A three-member panel of judges from the 9th U.S. Circuit Court of Appeals in San Francisco ruled that Napster "knowingly encourages and assists its users to infringe the record companies' copyrights," according to a summary of the decision issued by the court.
The ruling threatens to impose severe restrictions on Napster's free music-swapping service, potentially opening the Redwood City, Calif.-based company to substantial legal damages.
But Napster fans and business experts say that the site--regardless of its legal status--should be a wake-up call to the technology industry. As many online sites struggle to retain customers amid increasingly dour economic conditions, Napster's audience has mushroomed.
"Napster and Napster-like technology is a horse that is not only out of the barn, it's frolicking in the fields and reproducing," said Guy Kawasaki, chief executive of Garage.com, a venture capital investment bank. "There's no stopping it; there's only figuring out how to utilize its immense power."
Record labels and some artists haven't seen it that way, seeking instead to block Napster from trading copyrighted songs. Last summer, for example, heavy-metal band Metallica sent a list of some 300,000 usernames to the company, demanding they be barred from the service for trading the band's songs.
But Kawasaki said those usernames represent a business opportunity.
"If I were Metallica, I would have sent an e-mail to the 300,000 downloaders and offered them Metallica CDs, shirts and concert tickets," Kawasaki said. "If you gave me the e-mail addresses of 300,000 people who read my books, I guarantee you I could make a business out of this database."
Napster says it has 51 million members, and independent research confirms that it maintains one of the fastest-growing customer lists on the Internet. Napster members downloaded at least 250 million songs last weekend, hoping to cram hard drives with music in case Monday's ruling closed the site.
On average, 1.5 million people were logged on to the system at any one time on Saturday and Sunday, according to Cambridge, Mass.-based Webnoize, which tracked Napster for the 48-hour period. Usage was particularly high Sunday, when more than 130 million files were downloaded.
According to an ongoing Webnoize study, nearly 3 billion MP3s were downloaded using Napster software in January--a 91 percent increase from September. Napster's popularity has turned the MP3 format into the "de facto standard for digital music," according to Webnoize.
"In the few years since its introduction, MP3 has reached millions of consumers, essentially rivaling the reach of major broadcast television," said Webnoize researcher Gregor Rohda. "The music industry should seize the opportunity here and capitalize on the astounding reach this format has achieved."
Casual Napster user Markus Baertschi, an information technology consultant in Etoy, Switzerland, said Napster's business potential should not be confused with the copyright violations that the Recording Industry Association of America alleges.
"Napster does not violate any copyright itself but is helping its users to violate," Baertschi said. "If I'm shooting somebody, the arms manufacturer did help by providing the tool but did not perform the action himself."
Yorgos Voyiatzis, an avid Napster downloader from Roslindale, Mass., underscored the affection many music fans feel for the site. He said he would continue using the site even if he had to pay a monthly service fee.
He may be required to do just that. German media conglomerate Bertelsmann, parent company of record label BMG Entertainment, signed a cooperation deal with Napster in October with the hopes of creating a legitimate distribution service. Bertelsmann executives recently said they could start charging a monthly subscription fee as early as June.
The company, whose BMG unit will continue to participate in the lawsuit against Napster until the subscription service is running, has been trying to bring Napster together with other players in the industry to legitimize the popular Web site. Some legal experts say charging a fee could help placate musicians who are upset about being shorted royalties.
But questions remain about how many people would be willing to pay for something they have thus far downloaded for free.
"To me, Napster is cool primarily because it is not pervading into my surfing experience, it enhances it," Napster user Voyiatzis said. "I am willing to incorporate it into my Internet experience so long as it remains behind the screens--as a wallpaper, perhaps."