The Sad Truth About Napster How do you build a business from a piece of software? You don't, in the case of Napster. This thing should never have gotten out of Shawn Fanning's computer.
(FORTUNE Magazine) – Here's the sad truth about Napster. The company's legal argument is untenable, its business model is terrible, and its software isn't even all that good.
I could easily be accused of sour grapes for saying these things. I have invested in two companies--FullAudio and Garageband.com--that, while not real competitors of Napster, do operate in the same space, i.e., the digital music business. Indeed, one of those companies, FullAudio, has filed an amicus curiae brief in the legal case against Napster.
But I don't have sour grapes. In fact, I wish I didn't feel compelled to write this column, because I like the people who are running and financing Napster. Hank Barry, the interim CEO from Hummer Winblad Venture Partners (the VC firm that invested $13 million in Napster) was counsel to one of my portfolio companies and is one of the smartest intellectual-property attorneys I've ever met. Shawn Fanning, the whiz kid who wrote the software for Napster in his college dorm room, is a genuinely nice guy who has managed to keep his head despite an amazing swirl of publicity: This kid has been more visible in the past six months than Bill Gates! In a sickening spiral of publicity, with both vilification and adulation, Fanning has been pictured on the covers of several magazines (including this one), sometimes depicted as the savior of a tech industry grown inbred and moribund. But these magazines are ignoring a harsh truth, and that's what has me riled up.
The fact is that Shawn Fanning never set out to create a business based on his software--and that's the way it should have stayed. I have a really old-world view about business: It's important to have a clear idea of what value you are creating and exchanging when you start a business. Otherwise, you're just playing games with people's time and money, and that's not good. And that's why I'm so irritated about the publicity surrounding Napster: If the courts decide, as I expect, that Napster is breaking the law of the land regarding intellectual property and should not be allowed to continue, the only people who will be hurt are the ones who knowingly participated in building a company without a commercial purpose. They'll get what they deserve, but they should never have gotten involved in the first place. Here's why:
--Napster has no legal basis. Napster has served a purpose, albeit a small one. It has helped us understand that consumers want music files on their hard drive instead of streamed from another computer across the Net. Napster claims that 35 million people have downloaded its software in the year or so that it has been available. That's remarkable, and it suggests that music companies should focus on selling digital bits that customers can download rather than trying to sell streamed bits. But Napster allows individuals to take for free what they previously were compelled to pay for. There's no possible way that's legal.
--Napster is not good for the music business. Yes, the music labels have been gouging consumers for years. Yes, the music labels don't give artists as big a cut of revenues as they should. Yes, digital music will radically change the business model for the music industry going forward. All of those things are true. But Napster still enables an illegal activity, one that we actually do not want to become the rule of the land because it will have a chilling effect on the motivation of new musical artists. We want those greedy garage bands to keep dreaming about getting as rich and successful as Madonna or Carlos Santana.
--Napster is not a business. Shawn Fanning has testified that he never thought about creating a business around Napster. He was just a bored college student, looking for something to do. This is part of why I like Shawn Fanning: He seems like a real person, as opposed to those hyper kids who get straight A's and start companies that will clearly be major enterprises before they graduate from Harvard. And as a matter of fact, Fanning's financial interest in Napster is now de minimis, having been diluted by interim investments and stock options. The people who really stand to profit from Napster are Fanning's uncle John Fanning and the investors, none of whom appears to have a convincing vision for how the company might actually become an enterprise of real value.
This really irritates me. I invest in people who break their backs trying to create companies that provide real value. We're held to a much higher standard of performance: generating real revenue in return for value and being required to have a business model that will eventually produce a profit, still the measure of a successful enterprise in our free and open economic system.
--Napster software is flawed. Get this: Napster's software isn't designed very well. Everybody at Napster whom I ask about this dismisses it as a trivial problem that will get fixed, someday. But, wait a minute--this very software is being lionized! What gives?
The job for Napster is to keep a real-time directory of the music files on the hard disks of all those users who are connected at any one time, so that one user can request and get a copy of any file on another user's hard drive. But the software only shows you a directory of files for those users connected to the same physical computer. Let's say Napster has 100 server computers maintaining the directory of files. When you log on, you can only see a directory of those files for the users connected to the one server you are linked to. The users connected to the 99 other servers are invisible to you. (Some Napster users keep disconnecting and reconnecting to get around this.) Napster actually has far more than 100 servers maintaining the directory. If 35 million people have the software, fixing this is hardly trivial. Showing music files stored on a million users' hard disks to any one of those million users at any one time is a very, very difficult computer science problem. Shawn Fanning never did study computer science.
Even worse, Napster now claims to be leading the charge for what is called peer-to-peer software. But I remember writing about peer-to-peer computing in my newsletter back in the late 1980s. Apple Computer's Macintosh, for instance, uses peer-to-peer design for communicating between computers and printers on the network, a design that is much easier for users than the way that Windows computers communicate with printers. Sun Microsystems' Solaris operating system (and all versions based on Unix) treats all other computers on the network as peers. So how did Napster, a program written by a 19-year-old who was thinking about majoring in computer science, become the icon for a field of computer science that has been studied for years by well-trained, professional programmers? Something about that scenario makes me itch.
That's the sad truth about Napster: It has become an icon for values that aren't supported by the reality of the company. There is no legal basis for what its software does. It will not make life better for musicians. It was never intended to create real economic value. And if the software doesn't work as well as everyone imagines, then what are we left with? Nothing. Nothing at all.
STEWART ALSOP is a partner with New Enterprise Associates, a venture capital firm. Except as noted, neither he nor his partnership has a financial interest in the companies mentioned. He can be reached at email@example.com. His column can be bookmarked online at www.fortune.com/technology/alsop/.