when they're being traded, check them against the database to see if they're registered and authorized for sale, and charge for them accordingly. Snocap would earn its keep by taking a cut of the ensuing revenue.

What Snocap is offering the record labels in return for registering their songs is obvious and straightforward: a chance to make some coin off the tens of millions of P2P downloads currently taking place gratis, a one-stop shop for rights management across multiple online retailers, and valuable market information about demand for their catalogs. (Snocap would report the trading of unauthorized tracks so the labels would learn which ones to register.) For existing and future P2P services, the pitch is even simpler: the chance to go legit without having to negotiate with each label. And for consumers, Snocap promises tracks of reliably high quality, free of viruses and spyware. (Oh, and no lawsuits either.)

For Snocap to work, it will need to offer the P2P services a selection of songs large enough to keep their users happy--and that means signing up, at a minimum, most of the major labels. With the entertainment industry still waging an epic legal battle against file sharing (including, most prominently, the MGM Studios v. Grokster suit heard by the Supreme Court in March), the prospect of the labels throwing in with their former bête noire might at first seem improbable. But the world has changed since Napster's heyday--not least because of Apple's iTunes.

"Apple turned the tide," Fanning says. "It showed the labels that people were willing to pay for music, even though they could get it other places free. It changed the environment from where the industry was hostile to where suddenly people saw the opportunity." Fanning goes on, "But the music business doesn't want one or two retailers to control the entire market. And I think, considering the difference in the numbers between iTunes and P2P"--it took Apple more than a year to sell 100 million downloads, the number traded through free P2P systems every three or four days--"it's undeniable where the industry has to go if it wants to continue to grow the market."

Snocap has already signed both Universal Music and Sony BMG, which together account for nearly half of the worldwide music market. And the company is optimistic about landing the other majors. As Snocap's director of business development, Alex Rofman, puts it, "After all the millions [the labels] spent on litigation, and all the goodwill lost with their customers, P2P usage is bigger today than it was five years ago. So when we walk in and say, 'There's a better way to do this,' it's not exactly a no-brainer--because there's still a lot of resistance to change in these organizations--but it makes sense to them on a business level."

The trickier task for Snocap will be persuading P2P services to join. Some are philosophically opposed to any form of centralization. Others fear that any decrease in the selection of songs they make available will cause users to hit the road. And others, of course, believe that any business model other than "free" will be a kiss of death. Fanning and Rofman insist that, though they'd love to land a top P2P such as eDonkey before Snocap begins operations, it isn't necessary. "We don't expect our first retailers to be king-of-the-world types," Fanning says. "We just need two or three quality services that are willing to experiment."

In fact, in the long run, Snocap seems to be banking on new services rising up to take advantage of its capabilities. As Rofman argues, "We're still at a very early stage in the development of this market. How many business models are out there? There's the Steve Jobs model, the streaming model, and the tethered subscription model. And I'm not sure that any of them, ultimately, is going to be what consumers want on a mass scale."

Rofman is surely right about that--a fact that the much-hyped success of iTunes has done a lot to obscure. Before the online music market hits its sweet spot, tons of experimentation will be needed with business, pricing, and access models. And for that to happen, it seems to me, a system like Snocap's is not just necessary but basically inevitable.

Will Snocap's system be the one that flourishes in the years ahead? Maybe, maybe not. Though the company faces little competition now, that's not likely to be the case for long. (Especially if the Supreme Court deals a crippling blow to free file-sharing services.) It also faces big technical challenges, scalability first and foremost. At the same time, Snocap has a number of distinct advantages: its head start over future rivals, the experiences of its engineers at Napster, and, not least, Fanning's credibility with both the labels and the P2P community.

With hindsight, it's easy to see that the biggest impediment to Napster's success wasn't the record labels per se. It was that Fanning's ideas and his invention were too far ahead of the curve. Now, with Snocap, Fanning seems to be returning right on time. We all know that F. Scott Fitzgerald's old saw about there being "no second acts in American life" is complete and utter crap. But I can't think of anyone who has proven it by age 24. Here's hoping that Fanning will.