Big Secret On Wall Street

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Tenth-grader Sean Parker was pretty sure the FBI was out to get him.

Sean also knew that there was nothing wrong with his teeth.

So when his teacher paused World Civilizations class one afternoon in 1996 and said, “Sean, your father is here to get you for an orthodontist’s appointment,” the 16-year-old hacker suspected his luck had run out.

He was right.

Rather than taking him to the dentist, his dad shoved him into the family van and drove him to their Fairfax County, Virginia, home, where a group of stern-faced agents from the FBI had just confiscated Sean’s computer.

In a way, it was a little unfair. Sean was a white-hat hacker, with good intentions… mostly. He’d made it a personal mission to break into every domain ending with .com, .edu, .mil, and .gov. (including, of course, sensitive sites like army.mil, fbi.gov, and cia.gov)… and to then send helpful hints on how the site administrators could better protect their classified information. He hacked in, sent his love notes, and logged out before anyone on the other end could track his computer’s IP address to find out where he was.  

Then one day, Sean’s dad – upset about the boy’s slipping grades – yanked his son’s computer cord out of the wall mid-hack, derailing Sean’s usual website exit strategy. Due to that delay, the FBI figured out his IP… and they weren’t happy.

It was Sean Parker’s first run-in with the authorities, and it wouldn’t be his last.

Fortunately for Sean, he was tried for corporate hacking as a minor, and got off with community service – allowing him to finish out his high-school career and continue to hone his genius-level computer skills (albeit legally). By graduation, he’d scored several prestigious computer-science prizes, banked $80,000 income in his senior year through tech internships and freelance coding, and found a new best friend: a fellow computer geek named Shawn Fanning.

Sean convinced his parents to let him skip college and move to San Francisco, where in 1999 he partnered with Shawn to create a completely new type of website: an online file-sharing enterprise called Napster (after Shawn’s high-school nickname).

Napster allowed users to upload mp3 audio files from their computers onto a shared website… which any site user could then download and listen to, for free. Plenty of those mp3s, of course, were copyrighted pieces of music owned by royalty-hungry record labels… a detail that Sean and Shawn chose to ignore at the time.

At its peak in 2001, Napster boasted an unheard-of 80 million registered users worldwide, who were downloading about 14,000 songs a minute. (Sean and Shawn, however, didn’t make any money from the site except through T-shirt sales.) The short-lived golden age of P2P (peer-to-peer) file sharing was born.

Emboldened by Sean and Shawn’s success, a whole host of other P2P sharing companies popped up between 1999 and 2001: LimeWire, Grokster, Kazaa, and Napster’s biggest competitor, Scour, a startup that attracted buyout bids from billionaire investor Ron Burkle and former Walt Disney Studios President Michael Ovitz.

Sean had figured out a way to hack the music industry. And the music industry – like the FBI a few years earlier – wasn’t happy about it. 

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In 2000, for the first time ever, global record sales dipped sharply, in part as Napster and its clones captured market share. The music industry – up till that point, accustomed to hoarding artists and records and dribbling out new releases at corporate convenience – panicked. And rightly so: between 1999 and 2008, revenue from CDs, cassettes, records, and paid digital downloads in the U.S. dropped from $14.6 billion to $9 billion.

As the new millennium kicked off, big industry organizations like the Recording Industry Association of America (RIAA) and the National Music Publishers Association (NMPA) cracked down on file-sharing sites with punitive copyright-infringement lawsuits, insisting that the Supreme Court do something about these new technologies that had “outpaced the law.”

The Supreme Court sided with the fat cats. The RIAA won its injunction against Napster in 2001, after a year-long battle, and the court ordered the site shut down. (Today, it lives on in name only as a totally above-board streaming site – while Sean Parker moved on to other endeavors, like an executive role in the early days of Facebook, an arrest for possession of cocaine, and a $10 million Lord of the Rings-themed wedding.)

The rest of the music-sharing sites didn’t fare much better than Napster. Scour knuckled under to a $250 billion lawsuit from the RIAA, the NMPA, the Motion Picture Association of America (MPAA) and 26 other plaintiffs, filing for bankruptcy in late 2000. An MGM Studios lawsuit kneecapped Grokster in 2005. LimeWire held out until 2010 under a barrage of punitive court cases.

In many ways, though, the P2P genie was out of the bottle… and it was much bigger than some pirated mp3 files.

Internet users had realized that the World Wide Web could connect them – and often, deliver the things they wanted – faster and with less red tape than the top-down corporate structures that had controlled supply and demand throughout the 20th century.

After the demise of Napster, savvy netizens quickly developed encrypted file-sharing tools like cyberlockers and BitTorrent, allowing them to store and share pirated media at lightning speed. Legitimate buying and selling flourished online, too: marketplaces like eBay and Amazon connected buyers and sellers sans markups and middlemen. And Facebook and Twitter – the ultimate P2P sharing networks – blossomed from startups to multibillion-dollar corporations.

And one former P2P pioneer – a key early employee of Scour – vowed revenge on the establishment.

Seven years after corporate lawsuits killed his file-sharing company, the Scour alumnus was still sore, and determined to launch what he called a “revenge business.” “The idea was to take those… litigants that sued me and turn them into customers,” he said.  

In 2007, he accomplished that very goal, starting a software company that made him a multimillionaire – and selling his product to 23 of the bigwigs who’d originally scuttled Scour, Napster, and others.  

Still, the long-ago wound festered.

Once he’d cashed out after his software success, he founded an even bigger firm that, today, is a household name – and a $136 billion market cap company. In many ways, this business is a direct heir to the early days of music-sharing websites. It still trades on the idea of technology “outpacing the law,” and it’s built a staggeringly effective internet network that circumvents traditional business practices in 70 countries and counting.