Napster: Opportunity Meets A Web of Egos

By John Glynn Jr., Alex Tauber
2009 | Case No. E375

Napster: Opportunity Meets a Web of Egos” chronicles the rise and fall of Napster and, in particular, focuses on several vignettes between Shawn Fanning, Napster’s founder, and Ron Conway, an angel investor. The case starts with Napster’s humble beginnings – Fanning, a college dropout, writing the code for the Napster application on the floor of his uncle’s office. It then chronicles how the program became one of the Internet’s fastest growing applications and demonstrated the power of peer-to-peer applications. With its fast success, the case then discusses Napster’s twists and turns as it battles with a record industry that demonizes it as well as how the company evolves after different rounds of fundraising. A common thread in the Napster story is how the presence of strong egos squelched the tremendous opportunity that the company had. These egos (both inside and outside of the company) built a web of hubris that put Napster and the record industry in such a destructive warpath that, in the end, everyone lost – Napster went bankrupt and the record industry had to wrestle with many imitators that were more difficult to silence. The case specifically focuses on the following three vignettes between Shawn Fanning and Ron Conway. 1. The first vignette occurs at the point when Napster’s leaders are negotiating with the record labels before the courts get involved. Fanning feels that the company’s leaders, Hank Barry (its interim CEO) and John Hummer (the venture capitalist who represents the majority owner) are continuing the game of brinksmanship. Fanning calls Conway for advice. He is frustrated because he feels now is the time to strike a deal with the record labels and resolve any potential legal issues. However, Barry and Hummer are not listening. Conway needs to give Fanning advice on how to handle this situation. 2. The second vignette occurs at the point when the stakes are the highest (the courts have rendered a potentially adverse ruling against Napster and Bertelsmann, one of the major record labels, has made a large investment in the company), Fanning calls Conway for advice. He is at the end of his rope and feels frustrated. He wants to quit. 3. The final vignette occurs after Bertelsmann has made a third and final offer to buy Napster. The offer is conditional on Bertelsmann not assuming any legal liability for potential copyright infringements. Conway does not like the structure of the offer -all the preferred shareholders recover the full value of their investment but Shawn Fanning, who is a common shareholder, does not make a cent. Conway doesn’t feel like this is fair. His answer to this apparent injustice: all the preferred shareholders should take a haircut totaling $1 million and that sum should be given to Fanning. There is one problem – the two largest preferred shareholders, Hummer and Fanning’s uncle, don’t want any part of this deal. Conway must wrestle with three options on how to tackle this.

Learning Objective

The initial analysis of the three case vignettes (described above) require students to identify the option-set and then evaluate the pros and cons of each option. The settings are different in each of the vignettes. In the first vignette, there is a founder who is still married to his idea/product and does not like the direction that the new leadership team has chosen. In the second vignette, Fanning, who has been the face of Napster and who was the one who developed this blockbuster application, has lost emotional ownership in the company and wants to quit. In the last vignette, there is a silver bullet for the investors — an offer that will make all the investors “whole.” However, Conway does not feel like this offer adequately compensates Fanning. Although Fanning did not invest any money in Napster, he invested his time, he developed the blockbuster product that Bertelsmann wants to buy, and he always did what the “suits” with egos told him to do. Per the last study question (#5), by evaluating Fanning’s journey from beginning to end, students can also learn some enduring lessons about the entrepreneurship process. Many mistakes were made in not realizing the blockbuster potential of Napster. Some of these are mistakes that an entrepreneur has control over and should learn from.

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