One instance of fear killing off a great company was in the case of Napster. I was familiar with the case since one of our network partners, Draper Atlantic, had made the first convertible loan to Napster.

Napster was started by Sean Parker and Shawn Fanning. They created a new file sharing technology that allowed people to share files frictionlessly and for free. The technology had many potential uses for digital product distribution. Several other companies had used the technology for other purposes, but Napster created a product that was easy to use and only focused on music files, called MP3s. It was extraordinary technology in that people could now easily download music in the form of MP3 files to their computer and store it there for future use. Teenagers and music lovers everywhere glommed on to this new service and realized that they could get all the music they wanted from each other for free. They felt that it was OK since music was often shared at dances, parties and concerts, and this was just another form of sharing as long as someone originally bought the music. At its peak, Napster had over 80 million accounts.

Most of that music was copyrighted, but there was no clear case for the difference between playing a CD for others to share in a dorm room and sharing a file through the Internet. These MP3s spread so quickly and freely that they started to have a detrimental effect on CD sales in the music industry.

The music industry was an oligopoly. Sony, Disney, Universal and BMI pretty much controlled the entire spectrum of music. They decided which musicians would become famous and which would become obscure. They drove the marketing of music through the radio. They determined which music would be sold through the record stores. They had music and its industry completely wired. But then Napster’s free service came into being and it threw the music industry into a tailspin. The established music companies felt they were under attack. They were riddled in fear of losing their oligopoly, so they lashed out.
The music industry brought lawsuits against Napster, but they went much further than that. They sued everyone they could think of. They even sued the teenagers that were sharing the music. They cleverly called the file sharing “piracy,” and rallied the help of the top musicians to make it clear to the public that file sharing was “theft of services.” They lobbied the government to force a shutdown of Napster and hoped to put the management of Napster in jail.

And Napster responded with fear. The Napster team feared the repercussions of a lawsuit, or …