Who's Afraid Of This Kid? The recording industry, that's who. Shawn Fanning, 19, started a tiny online music service that has giant corporations crying foul.
By Amy Kover

(FORTUNE Magazine) – Early this year officials at Indiana University began noticing a curious thing: A rapidly rising percentage of the university's Internet bandwidth was being consumed by students using a new Web service that most of the officials had never heard of. In January some 20% of Indiana's bandwidth was being eaten up. By February demand had grown so huge that the figure was 60%; the university's servers were routinely clogged. Indiana was forced to install a filter to block the service. Several other universities, faced with the same situation, followed suit.

The culprit: students trading online music using a service called Napster. It's just the latest craze in the music world--and if you think the record industry is happy about it, think again. Its main trade organization, the Recording Industry Association of America (RIAA), has filed suit against the six-month-old San Mateo, Calif., dot-com, charging that Napster's primary function is to enable and encourage copyright violations.

Nonsense, counters Napster, we're just providing software. Founded by the fresh-faced 19-year-old Shawn Fanning, Napster is ground zero for online music aficionados who listen to music using the MP3 format. Napster has created a flourishing community in which visitors can chat even as they send each other copies of the latest Ani DiFranco song.

What Napster has invented is an architecture that makes downloading your favorite tunes incredibly simple and swift. The wrinkle: The music isn't actually traded through its site. Instead, Napster's software, which is free to anyone who wants to download it, allows you to zap a song from your computer via the Internet to another user's hard drive in under a minute. That's great news for anyone who has ever wrestled with a clunky MP3 Website only to have her computer conk out before hearing a single note.

No wonder teens are smitten. Since launching last September, Napster has been the buzz of college dorms and high school locker rooms around the country. Napster claims its user base grows between 5% and 25% daily (daily!). As of early March some five million people had downloaded the software. And why wouldn't teens flip for Napster? Mixing music and hanging out in a chat room sounds like a teen's dream. As one 15-year-old user, Sarah Gunther, puts it: "I love Napster. I'm never buying a CD again."

That's the kind of talk that gives RIAA execs agita. They fear Napster's burgeoning popularity will cut into CD sales. Moreover, the owners of the copyright on the downloaded music (typically held jointly by the record company's publishing subsidiary and the songwriter) don't get compensated. So the trade organization sued in December, charging that Napster "has created and is operating a haven for music piracy on an unprecedented scale."

Though that seems to be exactly what Napster is doing, two intellectual property lawyers say the law favors Napster. For one thing, Napster doesn't actually control any of the music--it never even passes through the Website. "Napster is saying, 'We just put software out there,' " says John Lynch of Howrey Simon Arnold & White. "So the plaintiff has to prove Napster is inducing illegal activity. And inducing is not what they're really doing."

What's more, the RIAA will have to prove that Napster is used almost exclusively for illegal activity, argues Mark Lemley, a law professor at University of California at Berkeley. That will be difficult because Napster provides access to new, uncopyrighted artists as well. The company says it plans to allow other items, such as photos, to be sent using its software too.

Napster argues that it is essentially powerless to prevent users from trading copyrighted music and that it shouldn't be held responsible for their misconduct. RIAA general counsel Cary Sherman dismisses that argument. "If you have knowledge that what you are doing is causing infringement," he says, "you're liable."

If the case proceeds and the courts side with Napster, that will leave Napster's users as the only copyright offenders. Suing every one of them would be futile. So far the RIAA hasn't attempted to do that. It has, however, tried to scare off individuals who have created Websites that allow you to download MP3 files. In those instances the RIAA has sent threatening letters or, in the case of college students, warned their universities.

The RIAA's aggressive posture isn't new--it has resisted new technology for decades. It squawked about cassette tapes years ago and later helped kill digital audio tape, each time on the grounds that recording artists would be deprived of copyright fees. More recently the battleground has shifted to MP3s. Besides its Napster case, the RIAA has filed two copyright suits (one of which it has already lost) against MP3-related companies, including one against MP3.com, the Website that started this whole craze. The industry, meanwhile, is shifting gears: Various record labels are preparing to sell their own song catalogs via MP3 later this year.

If the RIAA sees Napster as pirates' helpers, Napster thinks the recording industry should rethink its business model--and work with the upstart company. That seems like a no-brainer to Napster CEO Eileen Richardson, who, at age 38, plays the role of company elder. Exuding a cocky air of show-biz fabulousness, she says record companies could allow Napster to sell T-shirts and concert tickets on their behalf. Napster could also serve as a great image maker for their new musicians, she argues. "I don't want to say we're the MTV of the Internet," Richardson lets out slyly, "but--ooops--there, I just did! And look what MTV did for the image of stars like Madonna."

Don't count on a record-company alliance with Napster anytime soon. The RIAA's Sherman argues that asking it to work with Napster is "basically saying: 'Abandon all of your rights and make money in another way.' It tells artists that they're only good enough to sell advertising or maybe a T-shirt."

There's hypocrisy on both sides. Each time record companies see a new threat to their profits, they spout noble rhetoric about protecting the rights of artists. And for Napster to pretend it has nothing to do with copyright infringements is a little like a store that sells drug paraphernalia while claiming it's shocked--shocked!--that people use that equipment to take illegal drugs.

There's also lots of hubris on both sides. The industry's refusal to engage Napster seriously suggests a business that's a bit too comfortable doing things the same old way. But for Napster to suggest an alternative business model to the industry is preposterous. This is a company that has yet to produce any revenue--much less a profit--or even nail down a business model.

Right now it's toying with both advertising and e-commerce possibilities. Napster is paying its employees--and its legal fees--with money from its angel investors. It's also flirting with an impressive list of venture capitalists (including fortune's own columnist Stewart Alsop, who writes about the company in "Alsop on Infotech" in this issue).

That said, Napster clearly has good prospects, given its giant fan base. Unlike most attention-starved tech startups, it won't have to sink millions into advertising. As Richardson notes: "We have all the publicity we need."

Not all is rosy, though. As its popularity grows, Napster is facing its own crew of copycats, such as imesh.com. Several different computer junkies have figured out and copied Napster's service. The knockoffs "aren't our greatest joy," admits marketing vice president Elizabeth Brooks. "But we are a freeware company, so we get the whole free music vibe." She adds: "We are so far ahead of any of the imitations that it doesn't really matter."

All the strife only seems to fuel Napster's appeal. Students have cried censorship when universities have tried to free up bandwidth by blocking access to Napster. That has made it the perfect rallying point for students, who have always loved to get involved in (and outraged over) controversial issues. It doesn't hurt that many of Napster's employees are college age. As CEO Richardson points out: "We've got this great underground feel. People love the fact that they can say, 'Pssst. Have you heard about Napster?' " So in the end, the harder the RIAA pushes Napster, the more users the startup probably attracts.

That's something the company embraces. A few of Napster's employees use a screensaver that shows a picture of the late revolutionary Che Guevara. The screen reads, napster: la revolucion. That's overstating it, perhaps, but the RIAA should take heed: This is one guerrilla force it will have to contend with.