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BUSINESS 2000: THE YEAR IN REVIEW
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View Larger Images| BIZ 2000: LOOKING BACK |
| Energy: Summer ushered in a crisis that's only going to get worse. Energy flashback. Retail: A booming start ends in a sputter. Retail flashback. Investment Banking: A banner year goes bust. Digital Music: Napster made recording industry change its tune. Biotech: Of human genes, glowing bunnies and tainted tacos. Year In Review: From Y2K fizzle, to dot-com bust. |
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One image stands out during the momentous Year of Napster: Shawn Fanning making a beeline for a black sedan, looking like a rock star trying to escape the swarm of news photographers chasing him.
It happened in July, a few minutes after Fanning heard a federal judge in San Francisco slap a preliminary injunction against Napster Inc. in a copyright infringement suit filed by the world's biggest record companies.
So here was young Mr. Napster himself, creator of the easy-to-use online music sharing program, suddenly so popular that he was the center of a worldwide media frenzy not seen since Monica Lewinsky left Washington, D.C.
Yet he seemed uncomfortable with that fame, as well as with the conservative tie and blue suit he wore in an attempt to project Napster's new all-business, establishment-friendly image to the court and the public.
That scene was part of an amazing ride for the 20-year-old college dropout and his Redwood City company, which ushered in an era in how consumers will get entertainment.
The Napster phenomenon has forced record companies to move much more quickly to provide consumers with more choices to buy legitimate downloadable music, although critics say the labels still haven't moved fast enough.
And technology companies, mindful of consumers' interest in digital entertainment as demonstrated by Napster, are stepping up their efforts to provide wireless and video-on-demand services.
Also, the Napster "peer-to-peer" concept -- creating a vast, powerful and inexpensive network of individual computers via the Internet to find and share digital data of all sorts -- has become a business mantra chanted by companies like Intel Corp.
"The year 2000 was a watershed year for digital music," said Jim Long, president and chief executive officer of RioPort Inc., the San Jose digital audio company that in 1998 introduced the world to the Diamond Rio, the first portable MP3 player. "We had this huge earthquake called Napster, whose aftershocks are still happening."
"Napster was a seminal event in the evolution of digital commerce," said David Hyman, CEO of Gracenote Inc., a Berkeley company formerly known as CDDB that makes technology that recognizes which songs are on a CD.
But can Napster continue the ride in 2001? First, it's still unclear whether Napster can survive the record industry lawsuit that threatens to shut it down.
Also, it remains to be seen whether the company can find a way to work with the other "suits" -- the major record industry executives -- to persuade consumers to pay for a service they now get for free.
And after a year when Internet entertainment companies like Pop.com, ICast. com, Riffage.com and Scour Inc. succumbed to the dot-com fallout, will anyone, including Napster, be able to turn a profit?
Analysts said the answer starts with the old business axiom that nearly 50 million people can't be wrong.
"The No. 1 thing we've learned here is that there is a huge demand, as evidenced by the popularity of Napster," said Phil Leigh, senior vice president of equity research for Raymond James & Associates.
Even more amazing is how Napster Inc., born in San Mateo but now ensconced in Redwood City, has gained nearly 50 million users worldwide with almost no marketing, a business plan that was always a work in progress, almost no revenue sources and a software product still identified as a "beta" version.
What Napster did was capitalize on a consumer phenomenon that has been building since about 1997, when computer-savvy music fans -- typically high school and college students -- discovered that an audio compression format called MP3 was a free and easy way to use their computer to store, play back and trade their songs via the Internet.
In January 1999, Fanning, then an 18-year-old student at Northeastern University in Boston, tired of trying to find good MP3 songs on the Internet. So he wrote a program that allowed him and his friends to set up computer-to- computer links to share their music files.
With Napster, Internet users can connect with tens of thousands of other users offering millions of files, creating a virtually unlimited library of the most popular songs -- downloadable for free.
By February 2000, about 5 million copies of Napster were being used. College students began using Napster so much that universities around the country restricted or banned its use to keep their Internet connections from becoming clogged.
Those actions gave Napster even more publicity, as did lawsuits in April by rock group Metallica and rap star Dr. Dre. Another enduring image from the year is Metallica drummer Lars Ulrich visiting Napster's headquarters in May. He hand-delivered a computer printout showing the names of more than 300,000 Napster users the band claimed were illegally sharing Metallica songs.
Ulrich struck a blow for musicians who saw Napster as a threat to their livelihoods, but it seemed only to draw more attention to Napster, which by then had about 10 million users. Later that month, Napster picked up key financial support with a $15 million investment from Hummer Winblad Venture Partners, which sent partner Hank Barry to take over as interim CEO.
Napster membership continued to climb, hitting 20 million on July 13, even as the debate over whether sharing free music was legal or moral heated up in both the courtroom and the court of public opinion.
In July, U.S. District Court Judge Marilyn Hall Patel, ruling in the RIAA copyright infringement case, slapped a preliminary injunction against Napster, ordering the company to stop members from trading songs owned by the record companies that filed the suit.
Napster appealed, claiming the order would in effect shut down its business,
and hours before Patel's order was to take effect, the U.S. Court of Appeals in San Francisco blocked the injunction. The appeals court heard arguments from both sides Oct. 2, but has yet to issue its own verdict to affirm or reject Patel's injunction.
More importantly, the deal was a signal of how the record industry was changing its tune in light of Napster's success. Record labels started the year trying to stamp out Napster and were somewhat skeptical about whether consumers wanted downloadable versions of songs they could buy on CDs. But by midyear, the labels began or announced plans to test the downloadable music waters.
With the Napster pact, Bertelsmann's top executives were not only embracing Fanning and Barry as friends, but also the notion that Napster and downloadable music were the very future of the industry.
Details of how the new Napster will operate are still being hashed out, and both Napster and Bertelsmann are trying to persuade the other record labels to play along.
Michael Downs, vice president of the U.S. office of Magex Ltd., which is developing technology that will allow the secure distribution of digital content like music, believes a hybrid of Amazon.com is in the works, combining downloadable music with e-commerce.
"Are you ready for 'Napazon'? That could be it," Downs said. "I don't think anybody realized how fast this would happen."
But another online file sharing company was not so successful.
In April, Scour Inc. of Beverly Hills released a computer-to-computer program that took Napster two steps further, letting users find and trade digital photos and video, as well as music.
The Scour Exchange program attracted about 5 million users, making it the second most popular online file sharing program behind Napster.
But it also allowed trading of pirated versions of first-run theatrical films. In July, the Motion Picture Association and the RIAA filed a copyright infringement suit against Scour. The action scared away the potential investors Scour said it needed to stay in business, so the company filed for Chapter 11 bankruptcy protection in October. An Oregon software company bought Scour's assets earlier this month for $9 million and stock.
Then there's Palo Alto's Riffage.com, which bought its own record label and San Francisco's Great American Music Hall with high hopes of becoming an all- around online music resource. But the company went out of business Dec. 8 and put the Music Hall on the block.
Still, there's Napster, and the idea it unleashed: Music, movies and other forms of entertainment no longer have to be served on physical media such as electromagnetic tape or plastic disks.
Internet radio continues to grow in popularity. And next year, two services offering satellite radio are set to premiere, another step in moving digital entertainment away from computers and into cars.
Sales of portable MP3 players continue to climb, with nearly 100 models now on the market from all the major consumer electronics-makers and some computer manufacturers like Compaq.
Web music portal MP3.com Inc. of San Diego has put most of its legal problems behind it and partnered with the biggest record labels to create more sources of downloadable music.
"There's no question the market is going to come around big time," said RioPort's Jim Long. "Ten years from now, you'll be buying most of your music from the Web and not even think about it."
Other companies are already looking for the next Napster. A San Francisco company called Friskit Inc. last month released a beta version of a new music browser that can easily and quickly find any song available for streaming on the Internet.
Newsweek called Friskit a "streaming Napster" that is one of "five new technologies that could change your life" in 2001.
"The Napster comparison is somewhat flattering because it's a cultural phenomenon," said Friskit CEO Jeff Morgan. "But we want to be legal. We want to work with the labels."
And so does Napster.
- Feb. 2000 - Napster Inc. reports five million copies of its popular online music sharing program have been downloaded in just six months after the startup released a beta version of the software. The San Mateo company continues to fight a copyright infringement suit filed in December 1999 by the world's biggest record labels.
- March 2000 -- Napster becomes so popular among college students that more than 100 institutions, including San Francisco State University and the University of California at Berkeley, block or limit access to Napster to keep Internet connections from becoming clogged.
- April 4, 2000 - Scour Inc. of Beverly Hills releases beta version of Scour Exchange, a computer program that lets users search and share free digital music, photo and video files via the Internet.
- April 13, 2000 -- Heavy metal rock group Metallica sues Napster in U.S District Court in Los Angeles for copyright infringement. Rap star Dr. Dre follows with his own suit two weeks later. Meanwhile, Napster hits 10 million user mark.
- April 29, 2000 -- The world's biggest record labels scored a major victory when a federal judge in New York rules that Internet music portal MP3. com Inc. infringed on copyright laws with My.MP3.com.
- May 3, 2000 -- Metallica drummer Lars Ulrich and attorney Howard E. King appear at Napster offices to hand-deliver a 60,000-page printout with more than 317,000 Internet names of Napster users the band claims are illegally sharing its songs.
-- July 26, 2000-- U.S. District Judge Marilyn Hall Patel in San Francisco slaps preliminary injunction against Napster. Patel orders Napster to stop members from swapping music owned by the record companies that have filed the copyright infringement suit, but Napster appeals saying the company would have to shut down the entire service to comply.
--July 28, 2000-- U.S. Ninth Circuit Court of Appeals in San Francisco stays the lower court injunction. The surprise ruling allows Napster to keep operating the service pending a further ruling on the injunction to take effect.
-- Sept. 6, 2000 - A federal judge in New York rules MP3.com Inc. willfully violated copyright laws with its My.MP3.com service and must pay Universal Music Group damages that could total $250 million.
--Oct. 2, 2000 -- A three-judge Ninth Circuit panel hears oral arguments on whether to uphold or over turn lower court injunction against Napster, which reported 32 million users. Panel adjourns to deliberate, but has yet to render a decision.
- Oct. 12, 2000 - Scour Inc., the second most popular online file sharing company behind Napster, files for Chapter 11 bankruptcy protection, saying lawsuits by record and movie industries scared away new investors the company needed to survive.
It happened in July, a few minutes after Fanning heard a federal judge in San Francisco slap a preliminary injunction against Napster Inc. in a copyright infringement suit filed by the world's biggest record companies.
So here was young Mr. Napster himself, creator of the easy-to-use online music sharing program, suddenly so popular that he was the center of a worldwide media frenzy not seen since Monica Lewinsky left Washington, D.C.
Yet he seemed uncomfortable with that fame, as well as with the conservative tie and blue suit he wore in an attempt to project Napster's new all-business, establishment-friendly image to the court and the public.
That scene was part of an amazing ride for the 20-year-old college dropout and his Redwood City company, which ushered in an era in how consumers will get entertainment.
The Napster phenomenon has forced record companies to move much more quickly to provide consumers with more choices to buy legitimate downloadable music, although critics say the labels still haven't moved fast enough.
And technology companies, mindful of consumers' interest in digital entertainment as demonstrated by Napster, are stepping up their efforts to provide wireless and video-on-demand services.
Also, the Napster "peer-to-peer" concept -- creating a vast, powerful and inexpensive network of individual computers via the Internet to find and share digital data of all sorts -- has become a business mantra chanted by companies like Intel Corp.
"The year 2000 was a watershed year for digital music," said Jim Long, president and chief executive officer of RioPort Inc., the San Jose digital audio company that in 1998 introduced the world to the Diamond Rio, the first portable MP3 player. "We had this huge earthquake called Napster, whose aftershocks are still happening."
"Napster was a seminal event in the evolution of digital commerce," said David Hyman, CEO of Gracenote Inc., a Berkeley company formerly known as CDDB that makes technology that recognizes which songs are on a CD.
But can Napster continue the ride in 2001? First, it's still unclear whether Napster can survive the record industry lawsuit that threatens to shut it down.
Also, it remains to be seen whether the company can find a way to work with the other "suits" -- the major record industry executives -- to persuade consumers to pay for a service they now get for free.
And after a year when Internet entertainment companies like Pop.com, ICast. com, Riffage.com and Scour Inc. succumbed to the dot-com fallout, will anyone, including Napster, be able to turn a profit?
Analysts said the answer starts with the old business axiom that nearly 50 million people can't be wrong.
"The No. 1 thing we've learned here is that there is a huge demand, as evidenced by the popularity of Napster," said Phil Leigh, senior vice president of equity research for Raymond James & Associates.
Even more amazing is how Napster Inc., born in San Mateo but now ensconced in Redwood City, has gained nearly 50 million users worldwide with almost no marketing, a business plan that was always a work in progress, almost no revenue sources and a software product still identified as a "beta" version.
What Napster did was capitalize on a consumer phenomenon that has been building since about 1997, when computer-savvy music fans -- typically high school and college students -- discovered that an audio compression format called MP3 was a free and easy way to use their computer to store, play back and trade their songs via the Internet.
In January 1999, Fanning, then an 18-year-old student at Northeastern University in Boston, tired of trying to find good MP3 songs on the Internet. So he wrote a program that allowed him and his friends to set up computer-to- computer links to share their music files.
With Napster, Internet users can connect with tens of thousands of other users offering millions of files, creating a virtually unlimited library of the most popular songs -- downloadable for free.
MUSIC FOR THE MASSES
First released on the Internet in August 1999, the Napster program became an underground hit among college students who had the high-speed Internet access to make downloading songs a snap. In response, the world's biggest record labels, represented by the Recording Industry Association of America, sued Napster in December 1999, saying the program served only as a conduit for mass music piracy.By February 2000, about 5 million copies of Napster were being used. College students began using Napster so much that universities around the country restricted or banned its use to keep their Internet connections from becoming clogged.
Those actions gave Napster even more publicity, as did lawsuits in April by rock group Metallica and rap star Dr. Dre. Another enduring image from the year is Metallica drummer Lars Ulrich visiting Napster's headquarters in May. He hand-delivered a computer printout showing the names of more than 300,000 Napster users the band claimed were illegally sharing Metallica songs.
Ulrich struck a blow for musicians who saw Napster as a threat to their livelihoods, but it seemed only to draw more attention to Napster, which by then had about 10 million users. Later that month, Napster picked up key financial support with a $15 million investment from Hummer Winblad Venture Partners, which sent partner Hank Barry to take over as interim CEO.
Napster membership continued to climb, hitting 20 million on July 13, even as the debate over whether sharing free music was legal or moral heated up in both the courtroom and the court of public opinion.
In July, U.S. District Court Judge Marilyn Hall Patel, ruling in the RIAA copyright infringement case, slapped a preliminary injunction against Napster, ordering the company to stop members from trading songs owned by the record companies that filed the suit.
Napster appealed, claiming the order would in effect shut down its business,
and hours before Patel's order was to take effect, the U.S. Court of Appeals in San Francisco blocked the injunction. The appeals court heard arguments from both sides Oct. 2, but has yet to issue its own verdict to affirm or reject Patel's injunction.
RECORD INDUSTRY REPOSITIONS ITSELF
Meanwhile, Napster has worked out a settlement with German media giant Bertelsmann AG to jointly develop a revised Napster that would generate money for record companies and artists through a membership fee.More importantly, the deal was a signal of how the record industry was changing its tune in light of Napster's success. Record labels started the year trying to stamp out Napster and were somewhat skeptical about whether consumers wanted downloadable versions of songs they could buy on CDs. But by midyear, the labels began or announced plans to test the downloadable music waters.
With the Napster pact, Bertelsmann's top executives were not only embracing Fanning and Barry as friends, but also the notion that Napster and downloadable music were the very future of the industry.
Details of how the new Napster will operate are still being hashed out, and both Napster and Bertelsmann are trying to persuade the other record labels to play along.
Michael Downs, vice president of the U.S. office of Magex Ltd., which is developing technology that will allow the secure distribution of digital content like music, believes a hybrid of Amazon.com is in the works, combining downloadable music with e-commerce.
"Are you ready for 'Napazon'? That could be it," Downs said. "I don't think anybody realized how fast this would happen."
But another online file sharing company was not so successful.
In April, Scour Inc. of Beverly Hills released a computer-to-computer program that took Napster two steps further, letting users find and trade digital photos and video, as well as music.
The Scour Exchange program attracted about 5 million users, making it the second most popular online file sharing program behind Napster.
But it also allowed trading of pirated versions of first-run theatrical films. In July, the Motion Picture Association and the RIAA filed a copyright infringement suit against Scour. The action scared away the potential investors Scour said it needed to stay in business, so the company filed for Chapter 11 bankruptcy protection in October. An Oregon software company bought Scour's assets earlier this month for $9 million and stock.
A YEAR OF MOSTLY ROCK 'N' ROLL
The year was also tough on other companies trying to profit from Web entertainment. Online music seller EMusic.com of Redwood City, for example, saw its stock drop below $1 a share amid continuing losses.Then there's Palo Alto's Riffage.com, which bought its own record label and San Francisco's Great American Music Hall with high hopes of becoming an all- around online music resource. But the company went out of business Dec. 8 and put the Music Hall on the block.
Still, there's Napster, and the idea it unleashed: Music, movies and other forms of entertainment no longer have to be served on physical media such as electromagnetic tape or plastic disks.
Internet radio continues to grow in popularity. And next year, two services offering satellite radio are set to premiere, another step in moving digital entertainment away from computers and into cars.
Sales of portable MP3 players continue to climb, with nearly 100 models now on the market from all the major consumer electronics-makers and some computer manufacturers like Compaq.
Web music portal MP3.com Inc. of San Diego has put most of its legal problems behind it and partnered with the biggest record labels to create more sources of downloadable music.
BEYOND NAPSTER
And even energy giant Enron and video rental retailer Blockbuster Entertainment are getting into the act. Last week, they launched trials of a new Internet movies-on-demand service in Seattle, Salt Lake City and Portland, Ore."There's no question the market is going to come around big time," said RioPort's Jim Long. "Ten years from now, you'll be buying most of your music from the Web and not even think about it."
Other companies are already looking for the next Napster. A San Francisco company called Friskit Inc. last month released a beta version of a new music browser that can easily and quickly find any song available for streaming on the Internet.
Newsweek called Friskit a "streaming Napster" that is one of "five new technologies that could change your life" in 2001.
"The Napster comparison is somewhat flattering because it's a cultural phenomenon," said Friskit CEO Jeff Morgan. "But we want to be legal. We want to work with the labels."
And so does Napster.
FLASHBACK
-- Jan 21, 2000 -- The world's largest record labels, represented by the Recording Industry Association of America, sue MP3.com on grounds that My.MP3. com violates copyright laws. Meanwhile, a Santa Clara County judge issues an injunction stopping 21 computer programmers from posting on the Web a code called De-CSS, which can be used to unlock the program that scrambles movies recorded on DVD.- Feb. 2000 - Napster Inc. reports five million copies of its popular online music sharing program have been downloaded in just six months after the startup released a beta version of the software. The San Mateo company continues to fight a copyright infringement suit filed in December 1999 by the world's biggest record labels.
- March 2000 -- Napster becomes so popular among college students that more than 100 institutions, including San Francisco State University and the University of California at Berkeley, block or limit access to Napster to keep Internet connections from becoming clogged.
- April 4, 2000 - Scour Inc. of Beverly Hills releases beta version of Scour Exchange, a computer program that lets users search and share free digital music, photo and video files via the Internet.
- April 13, 2000 -- Heavy metal rock group Metallica sues Napster in U.S District Court in Los Angeles for copyright infringement. Rap star Dr. Dre follows with his own suit two weeks later. Meanwhile, Napster hits 10 million user mark.
- April 29, 2000 -- The world's biggest record labels scored a major victory when a federal judge in New York rules that Internet music portal MP3. com Inc. infringed on copyright laws with My.MP3.com.
- May 3, 2000 -- Metallica drummer Lars Ulrich and attorney Howard E. King appear at Napster offices to hand-deliver a 60,000-page printout with more than 317,000 Internet names of Napster users the band claims are illegally sharing its songs.
-- July 26, 2000-- U.S. District Judge Marilyn Hall Patel in San Francisco slaps preliminary injunction against Napster. Patel orders Napster to stop members from swapping music owned by the record companies that have filed the copyright infringement suit, but Napster appeals saying the company would have to shut down the entire service to comply.
--July 28, 2000-- U.S. Ninth Circuit Court of Appeals in San Francisco stays the lower court injunction. The surprise ruling allows Napster to keep operating the service pending a further ruling on the injunction to take effect.
-- Sept. 6, 2000 - A federal judge in New York rules MP3.com Inc. willfully violated copyright laws with its My.MP3.com service and must pay Universal Music Group damages that could total $250 million.
--Oct. 2, 2000 -- A three-judge Ninth Circuit panel hears oral arguments on whether to uphold or over turn lower court injunction against Napster, which reported 32 million users. Panel adjourns to deliberate, but has yet to render a decision.
- Oct. 12, 2000 - Scour Inc., the second most popular online file sharing company behind Napster, files for Chapter 11 bankruptcy protection, saying lawsuits by record and movie industries scared away new investors the company needed to survive.
E-mail Benny Evangelista at bevangelista@sfchronicle.com.
This article appeared on page D - 1 of the San Francisco Chronicle
