May 14, 2002 5:15 PM PDT

Napster CEO quits as sale rejected

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Napster Chief Executive Konrad Hilbers is stepping down, capping months of unsuccessful negotiations to sell the file-swapping company and settle lawsuits hanging over its business.

The company may also be close to filing for bankruptcy, according to sources close to Napster. In an e-mail to the company Tuesday, Hilbers confirmed that a last-ditch attempt to sell the company outright to German media giant Bertelsmann had fallen through after opposition from Napster's quarrelling board of directors.

The management team "has put together what I consider to be a valid and beneficial deal for Napster over the last weeks," Hilbers said in the e-mail, a copy of which was seen by CNET News.com. "Unfortunately, the board has chosen to not pursue the deal...I am convinced that not pursuing the offer is a mistake, and it will lead the company to a place where I don't want to lead it."

Sources close to the company said Shawn Fanning, who created the Napster software at age 19, also resigned Tuesday. Following in Hilbers' and Fanning's wake were several other senior executives, including general counsel Jonathan Schwartz.

A source close to the company said employees were given a choice Tuesday of resigning with severance pay or taking a one-week unpaid vacation.

Bertelsmann confirmed the deal's rejection.

"We regret that the Napster shareholders were unable to reach an agreement regarding the offer from Bertelsmann," the company said in a statement. "However, we continue to believe in the value of peer-to-peer technology. We are hopeful that Napster's brand and technology will be able to realize its potential as a compelling consumer proposition."

The dissolution of this Bertelsmann deal does not mean the company is relinquishing all hope of taking over Napster, however. The media giant has bankrolled Napster with tens of millions of dollars in loans and is likely its largest creditor. Should Napster file for bankruptcy, it still could gain control of the company or access to its technology.

Hilbers, who took the top spot last July, has been uniformly upbeat in his predictions that the former file-swapping star would rebound and create a new, legal service based on broad deals with the very record labels suing it. But the company has postponed the launch of its subscription plans indefinitely, as legal settlement and music licensing talks have fallen through.

The last several months have been marked by internal struggles, as original investor John Fanning has fought board members Hank Barry and John Hummer, both representing venture capital firm Hummer Winblad, for control of the company.

A lawsuit filed by Fanning in Delaware court in an attempt to wrest control from the venture capitalists was dismissed Tuesday, the company confirmed.

Konrad's departure, and the collapse of the Bertelsmann deal, leaves the once-proud file-swapping company with few resources at its disposal. It has had little to no income since opening its doors in 1999 and has been living on loans from Bertelsmann that have totaled more than $85 million for operational expenses alone.

Bertelsmann had also promised to pay tens of millions of dollars in additional legal settlement and music licensing fees. Napster has had several rounds of layoffs, cutting staff already dangerously close to the bone.

A representative for the company said Napster had not filed for bankruptcy and that no plans had yet been made to do so. However, with no revenue coming in, the company is on increasingly tenuous ground.

"We deeply regret that we have not yet been able to find a funding solution that would allow Napster to launch a service to benefit artists and consumers alike," the company said in a statement. "We will be looking at additional steps in the coming week to further reduce expenses."

A replacement for Hilbers or an interim CEO has yet to be named, a company representative said.

 

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