Napster runs out of lives -- judge rules against sale
Benny Evangelista, Chronicle Staff WriterPublished 4:00 am PDT, Wednesday, September 4, 2002
A Delaware judge blocked a proposed sale of bankrupt Napster Inc. to a German media conglomerate Tuesday, a ruling that leaves the Redwood City company out of cash, out of options and apparently out of lives.
Judge Peter Walsh ruled that Napster's $94 million deal with Bertelsmann AG was tainted because Napster Chief Executive Officer Konrad Hilbers, a former Bertelsmann executive, "had one foot in the Napster camp and one foot in the Bertelsmann camp."
Walsh sided with music industry groups representing music publishers and record labels, which protested that the Bertelsmann-Napster deal was not negotiated in good faith and possibly pre-empted a better offer.
Hilbers said the ruling will likely force Napster, which the worldwide recording industry blames for igniting a firestorm of online music piracy, to file for Chapter 7 bankruptcy and liquidate its assets.
Napster laid off its remaining 42 employees, with only two left to finish closing the company down for the second time this year, said spokeswoman Ricki Seidman. A message on the Napster Web site read, "Napster Was Here," followed by a page depicting a "Ded Kitty" and a gravestone.
"Napster is disappointed with the bankruptcy court's decision not to approve the sale of the company's assets to Bertelsmann," Hilbers said in a statement. "As with most startup 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."
Napster and its famous cat logo have survived numerous blows since bursting onto the Internet and into pop culture in 1999. But a series of court decisions forced Napster to remain offline since July 2001.
"After being on the brink of death on several occasions, this one looks fatal," said P.J. McNealy, research director for GartnerG2.
Napster's software allowed users to easily trade MP3 music files over the Internet without paying for the songs, prompting a slew of copyright infringement lawsuits from the world's biggest record labels and song publishers.
At one point, Napster claimed more than 70 million users worldwide, but was never able to generate income. Napster first shut its doors in May, but reopened after Bertelsmann agreed to acquire Napster's assets in a Chapter 11 bankruptcy proceeding and pay $9 million to its creditors.
In addition, Bertelsmann said it would forgive the $85 million loaned to Napster to develop a legal online music service. Bertelsmann also provided $5. 1 million to keep the firm afloat during the bankruptcy proceedings.
"We accept the court's decision that the sale of Napster's assets to Bertelsmann has been denied and that the purchase process will not proceed," the company said in a terse statement.
Trade groups representing songwriters and record labels -- who said they were still in line to collect millions in copyright infringement damages -- protested the offer, saying there could be other potential bidders who would provide creditors with a bigger payoff. They claimed Bertelsmann's bid was inflated by the amount of loans that should be considered an equity investment.
In his ruling, Walsh said the deal was tainted because Hilbers was "fundamentally conflicted," but noted he did not appear during court hearings to present his side.
Bertelsmann's plans for Napster were murky even before the forced departure last month of Bertelsmann CEO Thomas Middlehoff, Napster's biggest ally in the industry.
An unsecured creditors' group mounted a last-minute, but unsuccessful search for an alternate bidder. One company that was approached, Listen.com Inc. of San Francisco, flatly turned the group down.
Hilbers could not be reached. Napster founder Shawn Fanning said he had no immediate comment about the ruling.
Analysts disagreed whether the Napster name had any value left even in a bankruptcy auction, but most agreed about its mark on history.
"It energized consumers to the idea they could be getting access to media over the Internet, it turned MP3 into a standard, it scared the hell out of Hollywood," said Forrester Research principal analyst Josh Bernoff. "It really did change everything forever."