Napster to Liquidate After Sale Blocked

Napster Inc., the song-swapping service that became the fastest-growing business in history while terrorizing the entertainment industry, said Tuesday that it plans to liquidate after a bankruptcy judge blocked the sale of its technology to Bertelsmann.

Judge Peter Walsh agreed with record labels and music publishers who complained that the German publishing giant was too close to its former employee, Napster Chief Executive Konrad Hilbers, when it negotiated the sale.

“Mr. Hilbers had one foot in the Napster camp and one foot in the Bertelsmann camp,” tainting the transaction, Walsh said.

Hilbers had asked his Bertelsmann superiors for approval before taking the Napster job, and he later wrote in an e-mail, “My decision-making was always driven by what I thought was a better decision for Bertelsmann.”

Napster plans to convert the Chapter 11 bankruptcy reorganization it filed in June to a Chapter 7 liquidation, keeping only its chief financial officer and one or two workers.

Dozens more were fired Tuesday including founder Shawn Fanning, and Hilbers resigned.

By evening, the Web site that had drawn tens of millions of visitors read only: “Napster was here.”

Napster leaves behind a world changed by the powerful peer-to-peer system it pioneered.

The widespread piracy of copyrighted works the courts found Napster had encouraged polarized the entertainment and technology industries, with entertainment winning the early battles in the political war even as music sales slumped.

“What the Napster denouement shows is that you’ve got to have great software consumers want, and you’ve got to do it in a way that’s consistent with intellectual property laws,” said Rob Glaser, CEO of RealNetworks Inc., a maker of programs for playing music and video over the Internet.

Such Napster successors as Kazaa and MusicCity have continued to make copyrighted material available through broad consumer networks while fighting lawsuits.

During Napster’s bankruptcy proceedings, the record labels argued that more than $80 million in Bertelsmann’s loans to Napster were more like an equity investment, meaning the money shouldn’t have counted toward the proposed purchase price of more than $100 million.

Walsh’s ruling will cost Napster creditors the $9 million in cash Bertelsmann’s ex-CEO, Thomas Middelhoff, had pledged to complete the transaction. Under Middelhoff’s more conservative successors, Bertelsmann probably would have pulled the plug on Napster after the sale, a person familiar with the process said.

Napster blamed the record companies for spoiling the sale. The Recording Industry Assn. of America declined to comment.

But Carey Ramos, an attorney for the music publishers, said his clients weren’t acting out of spite.

He said other bidders had been scared away by Bertelsmann’s plan to include its massive loans in the sale price and that they might come forward now.

The prospects for that were bleak, Napster said. No bidders had emerged by last week.