At age ten, he looked into the sky and his life changed. "It was the first time I ever saw a blimp," he said, years later. "It told me to have a good year." The next day he walked to the Flushing commuter airport to talk his way into riding in one. He hung around the base so often that the Goodyear people eventually hired him as a crew member.
Aircraft became his calling. After graduating from Queens College, he started two New York companies-one to take tourists up in helicopters, another to charter airplanes. They made him a lot of money. In 1982, he pulled out his savings, borrowed money from friends and relatives and, with $250,000, started Airship International, a blimp company that provided advertising for McDonald's and Metropolitan Life Insurance. Sports Illustrated Sports Illustrated called him "Baron Blimp." called him "Baron Blimp."
Pearlman's flying businesses gave him connections, and not just for life insurance. By the late 1980s, "Air Lou," as he came to be called, had spun off a fast-growing charter jet company, which had made a name for itself hauling rock stars from concert to concert-Paul McCartney, the Rolling Stones, Michael Jackson, and Madonna were among the passengers. None of them excited him so much as an unfamiliar name he noticed in a logbook in late 1989: New Kids on the Block. New Kids on the Block. Pearlman discovered the popular boy band was filling stadiums around the world. "I thought the New Kids must be raking it in if they could afford to pay $250,000 a month for one of our planes," he later wrote in his autobiography. They'd made $200 million in concert sales and $800 million in merchandise revenues. Their svengali was Maurice Starr, who'd built the smash R&B band New Edition before they sued to break their contract. Pearlman discovered the popular boy band was filling stadiums around the world. "I thought the New Kids must be raking it in if they could afford to pay $250,000 a month for one of our planes," he later wrote in his autobiography. They'd made $200 million in concert sales and $800 million in merchandise revenues. Their svengali was Maurice Starr, who'd built the smash R&B band New Edition before they sued to break their contract.
Hmm, thought Pearlman. In 1989, the timing wasn't right for a new boy band-yet. He had to wait for the New Kids to peak. And he had to wait out the postNew Kids era, which belonged to Nirvana, grunge music, alternative rock, and college students. Over the next seven or eight years, the pendulum of pop music tastes would swing back to pop-Hanson and the Spice Girls were ascendant, and Ricky Martin was on the brink of graduating from his his boy band, Menudo. "You could tell the alternative age was over and the cycle just came back for pop music," says Paris D'Jon, who discovered the boy band 98 Degrees. boy band, Menudo. "You could tell the alternative age was over and the cycle just came back for pop music," says Paris D'Jon, who discovered the boy band 98 Degrees.
With the New Kids on his mind, Pearlman hired an old friend, Gloria Sicoli, an ex-singer with talent-spotting expertise. They tried out forty young men at his house in the summer of 1992. All of them pretty much sucked, except for Alexander James McLean, fourteen, a veteran of local talent contests, musicals, and theater productions. AJ arrived with his mother and sang three New Kids songs to a backup tape while Pearlman watched from a couch. AJ was talented. So was his friend, Tony Donetti, who passed the audition-but then Pearlman's people lost his phone number. During a second round of auditions, in the aircraft parts warehouse of Pearlman's company, Trans Continental, Donetti resurfaced as "Howie Dorough." He had been using a stage name on his agent's recommendation.
They found more local talent-Nick Carter, then twelve, who had a rebellious look and shaggy blond hair and had performed with the Tampa Bay Buccaneer cheerleaders for two years; Kevin Richardson, a model and actor who'd been a Ninja Turtle and Aladdin at Disney World; and Richardson's tenor-singing cousin, Brian Littrell. They'd audition other members, who wouldn't stick around, but these five named themselves the Backstreet Boys after a flea market across the street from the T.G.I. Friday's in Orlando. By May 8, 1993, they were playing SeaWorld, in Orlando, before three thousand screaming girls.
Pearlman contacted New Kids manager Johnny Wright, who with his wife Donna had to hear the Backstreet Boys sing over the phone before agreeing to manage them. For a star-making operation, the Trans Continental home base was surprisingly plain. "We were living in Orlando in a nondescript office park, where we were doing all our business," recalls Jay Marose, who signed on as vice president of marketing and promotions after working on a Chicago campaign for Fruit of the Loom underwear. "My office looked out across an asphalt parking lot at Johnny's office, and the other side was the studio. You would have just driven by. That's what kept us pretty normal. You would go bowling, and the movie theaters would give us free passes. There was nothing to do. I had these seventeen-year-olds going, 'What should we do tonight?' We were just sitting around staring at each other."
The offices were a sanctuary from the rest of the world, which had started to take notice-loudly. "The pitch of fourteen thousand girls?" Marose asks, answering his own question with a burst of laughter. Those screams would act as a resume for the band.
Pearlman saw right away that he needed a major record label to take the Backstreet Boys to the next level of fame and money. He used his considerable salesmanship to make contact with A&R scouts and attempt to talk them into seeing the Boys live. Unfortunately for Pearlman, the scouts were deep into alternative rock at the time. It took Donna Wright's voicemail, containing the high-pitched din of thousands of kids at a Cleveland concert, to capture the attention of David McPherson at Mercury Records. Intrigued, he accepted one of Pearlman's numerous invitations to see the Boys live-this time, at a high school in Hickory, North Carolina. At the concert, McPherson had a revelation. Hipsters might be obsessed with Stone Temple Pilots and Pearl Jam, he thought, but this is what kids are really listening to. He signed them to a deal at Mercury, but his label superiors didn't really understand the band, so the Backstreet Boys languished without any hits.
Around that time, in 1993, McPherson made contact with Calder and showed up at Zomba for a job interview. Calder asked McPherson what he was working on. McPherson mentioned a couple of R&B acts he thought Calder would think were cool.
Calder wasn't too impressed. Then McPherson mentioned the Backstreet Boys. "He was like, 'You know what? Groups like this are big overseas, and this group could help me expand my operations overseas-and, maybe, if they get big, all over the world,'" McPherson says. "It took a lot of money and a lot of time and a lot of A&R and marketing in a climate where you were crazy to spend that on a group like them. A group like that was unpopular, an uncool thing in a business where cool means a lot lot." McPherson was hired. Mercury bought out the Backstreet Boys' contract for $35,000, then dropped the band. Then the Boys signed with Jive Records, the Zomba imprint that specialized in pop, hip-hop, and R&B.
Clive Calder and Lou Pearlman needed each other, at least at first. Pearlman put together the Backstreet Boys and then 'NSync. Calder had the resources to break them around the world. They weren't best friends, but they had a cordial business relationship. "One of the reasons they got along was because Clive was always in control. It was a perfect symbiotic relationship," McPherson says. "Lou didn't care about the details. He didn't care how many songs were going to be on the album and who was going to produce those songs and what outfits the group was going to wear. He had spent so much time trying to get these guys signed-and no one signed them-that when he found willing suitors in myself and Clive Calder, all he had to do was sit back and go for the ride. Man, he was happy! Some people in that situation would try to control this and control that. He didn't care. He just wanted to be there for the pictures and the parties and the accolades and the plaque presentations. He knew Clive was going to take care of the business."
Calder, McPherson, and their Zomba colleagues had two strategies. First, Backstreet needed songs. Calder sent them to Sweden to record with a group of producers discovered by an aggressive scout in Zomba's Dutch offices. Dag Volle, also known as Ace of Base songwriter-producer Denniz PoP, was among them; Martin Sandberg, who renamed himself Max Martin, was PoP's protege. Backstreet recorded their first three songs, including "We've Got It Going On," at the producers' studio.
Next, Calder thought: We have to get them in front of the kids. We have to get them in front of the kids. Aside from the occasional Disney World show, American crowds weren't always interested. After Pearlman booked them to open for a wet T-shirt contest, the crowd pelted them with ice cubes. "We've Got It Going On" couldn't get on the radio, and it peaked at No. 65 on the Aside from the occasional Disney World show, American crowds weren't always interested. After Pearlman booked them to open for a wet T-shirt contest, the crowd pelted them with ice cubes. "We've Got It Going On" couldn't get on the radio, and it peaked at No. 65 on the Billboard Billboard Hot 100 chart. They needed seasoning. The breakthrough was in Germany, a country with government-controlled radio that never quite plunged into alternative rock and hardcore hip-hop. The Boys sold out concerts, scored hit videos, and turned "We've Got It Going On" into an overseas smash. Their success spread around Europe. Hot 100 chart. They needed seasoning. The breakthrough was in Germany, a country with government-controlled radio that never quite plunged into alternative rock and hardcore hip-hop. The Boys sold out concerts, scored hit videos, and turned "We've Got It Going On" into an overseas smash. Their success spread around Europe.
Calder called an old friend, Stuart Watson. He ran SWAT Enterprises, a consultancy that specialized in breaking acts in Asia. Watson listened to four Backstreet Boys songs and knew they were hits. He demanded Calder send the band to Asia, and Calder agreed. The band did promotional show after promotional show, from Singapore to Korea, and posed endlessly for magazine photo sessions. Using the 1980s publicity plan for teen singer Tiffany, Watson put the Boys in malls. Within three weeks, the band sold 1 million CDs in Asia. Later, a Montreal program director, on vacation in France, heard the band and returned home to put them on the radio. Barry Weiss, Jive's president, set up a Montreal concert; fifty thousand showed up. Girls screamed. Weiss called Calder from the show and held up the phone. Weiss and Calder both knew what was next: America.
"They brought them to Chicago, to the station, on a tour bus," recalls Erik Bradley, program director for B-96, the Top 40 radio station WBBM-FM in Chicago. "They came by and met everybody and were so nice and amazingly seasoned for being young people. They sang a cappella in the lobby." The Boys showed up at a dinner in New Orleans, hosted by EMI Music, and schmoozed with independent radio promoters like Bill Scull of Tri State Promotions in Cincinnati. "Unlike rock bands, these bands were perfect for radio stations to do promotions with," Scull says. "They totally appealed to the Top 40 demographic-fifteen to eighteen to twenty-five years old, the female demo. They were cute and they were fun and they could dance! Every radio station wanted them to show up for the birthday bash, the Halloween party, the Christmas show, whatever. We did all sorts of things with them like that." The Boys worked their boyish charm all over the place. They broke in America in 1997, starting a rush of debut CD sales that would ultimately total 14 million.
More good fortune arrived for Jive Records in 1996: a fifteen-year-old girl who had recently moved to New York from Orlando, where, with Justin Timberlake and JC Chasez, she had been a Mouseketeer on The Mickey Mouse Club The Mickey Mouse Club. With help from her mother and a local attorney, Larry Rudolph, Britney Spears was aggressive and ambitious and sent a demo tape of her cover of a Toni Braxton song to record labels all over the city. None heard anything even remotely commercial in her voice. Jive, however, was actively seeking a female star to push to the Backstreet Boys audience. "We were looking for a Debbie Gibson, if you like," says Steve Lunt, a Jive A&R man at the time. "[Spears's demo tape] was in one of those karaoke studios where you lay your vocal over an imitation of somebody else's track. It was totally awful. She was singing totally in the wrong register. But when she got to the end, her voice went up to the sort of 'girlie range,' and you heard the kind of soul she had." The accompanying photos were cute, too.
Lunt took the material to Calder. He agreed to a deal, with a caveat: Be cautious. Be cautious. If Calder didn't hear a hit in six months, Spears would be just another teen with big dreams. If Calder didn't hear a hit in six months, Spears would be just another teen with big dreams.
Lunt went to work. The standard operating procedure at Zomba was to keep everything in-house. Lunt hooked Spears up with a number of songwriters in the company's publishing division, but they mostly focused on R&B. Finally, in the fifth month, he found Eric Foster White, a pop songwriter and producer. Singer and producer clicked immediately, and White linked Britney with a 1986 Jets tune, "You Got It All," penned by Rupert Holmes of "Escape (The Pina Colada Song)" fame. "Sweet and innocent and catchy. A little bit R&B but still basically sweet pop," recalls Lunt, now an A&R vice president for Atlantic Records. "When Clive heard that in the A&R meeting, he said, 'OK, we've got something.' Up until that, it was in doubt." Calder and Lunt then contacted Max Martin, the Swedish pop producer who'd worked with Backstreet, and asked him to fly to New York. Spears, Martin, and Lunt went to dinner and hit it off. Martin and Spears flew back to Sweden and, within two days, sent back a demo-"...Baby One More Time."
"We at Jive said, 'This is a fuckin' smash,'" Lunt recalls. In all, Spears cut six songs in Sweden. Then she returned to the States and started working the key radio stations. Jive's top radio-promotion executive, Jack Sadder, brought her one day to Star 100.7 in San Diego to talk to one of his longtime contacts, music director Michael Steele. Because Steele didn't have a cassette deck in his office, Sadder convinced him to listen to Spears's tape in the car. "We go out in the parking lot. It's just hot as hell in Southern California, probably one hundred degrees that day. I get in the driver's seat. Jack's in the passenger seat. This little fifteen-year-old is in the backseat of my car. I want to go to lunch," Steele recalls. "It's '...Baby One More Time.' I go, 'Yeah, this is all right.' We go back into the station, and thirty days later she was No. 1."
As Calder predicted, Backstreet and Britney fed off each other in the marketplace. Pearlman had a piece of the Backstreet Boys, and as they became more successful thanks to Jive Records's machinations, their manager became richer. "Baron Blimp" left blimps behind-his public company, International Ltd., had crashed twice and the stock had dropped from $6 to 3 cents per share-and threw himself into music. Trans Continental grew fast, spending tons of money on studios, training, and touring. Pearlman's Orlando lifestyle became extravagant, as he would later chronicle in a promotional videotape called Lou Pearlman Living Large Lou Pearlman Living Large. The title was especially catchy given Air Lou's heft. He lived in a $12 million mansion down the street from ex-Magic basketball star Shaquille O'Neal. He also lived in a Mediterranean mansion in suburban Windermere, off Lake Butler, where he kept boats and Jet Skis. He rode in a blue Rolls-Royce with a chauffeur. He made political contributions to Republicans, owned a small piece of the local arena football team, the Orlando Predators, and showed off a diamond-studded Rolex to guests. He was single and, though he didn't even drink, he couldn't get enough of entertaining. "He was arrogant and thought he was the smartest guy in the room, but he could be very charming," says Bob Jamieson, ex-head of RCA Records and, later, its parent company BMG North America. "But there was always an element of him that made you second-guess. You felt uncomfortable."
It's hard to imagine a more successful act than the Backstreet Boys circa 1997, but Pearlman needed something else. "You can't make money on an airline with just one airplane," he told the Los Angeles Times. Los Angeles Times. According to Pearlman, it was his idea to begin auditions for a second group-but this is where the story starts to get ugly. And full of contradictions. According to Pearlman, it was his idea to begin auditions for a second group-but this is where the story starts to get ugly. And full of contradictions.
In Pearlman's version, he auditioned five new boys, beginning with Chris Kirkpatrick, an Orlando doo-wop singer and Outback Steak-house employee who yearned to form his own band. Kirkpatrick had a friend of a friend named Justin Timberlake, who had a shockingly deep baritone for a teenager and an impressive resume, from Star Search Star Search to to The Mickey Mouse Club The Mickey Mouse Club. Fellow Mouseketeer JC Chasez and a mutual friend, Joey Fatone, joined within a few weeks. Justin's voice coach brought in Lance Bass. Together, the boys scrambled letters in their names and came up with 'NSync. The auditions and 'NSync's name were all Pearlman's idea. Timberlake's mother, Lynn Harless, had another version of the story, which vehemently contradicted Pearlman's recollection. "[Pearlman] did not 'select' the members of 'NSync," she would declare in a court affidavit. "The members of 'NSync found each other.... Mr. Pearlman did not 'audition' these singers; we all did. The name 'NSync was not Mr. Pearlman's idea but mine."
A feud between the two Trans Continental groups-soon to be the world's biggest pop stars-set in. "We brought in another brother and they saw it as an abandonment," said Johnny Wright, who became manager for 'NSync, which was OK with Backstreet until their new rivals followed their blueprint in Germany and Asia and became just as famous as their predecessors. "And that ended up putting me in a position I did not want to be in where the groups are now competing head to head in a race to the top."
The idea for a second superstar boy band-whether it came from Pearlman or not-turned out pretty well commercially. But there were cracks in the foundation of Pearlman's boy-band empire. The first came from the Backstreet Boys themselves. They were tired. They acted less like boys and more like pop stars. Professionals. Professionals. They showed up in Pearlman's office one day in August 1997 with entourages-girlfriends, brothers, uncles. The They showed up in Pearlman's office one day in August 1997 with entourages-girlfriends, brothers, uncles. The Wall Street Journal Wall Street Journal reported "name-calling" that day and quoted Johnny Wright: "The meeting was not on a positive note." In May 1998, at the height of their success, when they'd earned his company $200 million in revenues, the Boys filed suit against Pearlman. They insisted they had earned $300,000 during the same period Pearlman made $10 million. They called themselves "indentured servants." They were also, sources told the media, a little miffed at having to compete with 'NSync within the same management company. Pearlman settled with the band. They got more control over recording, merchandising, and touring. Pearlman saved face-or so he told the media later. He negotiated a sort of monetary "sixth Backstreet Boy" role for himself, and in 1999, the reported "name-calling" that day and quoted Johnny Wright: "The meeting was not on a positive note." In May 1998, at the height of their success, when they'd earned his company $200 million in revenues, the Boys filed suit against Pearlman. They insisted they had earned $300,000 during the same period Pearlman made $10 million. They called themselves "indentured servants." They were also, sources told the media, a little miffed at having to compete with 'NSync within the same management company. Pearlman settled with the band. They got more control over recording, merchandising, and touring. Pearlman saved face-or so he told the media later. He negotiated a sort of monetary "sixth Backstreet Boy" role for himself, and in 1999, the Wall Street Journal Wall Street Journal estimated he took in $20 million of the band's overall profits just in that one year. "It would be nice to have them as my five sons," Pearlman said. "Instead, it's five sons with lawyers in between." estimated he took in $20 million of the band's overall profits just in that one year. "It would be nice to have them as my five sons," Pearlman said. "Instead, it's five sons with lawyers in between."
Backstreet saw "Big Papa," as he called himself, as anything but fatherly. "Here were some guys that sold twenty-plus million albums on their first record and barely had anything to show for it," says Peter Katsis, senior vice president of music for the Firm, which represented hard-rock bands Korn and Limp Bizkit and took over the Boys' management. "Each guy maybe had a nice house in the Orlando area and a couple of bucks in the bank-but certainly nothing reflecting what they should have been able to make."
The Firm inherited the Boys' Into the Millennium tour, planned for late 1999, and its managers were shocked at the behind-the-scenes disarray and B-level concert professionals they inherited from Pearlman's company. "Total Spinal Tap Spinal Tap shit," Katsis recalls. The stage was to be five feet tall. The show was to include nine wardrobe changes. "So," he asked, "these guys are going to shit," Katsis recalls. The stage was to be five feet tall. The show was to include nine wardrobe changes. "So," he asked, "these guys are going to crawl crawl under this five-foot-high stage to do under this five-foot-high stage to do nine nine wardrobe changes?" Katsis fired a lot of people. The tour sold 765,000 tickets in just a few hours, filling every venue on the docket for thirty-nine cities. It drew 2 million fans in the end. wardrobe changes?" Katsis fired a lot of people. The tour sold 765,000 tickets in just a few hours, filling every venue on the docket for thirty-nine cities. It drew 2 million fans in the end.
'NSync didn't take long to catch up with the Backstreet Boys-in terms of both CD and ticket sales and and friction with Lou Pearlman. Big Papa marketed them in the Boys' image, as a singing-and-dancing team starring the Friendly One, the Cute One, the Rebellious One, and so on. Like the Backstreet Boys and a lot of young, inexperienced stars at the beginnings of their careers, 'NSync signed a contract that allowed their manager to make tons of money off their success. In early 1997, JC Chasez realized the band was selling millions of records in Germany as well as boxloads of T-shirts and other merchandise throughout their European tour. The band complained, demanding accounting for CD sales. On August 1, Pearlman gave each member a paltry advance of $10,000. Chasez contacted a lawyer relative, who looked at the band's contracts and found problems. She referred them to an experienced music business attorney, Adam Ritholz, who had worked for CBS Records and represented singer-songwriter Lisa Loeb and R&B star Maxwell. friction with Lou Pearlman. Big Papa marketed them in the Boys' image, as a singing-and-dancing team starring the Friendly One, the Cute One, the Rebellious One, and so on. Like the Backstreet Boys and a lot of young, inexperienced stars at the beginnings of their careers, 'NSync signed a contract that allowed their manager to make tons of money off their success. In early 1997, JC Chasez realized the band was selling millions of records in Germany as well as boxloads of T-shirts and other merchandise throughout their European tour. The band complained, demanding accounting for CD sales. On August 1, Pearlman gave each member a paltry advance of $10,000. Chasez contacted a lawyer relative, who looked at the band's contracts and found problems. She referred them to an experienced music business attorney, Adam Ritholz, who had worked for CBS Records and represented singer-songwriter Lisa Loeb and R&B star Maxwell.
Ritholz studied the contracts. He learned Trans Continental took 50 percent of the band's CD royalties, 50 percent of T-shirt and other merchandise sales, and 30 percent of touring revenues-a far greater share than the standard manager's 10 to 15 percent. He requested more documents from Trans Continental's attorneys. He learned Pearlman had formed 'NSync Productions Inc., listing his home as the place of business and giving himself the power to make decisions on behalf of the band. The band was reluctant to go against its Big Papa but demanded a meeting with him at a Trans Continental office in May 1999. They were there all day-maybe ten hours. Pearlman lectured the band. His lawyers tried to scare them: If they continued along this path, they'd endanger their careers. If they continued along this path, they'd endanger their careers. One by one, each member of 'NSync stood up and walked out of Pearlman's office. One by one, each member of 'NSync stood up and walked out of Pearlman's office.
In his negotiations with Pearlman, Ritholz tried to enlist the band's record label, RCA, to help the band extricate itself from Trans Continental. By Ritholz's way of thinking, the label and its parent company, BMG, which at the time was the second-biggest label in the United States, could put far more pressure on Pearlman than five young men and their attorney ever could. He figured the label, wanting to take care of its hot-selling assets, would agree. Instead, he was shocked to discover that Strauss Zelnick, then the chairman of BMG, refused to abandon Pearlman. "He said to me, 'I have a certain principled way of doing things. This is the girl I brought to the dance-she may not be the prettiest girl, but she's the girl I'm going home with,'" Ritholz says. "It was a very significant misjudgment on his part." As Ritholz recalls it, Zelnick asked to meet with the band in person-at a Times Square hotel room in July 1999. No lawyers were allowed to attend, but Ritholz found out later that Zelnick insisted that he would "do anything in his power" to make sure RCA put out the band's next CD. Once again, 'NSync walked out.*
Ritholz soon realized Pearlman's company had unintentionally given the band a huge loophole. Early on, Trans Continental agreed to release an 'NSync album in the United States within a year after its recording. But the band's self-titled debut came out in Germany-and took almost two years to arrive in the United States. "We took the position that the agreement was therefore terminated and 'NSync was free to make another deal," Ritholz says. As for BMG, it seems the label's German subsidiary, Ariola, had never made 'NSync sign a standard "inducement letter," which would have held them to their label contract even if they broke with their management company. 'NSync gave notice. Although Lou Pearlman and RCA Records didn't see it this way, the band that was about to sell 11 million copies of 2000's No Strings Attached No Strings Attached in the United States became a free agent. in the United States became a free agent.
At first, Clive Calder didn't want any part of 'NSync's dispute with Lou Pearlman. The head of BMG Entertainment, Zelnick, was a friend who'd supported Calder's crazy boy-band notions from the very beginning. Zelnick had authorized the Backstreet Boys' maiden voyage in Germany, after all. Plus, BMG owned 20 percent of Zomba and distributed the labels' CDs worldwide. Calder didn't want to damage that relationship. But he quickly realized he could spin the 1999 'NSync trial into solid gold.
Clive Calder learned this very important bit of information by coincidence. Ritholz had been negotiating with many labels, but he wasn't even considering Calder's Jive/Zomba operation. The label already had the Backstreet Boys, and 'NSync didn't want to work at the same company as its rival. In late July 1999, Ritholz was on the phone with a London-based Zomba executive regarding a producer he represented. Calder knew Ritholz, happened to be in the London office, and jumped on the line. "What's going on?" he asked pleasantly. Ritholz told him of 'NSync's status. Calder couldn't believe it. Maybe he would be interested in signing the band, he told the attorney. Ritholz then convinced 'NSync that having two superstar boy bands on one label wouldn't be a problem-lots of labels have enough resources for multiple R&B singers or alt-rock bands who compete for the same radio play. In about a month, the negotiations went forward and 'NSync signed with Calder's company.
That was too much for Strauss Zelnick.
Back in 1994, Zelnick had been a confident, straightlaced, thirty-seven-year-old wunderkind with a Harvard MBA and a star-studded resume, including ownership of the video-game company Crystal Dynamics and executive titles at 20th Century Fox and Columbia Pictures. His wife called him "MKIA"-"Mr. Know It All." Bertelsmann recruited him to be president of its record label, BMG Entertainment, whose biggest holdings at the time included R&B stars TLC and diva Whitney Houston. "I had virtually no record business experience," Zelnick says. "My style was, up-front, to acknowledge and admit my lack of experience. I always maintained healthy respect for those who were vastly more experienced than I."
Zelnick would remain the top BMG executive for the next seven years, and he gradually absorbed music business culture. (Zelnick, however, never lost his folksy corporate style: He gave twelve-packs of his homemade barbecue sauce, Strauss in the House, to friends, complete with his picture on the bottles and BMG's address on the back.) Within a few years he would find himself working out at a gym with a trainer named Tyrese, an aspiring R&B singer who would soon become a star for his label. Zelnick would also happily sing along as teen star Pink jumped on a table at a Beverly Wilshire presidential suite label party to perform "There You Go."
It seemed as if Zelnick could do nothing wrong during his first five years at BMG. The label's worldwide sales increased 7 percent, to $4.6 billion. Its US market share jumped from fourth (out of five major record labels at the time) to second, behind powerhouse Universal Music.
But Zelnick's long music business honeymoon ended abruptly in 1999. First, he took the fall for pushing out BMG's best-known record executive, sixty-six-year-old Arista founder Clive Davis, just after Davis had engineered Carlos Santana's 5-million-selling Supernatural Supernatural comeback. But as Bertelsmann's board knew well, Davis spent money to make money, profit margins were low, and he annoyed the company's top brass by not grooming a successor. Zelnick picked another well-known label executive, Antonio "LA" Reid of LaFace Records, as Davis's replacement. Davis did not go quietly. He told everybody he knew in the music business that he was being pushed out. Barry Manilow called the move "mean-spirited," and Santana and Aretha Franklin threatened to leave the label. (They didn't.) Davis went on to form J Records, discover Alicia Keys, sign a contract with comeback. But as Bertelsmann's board knew well, Davis spent money to make money, profit margins were low, and he annoyed the company's top brass by not grooming a successor. Zelnick picked another well-known label executive, Antonio "LA" Reid of LaFace Records, as Davis's replacement. Davis did not go quietly. He told everybody he knew in the music business that he was being pushed out. Barry Manilow called the move "mean-spirited," and Santana and Aretha Franklin threatened to leave the label. (They didn't.) Davis went on to form J Records, discover Alicia Keys, sign a contract with American Idol American Idol, and return to his old label as the head of BMG North America. (Zelnick wouldn't comment on the Davis escapade.) Zelnick, too, was responsible for BMG's break with the company's Clive Number Two-Calder. When 'NSync abandoned BMG's ship, choosing Calder's Zomba as their new label, Zelnick was suddenly in a terrible position. He didn't want to lose the band, which was at the time the label's biggest-selling act. And he didn't want to anger Calder, whose label was a money machine for BMG. Yet Zelnick chose to cast his lot with Pearlman and sue the band-as well as Calder and Zomba-for breach of contract. He alienated Calder, once his ally. Then he was forced to settle with the band. Zelnick wouldn't talk about the case, but a source close to BMG at the time speculates why Zelnick made his decision: "Lou is a bad guy. He treated the guys badly. But BMG had a deal with him and [Pearlman] lived up to it. He had not breached it."
The BMGTrans Continental lawsuit against Zomba, the band, and Calder himself was for $150 million in damages. The trial lasted two and a half months, but it seemed like forever. The band and its old, estranged friends from Trans Continental found themselves in US District Court in Orlando on Christmas Eve 1998. "Justin and I were texting each other about our suits-because we'd never seen each other in suits," says Jay Marose, head of marketing for Trans Continental. The band settled with Pearlman's company just after Christmas 1998, for an undisclosed amount. "That was the most stressful time of my career," says Bob Jamieson, then chairman of BMG North America. "I don't want to talk about that. It's too far gone and brings up a lot of pain."
On January 12, 1999, Jive Records put out 'NSync's new single: "Bye Bye Bye."
Swooping in to grab 'NSync from BMG was merely part one of Calder's long-term plan. That made him tons of revenue, as the band's debut Jive album would be the record-setting No Strings Attached No Strings Attached. Part two was even more involved-and savvy. Calder had set the table for it in the early 1990s, when he sold huge chunks of Zomba's profitable publishing and record divisions to BMG. In 1996, BMG execs and Calder made a deal involving a "put option"-an agreement for BMG to buy Zomba for a certain price at a later date. Negotiated before Jive's 'NSync bonanza, this price was reportedly three times Zomba's profits during a three-year period. By the early 2000s, that price was suddenly-and unexpectedly to BMG-very high. Calder could sell anytime he liked. Or not.
Masterfully, Calder held out until precisely the right moment. No Strings Attached No Strings Attached came out in early 2000 and sold 11 million copies in the United States alone. (That in itself was a lot of revenue that BMG, having lost the band to Calder, didn't get.) In June 2002, after 'NSync, Britney Spears, and the Backstreet Boys had set international records for album sales, Calder must have been pretty sure this type of music was reaching its peak. He called BMG and declared he wanted to sell. The price, based on the 1996 formula, was $2.74 billion. BMG could afford it. Its parent company, German publishing behemoth Bertelsmann, had recently sold a share in America Online Europe back to AOL Time Warner for more than $7 billion. came out in early 2000 and sold 11 million copies in the United States alone. (That in itself was a lot of revenue that BMG, having lost the band to Calder, didn't get.) In June 2002, after 'NSync, Britney Spears, and the Backstreet Boys had set international records for album sales, Calder must have been pretty sure this type of music was reaching its peak. He called BMG and declared he wanted to sell. The price, based on the 1996 formula, was $2.74 billion. BMG could afford it. Its parent company, German publishing behemoth Bertelsmann, had recently sold a share in America Online Europe back to AOL Time Warner for more than $7 billion.
As Rolling Stone Rolling Stone reported at the time, Island Records's Chris Blackwell, who discovered Bob Marley and U2, received $300 million when he sold his company. David Geffen got just $550 million. Richard Branson, jet-setting airline magnate and music industry genius, received a paltry $950 million for Virgin. reported at the time, Island Records's Chris Blackwell, who discovered Bob Marley and U2, received $300 million when he sold his company. David Geffen got just $550 million. Richard Branson, jet-setting airline magnate and music industry genius, received a paltry $950 million for Virgin.
"The most impressive man ever in the music business, if you ask me," the Firm's Peter Katsis says of Calder. "Here's this guy who built all this stuff up and knew exactly what to do with it, knew exactly how far to take it, knew exactly when to sell his company."
Ruthless is a word many in the record business have used to describe Clive Calder, who pops up in is a word many in the record business have used to describe Clive Calder, who pops up in Forbes Forbes magazine every year as something like the 317th richest person on the planet. But his sell-out to BMG may not have been motivated purely by ruthlessness. An old friend says Calder's attitude changed, perceptibly, one terrible day in 2001. It seems Calder used to be able to see the World Trade Center from Zomba's offices. "Anyone who knew him knew that he tended to put work before family," says ex-Jive A&R man Steve Lunt, who has known Calder since the late 1970s, when his English rock band City Boy signed with Zomba. "After 9/11, there were subtle changes to that equation. He would start taking vacations. He would go on boat trips with his wife and kids. It wasn't long after that when he made that huge deal. He realized, ultimately, there were other things more important to his life. I'm sure he's currently dedicating himself to those as we speak." Clive Calder lives, reclusively as ever, in the Cayman Islands. magazine every year as something like the 317th richest person on the planet. But his sell-out to BMG may not have been motivated purely by ruthlessness. An old friend says Calder's attitude changed, perceptibly, one terrible day in 2001. It seems Calder used to be able to see the World Trade Center from Zomba's offices. "Anyone who knew him knew that he tended to put work before family," says ex-Jive A&R man Steve Lunt, who has known Calder since the late 1970s, when his English rock band City Boy signed with Zomba. "After 9/11, there were subtle changes to that equation. He would start taking vacations. He would go on boat trips with his wife and kids. It wasn't long after that when he made that huge deal. He realized, ultimately, there were other things more important to his life. I'm sure he's currently dedicating himself to those as we speak." Clive Calder lives, reclusively as ever, in the Cayman Islands.
LOU P PEARLMAN LOST his two jewels, but he kept hustling. He still had other teen pop acts-C Note, Innosense, LFO. He shifted to reality television, appearing on MTV's his two jewels, but he kept hustling. He still had other teen pop acts-C Note, Innosense, LFO. He shifted to reality television, appearing on MTV's Making the Band Making the Band series about assembling the next Backstreet Boys or 'NSync. The result of this experiment, O-Town, was named after Trans Continental's $6 million recording studio, and the group sold more than 1 million copies of its debut. But Pearlman never regained his old touch. "He was never hands-on. He would always pawn you off to another guy who was working with the company at the time," says Raul Molina, a singer for C Note, a bilingual singing-and-rapping group marketed, a bit against its will, as a boy band. "They never really had any music experience." series about assembling the next Backstreet Boys or 'NSync. The result of this experiment, O-Town, was named after Trans Continental's $6 million recording studio, and the group sold more than 1 million copies of its debut. But Pearlman never regained his old touch. "He was never hands-on. He would always pawn you off to another guy who was working with the company at the time," says Raul Molina, a singer for C Note, a bilingual singing-and-rapping group marketed, a bit against its will, as a boy band. "They never really had any music experience."
Pearlman nonetheless micromanaged C Note. "Watch, at the end of the next song, David [Perez] will unbutton his shirt and they'll go crazy," Pearlman told Los Angeles Times Los Angeles Times reporter Geoff Boucher during a fairgrounds concert in 1999. Sure enough, singer Perez unbuttoned his shirt at the end of the next song and the girls went crazy. But C Note didn't agree with Pearlman's decisions. He insisted they add a blue-eyed, blond-haired white boy to the all-Hispanic lineup-which they did, reluctantly. When their label, Epic, scored the band a float with Jennifer Lopez for the Puerto Rican Day parade in New York City-ideal for their bilingual audience-Pearlman nixed the plan. He sent them to an Adidas-sponsored show at Bryant Park instead. The parade drew 2 million spectators. reporter Geoff Boucher during a fairgrounds concert in 1999. Sure enough, singer Perez unbuttoned his shirt at the end of the next song and the girls went crazy. But C Note didn't agree with Pearlman's decisions. He insisted they add a blue-eyed, blond-haired white boy to the all-Hispanic lineup-which they did, reluctantly. When their label, Epic, scored the band a float with Jennifer Lopez for the Puerto Rican Day parade in New York City-ideal for their bilingual audience-Pearlman nixed the plan. He sent them to an Adidas-sponsored show at Bryant Park instead. The parade drew 2 million spectators.
"He's one of these salesmen who could sell anything to anybody," says Molina, twenty-eight, now recording with a new, post-Pearlman version of the band. "We'd go into a meeting and be ready to tell him: 'This is what we need to do!' And before we knew it, it was all turned around. The sky was green and the grass was blue. We ended up signing even the same contracts 'NSync and Backstreet Boys signed. At that point, we didn't know any better." is what we need to do!' And before we knew it, it was all turned around. The sky was green and the grass was blue. We ended up signing even the same contracts 'NSync and Backstreet Boys signed. At that point, we didn't know any better."
Then the teen pop bubble burst, as every teen pop bubble does. Fans grew up. The next generation of kids-the little brothers and sisters of the boy-band fanatics-just didn't have the same emotional connection to these superstar acts. Not only that, the acts were obviously getting older, with no choice but to remake themselves into the more sophisticated crooners you might hear on adult-contemporary radio stations. The transition did not go well for most of them. Record sales plummeted for the Backstreet Boys. Nick Carter left the group. His solo album went nowhere. Britney Spears, of course, transformed from schoolgirl to snake-wielding burlesque dancer to Kevin Federline's wife to head-shaving mom to MTV awards show bust to suicide risk to sitcom guest star. Only Justin Timberlake made the transition; after he split from 'NSync, he released 2002's Justified Justified (on Zomba, of course), which would turn him into one of the world's biggest pop stars. Years later, teen pop came back-in the form of (on Zomba, of course), which would turn him into one of the world's biggest pop stars. Years later, teen pop came back-in the form of Hannah Montana, High School Musical Hannah Montana, High School Musical, the Jonas Brothers, and other smash TV shows, albums, and concert tours by stars on the Disney Channel and other Disney-owned properties.
Pearlman survived the end of teen pop by forming corporations-talent agencies,* artist management firms, airlines. He wooed investors for Employee Investment Savings Accounts. He reminded them of his glory days with 'NSync and the Backstreet Boys and showed them the massive car collection and Jet Skis he kept at his suburban Orlando mansion. A lot of people, sadly, succumbed to his charm. Manhattan dentist Steven Sarin met Pearlman through a connection with his Florida retirement home. Pearlman called Sarin and his wife every year on their birthdays and invited their whole family to various teen pop concerts. They invested their life savings. Joseph Chow, an engineering professor at the University of Illinois-Chicago, dumped more than $14 million into Trans Continental entities-in exchange for hanging out with Pearlman in the 1990s. artist management firms, airlines. He wooed investors for Employee Investment Savings Accounts. He reminded them of his glory days with 'NSync and the Backstreet Boys and showed them the massive car collection and Jet Skis he kept at his suburban Orlando mansion. A lot of people, sadly, succumbed to his charm. Manhattan dentist Steven Sarin met Pearlman through a connection with his Florida retirement home. Pearlman called Sarin and his wife every year on their birthdays and invited their whole family to various teen pop concerts. They invested their life savings. Joseph Chow, an engineering professor at the University of Illinois-Chicago, dumped more than $14 million into Trans Continental entities-in exchange for hanging out with Pearlman in the 1990s.
Even to sophisticated investors, Pearlman had an irresistible charm. "He was certainly very friendly," says Jennifer Chow, Joseph's daughter, who dutifully went to Backstreet Boys concerts with her father even though, in her early twenties, she liked Nirvana better. "He would always say, 'I'm trying to make new things happen! Break boundaries! Take things to the next level!' He was very excited and animated." Over the years, Pearlman treated former Chicago freight company owner David Mathis to lunch with Britney Spears, introduced him to stars like Sylvester Stallone, and accompanied him on a Budweiser blimp ride. "He told us he had 412 airplanes, the company had a value of $1.8 billion, and the IPO was coming out at $17.50 a share," Mathis told the St. Petersburg Times St. Petersburg Times in 2007. "It was totally convincing." in 2007. "It was totally convincing."
The problem for Pearlman, an accounting major at Queens College, was accounting. Basically, he didn't do any. In what investors later called a Ponzi scheme, Pearlman shuffled funds from one of his corporations to the next, paying bills without keeping track of which company owned what. Sarin, the Manhattan dentist, lost his life savings. His wife cried every day.
Mathis, the Chicago freight-company owner, claimed a loss of $2.8 million. Chow, the engineering professor, died in 2002, leaving his children to deal with his defaulted Trans Continental investments. In 2007, the Florida Office of Financial Regulation declared Pearlman may have duped about 1,800 investors out of $317 million. The FBI raided his home and Trans Continental offices in Orlando. Banks seized his assets. Investors sued by the dozens. Pearlman declared bankruptcy.
For months, Pearlman went missing. He wrote a letter to an Orlando newspaper saying he was busy in Germany promoting a new boy band, US5. In 2007, a federal grand jury indicted him on three counts of bank fraud. Creditors liquidated his assets in an Orlando auction. They sold a platinum Millennium Millennium album for $2,300 and Pearlman's honorary key to the City of Orlando for $1,400. Officials finally captured him in late June, where he was registered in an Indonesian hotel under the name "A. Incognito Johnson." He returned home to Orlando and, in March 2008, acknowledged he oversaw schemes that fraudulently took $300 million from investors and banks. He pleaded guilty to several federal charges: conspiracy, money laundering, and making false statements during a bankruptcy proceeding. On May 21, 2008, a US district judge sentenced him to twenty-five years in prison, with a chance of reducing his time by one month for every $1 million he paid back to investors. "I'm truly sorry, your honor, to all the people who have been hurt by my actions," Pearlman said in the courtroom, wearing an orange jumpsuit and leg shackles. Further ugly revelations came with Pearlman's fall. In album for $2,300 and Pearlman's honorary key to the City of Orlando for $1,400. Officials finally captured him in late June, where he was registered in an Indonesian hotel under the name "A. Incognito Johnson." He returned home to Orlando and, in March 2008, acknowledged he oversaw schemes that fraudulently took $300 million from investors and banks. He pleaded guilty to several federal charges: conspiracy, money laundering, and making false statements during a bankruptcy proceeding. On May 21, 2008, a US district judge sentenced him to twenty-five years in prison, with a chance of reducing his time by one month for every $1 million he paid back to investors. "I'm truly sorry, your honor, to all the people who have been hurt by my actions," Pearlman said in the courtroom, wearing an orange jumpsuit and leg shackles. Further ugly revelations came with Pearlman's fall. In Vanity Fair Vanity Fair, a census taker named Alan Gross declared himself himself the subject of Pearlman's famous early history about becoming obsessed with blimps and hitching a ride with the blimp hangar people in the 1960s. "The stories he tells?" Gross said. "They're not about Lou. They're about me." As Gross told it, he and Pearlman were childhood neighbors in the Mitchell Garden Apartments in Flushing; Gross saw the blimps from his window, made friends with the blimp operators, and became a gofer at the blimp hangar. Pearlman merely adopted Gross's stories as his own. And if that weren't creepy enough, the subject of Pearlman's famous early history about becoming obsessed with blimps and hitching a ride with the blimp hangar people in the 1960s. "The stories he tells?" Gross said. "They're not about Lou. They're about me." As Gross told it, he and Pearlman were childhood neighbors in the Mitchell Garden Apartments in Flushing; Gross saw the blimps from his window, made friends with the blimp operators, and became a gofer at the blimp hangar. Pearlman merely adopted Gross's stories as his own. And if that weren't creepy enough, Vanity Fair Vanity Fair's reporting revealed Pearlman allegedly showed some of his young male singers porn movies, wrestled naked with them in their beds, and created a culture where sex with the boss was expected, almost inevitable. Pearlman has denied the claims.
"Karma's a bitch," 'NSync's Lance Bass said.
ONETIME WUNDERKIND STRAUSS Zelnick would last at BMG for only another year after the 'NSync settlement. By late 2000, Zelnick and his boss, Bertelsmann chief executive officer Thomas Middelhoff, had worked together for more than six years. They liked each other. But one day, Zelnick was sleeping at home after a strenuous oral-surgery session, and he received a phone call from Middelhoff that would be the beginning of the end. He told Zelnick that Bertelsmann was about to invest millions of dollars in a small Silicon Valley startup that allowed music fans all over the world to share songs online for free. Zelnick felt blindsided. "How could the music group not know about this?" he said. As Middelhoff well knew, Zelnick considered this business model to be outright theft of copyrighted music. Middelhoff held the opposite belief. He felt Napster would save the record industry. Zelnick would last at BMG for only another year after the 'NSync settlement. By late 2000, Zelnick and his boss, Bertelsmann chief executive officer Thomas Middelhoff, had worked together for more than six years. They liked each other. But one day, Zelnick was sleeping at home after a strenuous oral-surgery session, and he received a phone call from Middelhoff that would be the beginning of the end. He told Zelnick that Bertelsmann was about to invest millions of dollars in a small Silicon Valley startup that allowed music fans all over the world to share songs online for free. Zelnick felt blindsided. "How could the music group not know about this?" he said. As Middelhoff well knew, Zelnick considered this business model to be outright theft of copyrighted music. Middelhoff held the opposite belief. He felt Napster would save the record industry.
Big Music's Big Mistakes, Part 4Killing the SingleIn 1959, when Terry McManus was twelve, he bought a 39-cent copy of Jerry Lee Lewis's single "I'll Sail My Ship Alone" from a drugstore in Birmingham, Alabama. Later, when the Beatles and Beach Boys started putting out arty albums like Sgt. Pepper's Lonely Hearts Club Band Sgt. Pepper's Lonely Hearts Club Band and and Pet Sounds, Pet Sounds, he went along with them, shelling out $3.99 apiece. For years afterward, he used singles as a cheap way to decide which albums to buy. But as the major labels started to make more money than ever off CDs in the 1980s and 1990s, McManus began noticing he couldn't find a single anymore. "Here is where the North American music industry made its greatest mistake of the twentieth century," McManus, a veteran Canadian producer and songwriter, wrote in a he went along with them, shelling out $3.99 apiece. For years afterward, he used singles as a cheap way to decide which albums to buy. But as the major labels started to make more money than ever off CDs in the 1980s and 1990s, McManus began noticing he couldn't find a single anymore. "Here is where the North American music industry made its greatest mistake of the twentieth century," McManus, a veteran Canadian producer and songwriter, wrote in a Billboard Billboard op-ed. "When it stopped making vinyl singles and offered nothing to replace them, the industry stopped a whole generation from picking up the record-buying habit." op-ed. "When it stopped making vinyl singles and offered nothing to replace them, the industry stopped a whole generation from picking up the record-buying habit."McManus was prescient. He wrote his Billboard Billboard piece in 1997, two years before millions of music fans would learn how to get singles their own way-for free-via the internet. "If you think about water that's trying to reach the surface-it comes up in one place and you plug it up. And you go, 'OK, that's plugged up, my water problem is finished.' It's not. It's still seeking a way to rise to the surface," says McManus, now a music business professor at Fanshawe College in London, Ontario, Canada. "As soon as Napster opened up, the single came roaring back up. I call Napster 'the revenge of the single.'" piece in 1997, two years before millions of music fans would learn how to get singles their own way-for free-via the internet. "If you think about water that's trying to reach the surface-it comes up in one place and you plug it up. And you go, 'OK, that's plugged up, my water problem is finished.' It's not. It's still seeking a way to rise to the surface," says McManus, now a music business professor at Fanshawe College in London, Ontario, Canada. "As soon as Napster opened up, the single came roaring back up. I call Napster 'the revenge of the single.'"Why did the business phase out the single?"Very simple," says Jim Caparro of the Entertainment Distribution Company, who was, in the 1990s, president of Island Def Jam Records: Not enough profit. The single cost too much to produce and didn't make up enough in sales. For years, major labels used singles as cheap or free promotional tools. They'd give them away to radio stations, persuading programmers to air their songs. They'd gussy them up and give them out at concerts. "The industry was looking for excuses to get out of it," Caparro recalls. "You had these arguments that singles were cannibalizing album sales. So they killed the single."By the late 1990s, the record business had boiled down much of the business to a simple formula: 2 good songs + 10 or 12 mediocre songs = 1 $15 CD, meaning billions of dollars in overall sales. Cassettes, too, gradually fell victim to this formula, and were phased out. Attempts to resuscitate the singles market, like the "cassingle" and a shorter version of a record known as the EP, ultimately failed. "They tried everything," says ex-Tower executive Stan Goman. Instead of singles, Tower started displaying candy bars and other tchotchkes at the counter for impulse shoppers to buy for less than $1. "It's no coincidence that the decline of cassettes and the rise of CD burning arose simultaneously," says Steve Gottlieb, president of the independent label TVT Records. "People realized the only viable way to buy music was $16.99, because CD was the only viable format."In the short term, dozens of artists and labels made mountains of cash off this formula. Remember OMC's "How Bizarre"? Chumbawamba's "Tubthumping"? These were one-hit wonders, but the acts were lucky enough to make records in an era when fans had no other choice but to buy the album in order to get the single. "If you only sold hand lotion in five-gallon bottles, pretty soon people would be tired of it," says Albhy Galuten, a well-known producer who later became Universal Music Group's senior vice president of advanced technology. "You can't go around forcing people to buy something they don't want."Yet that was precisely the direction the record industry wanted to go in. CDs were big. How could major labels make them huge huge? The answer was to sell more CDs, at bigger record stores. Music chains like Tower and Wherehouse were well and good, but for huge, huge, labels had to go to Wal-Mart. Or Best Buy, Target, or Circuit City. But there was a fatal flaw in that strategy. labels had to go to Wal-Mart. Or Best Buy, Target, or Circuit City. But there was a fatal flaw in that strategy.Big Music's Big Mistakes, Part 5Pumping Up the Big BoxesFrom the mid-1980s to the mid-1990s, on a stretch of busy highway in Merrillville, Indiana, Hegewisch Records occupied a small, nondescript hut of a building, next to a gravel parking lot, in a part of town that epitomized suburbia-strip malls on every corner, endless traffic, especially during holiday shopping season, and Chili's, Taco Bells, and T.G.I. Friday's stretching as far as anybody could see. Inside the store, Red Red Meat CDs were displayed as prominently as Madonna CDs on the racks. "Guitarist Wanted" fliers papered the small, narrow entryway, next to worn copies of the Illinois Entertainer Illinois Entertainer and other thin newspapers devoted to the local rock scene. Hipsters who played in bands on the side stood behind the counter in horn-rimmed glasses and bowl cuts. This Hegewisch was part of a three-store chain, and it survived by selling an eclectic mix of rock, pop, and jazz CDs. and other thin newspapers devoted to the local rock scene. Hipsters who played in bands on the side stood behind the counter in horn-rimmed glasses and bowl cuts. This Hegewisch was part of a three-store chain, and it survived by selling an eclectic mix of rock, pop, and jazz CDs.One day in 1992, a Best Buy came to town, across and about a quarter-mile down US 30 from Hegewisch. Circuit City showed up a year later. It wasn't so bad at first-dishwashers and computers didn't exactly compete with music. But soon Best Buy started marketing its CDs and cutting prices more aggressively than ever. It would take a loss on hit CDs, drawing music fans into the store to buy much more profitable toaster ovens. This was an awesome development for consumers. The Beatles' Anthology 2 Anthology 2 cost $27.99 at Hegewisch and $22.99-with a free, limited-edition interview disc-at Best Buy. It was ridiculous for Hegewisch. "We can't keep up with that," Dave Diaz, the store's twenty-nine-year-old manager, said at the time. The Merrillville Hegewisch closed in 1995. The other two stores in the chain hung on until 2003. cost $27.99 at Hegewisch and $22.99-with a free, limited-edition interview disc-at Best Buy. It was ridiculous for Hegewisch. "We can't keep up with that," Dave Diaz, the store's twenty-nine-year-old manager, said at the time. The Merrillville Hegewisch closed in 1995. The other two stores in the chain hung on until 2003.Best Buy started selling CDs at all its stores in 1986, as a way of supplementing its core business, stereo equipment. Best Buy's CD sections took off as CD sales exploded; its stores were stocking 40,000 to 60,000 titles by the mid-1990s. Not only that, Best Buy could afford to drop the prices on CDs, even the hot new titles, when Tower and Hegewisch were stuck selling them for the usual prices in order to make a profit. (Although numerous record label executives say Best Buy's music economics involved taking a loss on a wide swath of CD titles, the company's executives insist they always made money from music. "The reality is all of our businesses have to be profit contributors," says Gary Arnold, the chain's senior entertainment officer.) Consumers were thrilled, because CDs were cheaper than ever. Labels were happy, too, until they realized just how much they had to compromise to sell millions of CDs in these stores.In 1996, Best Buy and Wal-Mart sold more than 154 million units out of more than 616 million overall, according to Nielsen SoundScan. With their newfound clout, these chains started dictating terms. Wal-Mart pushed back against explicit lyrics and album covers-in 1993, the company refused to stock Nirvana's In Utero In Utero due to back-cover artwork depicting human fetuses. Nirvana's then-label, Geffen Records, decided not to censor the artwork and just live with the lack of sales at Wal-Mart's 1,964 stores. Labels would compromise within three years, producing "clean versions" of certain hip-hop records and airbrushing racy images out of CD covers so Wal-Mart would stock them. due to back-cover artwork depicting human fetuses. Nirvana's then-label, Geffen Records, decided not to censor the artwork and just live with the lack of sales at Wal-Mart's 1,964 stores. Labels would compromise within three years, producing "clean versions" of certain hip-hop records and airbrushing racy images out of CD covers so Wal-Mart would stock them.Best Buy was far less moralistic but developed hefty financial requirements to stock albums. The chain demanded $40,000 to $50,000 from labels to push CDs in house ads and on displays and racks, sources say. This practice changed record stores forever. Tower Records, for one, went ballistic. "Frigging Best Buy!" says Stan Goman, Tower's former chief operating officer. "That was it." For years, Tower Records had a policy of not accepting money to display CDs prominently on store shelves. Store managers made those decisions based on what was selling and what they thought was good. It was a fair policy, but it was a dinosaur. Eventually, Tower couldn't resist the competitive pressure-and caved. "I couldn't believe it-all this stuff I never heard of on end-caps in the store," Goman says. "You wind up displaying all this crap. crap. I had a fight on a daily basis with that. I said, 'What the hell are we taking this money for?' When the big boxes got in, they just used the same strategy that they used with everybody else, which was common in the grocery industry. We had a different philosophy. It ended up blowing up in our face a little bit." I had a fight on a daily basis with that. I said, 'What the hell are we taking this money for?' When the big boxes got in, they just used the same strategy that they used with everybody else, which was common in the grocery industry. We had a different philosophy. It ended up blowing up in our face a little bit."But the label distribution execs didn't want to kill off Hegewisch, or Tower Records, or Sam Goody. These stores had been loyal customers for decades, and sold a lot of records. If they sold Anthology 2 Anthology 2 for $5 more, that, too, was good for the record companies, right? So the major labels came up with a policy: "Minimum Advertised Price," or MAP. Any store that sold CDs above a certain price would receive a financial boost from the record labels in the form of newspaper or television advertising. Newbury Comics in New England sold 'NSync's CD for $5 more, that, too, was good for the record companies, right? So the major labels came up with a policy: "Minimum Advertised Price," or MAP. Any store that sold CDs above a certain price would receive a financial boost from the record labels in the form of newspaper or television advertising. Newbury Comics in New England sold 'NSync's CD No Strings Attached No Strings Attached in its first week for $11.88. A week later, to get the free ad money, Newbury raised the price to $14.99. "The MAP thing was great," says Terry Currier, owner of two Music Millennium stores in Portland, Oregon. "It gave everybody a fair shake to not be bulldogged by the big retailers and not have to give away the product." But it didn't last. in its first week for $11.88. A week later, to get the free ad money, Newbury raised the price to $14.99. "The MAP thing was great," says Terry Currier, owner of two Music Millennium stores in Portland, Oregon. "It gave everybody a fair shake to not be bulldogged by the big retailers and not have to give away the product." But it didn't last.In 2000, after MAP had been in place for almost eight years, the Federal Trade Commission accused the labels of price-fixing, and the FTC declared they were penalizing some record stores, like Best Buy and Wal-Mart, for selling CDs too cheaply. Best Buy's Arnold never understood the labels' logic: What's wrong with selling CDs too cheaply? The major record labels had been doing it for years through bargain-basement mail-order deals like Columbia House. "Nobody ever explained that to us," Arnold says. "If you are so concerned about the perceived value of your product, how can you place it available twelve-for-a-penny?" The government cracked down hard. From 1996 to 1999, the FTC announced, CD purchasers paid a collective $480 million more than they should have, thanks to these MAP policies at record stores. The commission leaned on the five major record labels, which agreed to drop the practice.Further humiliation was in store for the labels. Forty-one states, from New York to Arizona, filed suit, alleging price-fixing and collusion. The labels' lawyers had no choice but to settle. Although they didn't officially admit any wrongdoing, labels agreed to pay $20 to anybody who bought any one of the 4.1 billion CDs sold between 1995 and 2000. They also agreed to donate 5.5 million CDs-worth about $75.5 million-to schools and libraries around the country. Would these free CDs include big sellers like Bruce Springsteen and Beyonce? Not a chance! In 2002, the Louisville Free Public Library in Kentucky was not exactly thrilled to receive as part of this settlement 171 free CDs, including Martha Stewart Living: Spooky Scary Sounds for Halloween Martha Stewart Living: Spooky Scary Sounds for Halloween, Linda Eder's Christmas Stays the Same, Christmas Stays the Same, Lee Greenwood's Lee Greenwood's American Patriot, American Patriot, and six copies of Ricky Martin's and six copies of Ricky Martin's Sound Loaded Sound Loaded. "It's better than a poke in the eye with a sharp stick-but not much," Craig Buthod, the Louisville library's director, said at the time. "I'd have to say this looks like leftovers."Before long, mass retailers like Best Buy and Wal-Mart would account for more than 65 percent of all the CDs sold in the United States. Tower and Musicland would go bankrupt. If labels wanted to continue selling millions of CDs, they had had to rely on Best Buy and Wal-Mart. Eventually, big boxes would drastically reduce their shelf space. But in the meantime, Napster was on the way. to rely on Best Buy and Wal-Mart. Eventually, big boxes would drastically reduce their shelf space. But in the meantime, Napster was on the way.
Chapter 4.
19982001 A Nineteen-Year-Old Takes Down the Industry-with the Help of Tiny Music, and a Few Questionable Big Music Decisions IN 2007, 2007, Doug Morris, sixty-eight-year-old chief executive officer of the Universal Music Group, the world's largest record company, gave an interview to Doug Morris, sixty-eight-year-old chief executive officer of the Universal Music Group, the world's largest record company, gave an interview to Wired Wired magazine that left many in the record industry frowning in stunned silence. He was talking about major labels in the late 1990s and why he and his contemporaries didn't plunge into internet music more quickly. "There's no one in the record company that's a technologist," he said. "That's a misconception writers make all the time, that the record industry missed this. They didn't. They just didn't know what to do. It's like if you were suddenly asked to operate on your dog to remove his kidney. What would you do?" Responded the magazine that left many in the record industry frowning in stunned silence. He was talking about major labels in the late 1990s and why he and his contemporaries didn't plunge into internet music more quickly. "There's no one in the record company that's a technologist," he said. "That's a misconception writers make all the time, that the record industry missed this. They didn't. They just didn't know what to do. It's like if you were suddenly asked to operate on your dog to remove his kidney. What would you do?" Responded the Wired Wired writer: "Personally, I would hire a vet." Morris shot back: "We didn't know who to hire. I wouldn't be able to recognize a good technology person-anyone with a good bullshit story would have gotten past me." writer: "Personally, I would hire a vet." Morris shot back: "We didn't know who to hire. I wouldn't be able to recognize a good technology person-anyone with a good bullshit story would have gotten past me."
Granted, record labels didn't have high-tech staffs on the level of Apple Computer or Sun Microsystems. But Morris's memory of his own staff at the time was disturbingly out of touch. "There were only like forty people trying to get Doug's attention," says Erin Yasgar, who headed Universal's first new-media department, beginning in 1998. "We were all like, 'Pay attention to us!'" Also at Universal were internet experts like Albhy Galuten, the Grammy-winning Saturday Night Fever Saturday Night Fever soundtrack producer who later created the first Enhanced CD to include video and software, and Courtney Holt, who had marketed Universal artists online since the dial-up days of America Online and CompuServe. These high-tech experts were scattered throughout all the major labels. soundtrack producer who later created the first Enhanced CD to include video and software, and Courtney Holt, who had marketed Universal artists online since the dial-up days of America Online and CompuServe. These high-tech experts were scattered throughout all the major labels.
It was the CD that first turned record people who otherwise might not have known a bit from a byte into New Media Executives. One of the very first ones was Stan Cornyn, longtime vice president of Warner Music, a creative and funny guy who in the 1960s had penned famous and influential industry ads like "Joni Mitchell is 90% Virgin." In the mid-1980s, the bespectacled Warner veteran started a new division called the Record Group, whose function was, as he recalls in Exploding, Exploding, "make-whatever-you-can-dream-up." His small staff tinkered for months, losing money, developing business models for CD+Graphics, Laserdisc, and a new video format called CD-V. "Bill Gates came by my office, saw our work, and pretended to be interested," Cornyn writes. "I realized he'd never make it in showbiz." None of this digital ephemera came remotely close to matching the success of the compact disc. "make-whatever-you-can-dream-up." His small staff tinkered for months, losing money, developing business models for CD+Graphics, Laserdisc, and a new video format called CD-V. "Bill Gates came by my office, saw our work, and pretended to be interested," Cornyn writes. "I realized he'd never make it in showbiz." None of this digital ephemera came remotely close to matching the success of the compact disc.
Once executives figured out how to use AOL and Netscape, their days of tinkering in label labs, trying to add new functions to shiny pieces of plastic, were over. In late 1993, a panicked secretary strode into Warner vice president Jeff Gold's office to deliver an urgent message: Depeche Mode's new Songs of Faith and Devotion Songs of Faith and Devotion CD had just leaked to fans in online chat rooms! "Oh no!" Gold declared to himself in a panic, picking up the phone, preparing to implement all kinds of high-tech emergency response plans. Then he paused: " CD had just leaked to fans in online chat rooms! "Oh no!" Gold declared to himself in a panic, picking up the phone, preparing to implement all kinds of high-tech emergency response plans. Then he paused: "Chat rooms?" He opened a CompuServe account to check them out, and it wasn't long before he became addicted. Gold called his friend Marc Geiger, who had founded the Lollapalooza rock festival and was then head of new media for Rick Rubin's American Recordings. The two met regularly at Geiger's house in Los Angeles and lurked on fans' online conversations. Then they went back to work and made some calls. Working with CompuServe and AOL, Gold and Geiger ran Thursday-night talk shows, with Perry Farrell of Jane's Addiction, among others, and posted exclusive sound clips and contests. At one point, Gold showed Mo Ostin, Warner's respected old-school record man, what he and Geiger were up to after hours. "Fantastic," Ostin said dryly, "but don't forget your real job."
Yes, contrary to Morris's recollections, major labels employed technologists. Some, like Geiger and Gold, were amateur tinkerers who simply thought computers were cool. Others, like Paul Vidich of Warner Bros., were business-strategy types who saw internet music as a huge sales and marketing opportunity-Vidich and his staff went so far as to set up the Madison Project, a high-level experiment to sell music files over Time Warner cable television systems in San Diego in 1999. Fred Ehrlich, Sony Music's head of new technology, spent the dot-com boom investing millions of his company's money in promising ventures like eUniverse. When the dot-coms crashed, Sony abandoned ship, divesting its 20 percent stake in eUniverse. That company morphed, essentially, into MySpace. "A lot of those investments wound up being very successful a couple of years later," Ehrlich says today. It was only certain people in charge who thought like Doug Morris.
When Netscape went public in 1994, introducing the World Wide Web to the public and ushering in the internet boom, top executives at major labels were largely unmoved. Starry-eyed visionaries from high-tech startups kept showing up in their offices, presenting business plans and, invariably, asking for free content. "I met with people until I was blue in the face, from the dot-com industry," remembers John Grady, head of Mercury Records in Nashville in the late 1990s. "After a while, it grew rather tiresome. That's sort of the taste everybody had in their mouth from it." These would-be dot-com millionaires tried to push old-school record men to sell music online, change the business model, plunge into the new world. They made little progress. One of the most credible dot-com guys, in the eyes of the music business, anyhow, was Rob Glaser. By December 1995, he had already started RealNetworks, which was growing fast as the premier online-audio service on the internet, one that turned dry National Public Radio news reports into essential audio content for web surfers. He contacted numerous label execs, trying to make a content deal. Everybody was nice-he had lunches with Al Smith and Fred Ehrlich of Sony Music and cigar-chomping Charles Koppelman of EMI. He hung out with MCA executives on a private jet. Each exec seemed to enjoy the meetings but had no interest in doing business. They were making big money. They had the Spice Girls. They had all the time in the world. Why change?
THE STORY OF Napster does not begin with Shawn Fanning, the nineteen-year-old Metallica fan with big headphones who invented this revolutionary file-sharing software in his college dorm room. It actually begins in the dark ages of the late 1970s, with a group of easygoing, bespectacled German audio engineers working on their PhD theses at the University of Erlangen-Nuremberg. Napster does not begin with Shawn Fanning, the nineteen-year-old Metallica fan with big headphones who invented this revolutionary file-sharing software in his college dorm room. It actually begins in the dark ages of the late 1970s, with a group of easygoing, bespectacled German audio engineers working on their PhD theses at the University of Erlangen-Nuremberg.
Back then, Professor Dieter Seitzer was trying to transmit speech more quickly and efficiently over phone lines-both via traditional copper wires and the Integrated Services Digital Network, or ISDN, which many scientists perceived as the future of telephone systems. While working on this problem, Seitzer decided it might be even more interesting to send tiny music files over phone lines. But he was so ahead of his time that a confused German bureaucrat denied him a patent. The word the examiner used was "impossible." Seitzer took that as a personal challenge and immediately assigned one of his PhD students to project shrink-the-music.
The student, Karlheinz Brandenburg, soon devoted his doctoral thesis to audio compression. He joined a team of ten to fifteen audio researchers who would spend the next twelve years working on Seitzer's problem. Brandenburg was the research team leader-sort of. "Everybody contributed ideas," he says. "It was not me implementing and the others having ideas."
Thus began a convoluted process, involving dozens of scientists from the Erlangen-Nuremberg team, Bell Laboratories, Philips Electronics, and several other companies working separately and together, to create a compressed audio file that would become known as the MP3. To make this idea work, the researchers had to tap into an existing science-psychoacoustics-that had been applied to loudspeakers, telephone networks, and other high-tech sound developments from as early as the 1930s. (It's unclear which of the research teams was the first to adapt this science to audio compression; the idea had been floating around in academic German papers for years.) Psychoacoustics has to do with how the human brain perceives sound, and, more important, which sounds the brain leaves out. For example, whenever two identical sounds hit the ear from two different directions, a human will hear it as a single sound coming from the first direction. This is called the Haas effect Haas effect, and understanding such phenomena allowed the German team, in essence, to throw out the sounds human ears don't hear and keep the important ones.
This was complicated-and cumbersome, especially at first. The best track Brandenburg and the German engineers could find for research purposes was Suzanne Vega's hit "Tom's Diner," which contained no noise other than the singer-songwriter's voice. The researchers used state-of-the-art equipment of the time, like the digital signal processors that Bell Labs had first released in 1979, to take tiny samples of every second of music on a digital audio disc. The team reasoned that if CDs used 16 bits of data to sample music 44,100 times per second, which comes out to roughly 1.5 megabits per second, a compressed version of the music could use a much smaller number-say, 128,000 bits per second. The question was where to allocate those bits in sampling the music. Maybe a particularly important middle C would take up a few hundred bits; a high-frequency sound undetectable to the human ear might wind up using no bits at all. (These techniques would eventually lead MP3 critics, from rocker Neil Young to digital music pioneer James T. Russell, to bemoan the loss of sound quality.) Combining psychoacoustics and long-established concepts like Huffman coding and Fast Fourier Transforms, the team wrote software encoders and decoders to compress the audio files. But they were limited by the high-tech realities of the time. They could test only twenty seconds of music at a time, due to the limited capacity of hard-drive storage, and they had trouble finding enough university computing time to spend four hours on each twenty-second passage. Not only that, it was the age of low-capacity, 3.5-inch floppy discs.
They labored for more than a decade on the project, meticulously working out the kinks and taking advantage of advances in storage capacity and the growing availability of personal computers. For a long time, nobody had any idea that this obscure German research project would turn into anything more than an obscure German research project. "In 1988 somebody asked me what will become of this," Brandenburg told the BBC News. "And I said it could just end up in libraries like so many other PhD theses."
By 1991, the engineers had enough resources to perfect the MP3. They successfully compressed "Tom's Diner" into the format and developed a standard player for computers. They began to share resources with a prominent German research society, the Fraunhofer Institute for Integrated Circuits, and together they focused on turning their invention into a worldwide hit. They wrote a proposal to the Geneva-based International Organization for Standardization, which tells the world, for example, how many tubes and valves belong in car tires and the minimum amount of platinum required for platinum jewelry. One of the many subgroups of the ISO, as the organization is widely known, is the Moving Picture Experts Group, or MPEG, which formed in 1988 to create standards for digital multimedia formats. By then, the scientists from Philips, Bell Labs, and the other companies working on the same idea had come up with similar inventions and were furiously trying to make them work. At the time, all these scientists were still thinking telephone. telephone. But the internet would soon become far more exciting than the phone. But the internet would soon become far more exciting than the phone.
In all, fourteen different groups submitted their technologies to MPEG. And this is where the history of the MP3 becomes even murkier. "It's not a straightforward story, unfortunately,"* says German team member Bernhard Grill, who specializes in algorithm and software design. In 1991, MPEG merged four of the proposals and eventually turned the compression technology into a standard with the catchy little name of ISO-MPEG-1 Audio Layer 3. That's MP3, for short. Two variations, MP2 and MP1, worked better for video. says German team member Bernhard Grill, who specializes in algorithm and software design. In 1991, MPEG merged four of the proposals and eventually turned the compression technology into a standard with the catchy little name of ISO-MPEG-1 Audio Layer 3. That's MP3, for short. Two variations, MP2 and MP1, worked better for video.
At the time, nobody in the record industry had a clue any of this was going on. Executives at Sony Music, Warner, and the rest didn't know MP3 existed, let alone that it contained no copy protection. Nor did they know that any music fan in the world could stick a CD into a recordable drive on a computer and rip every song into a compressed, easy-to-store form, then burn the MP3 to a blank CD, or post it for free on the internet, or even trade it via email. The Fraunhofer team tried to warn the industry in the early 1990s, but didn't get anywhere. "There was not that much interest at that time. Oh, there were some meetings, but not with the top hierarchy," Grill says. "They didn't realize how fast the internet would grow. No one saw it coming that fast."
As the 1990s wore on, and the internet started to blow up, the MP3 slowly turned into an underground hit. One fan discovered it, then another, then another. Two of them were Rob Lord and Jeff Patterson, then computer-science majors at the laid-back campus of the University of CaliforniaSanta Cruz. Patterson had a band, the Ugly Mugs. Lord was an indie rock and electronic music fan who happened to be studying psychoacoustic audio compression. Lord found the MPEG specifications online. With help from friends at Sun Microsystems and elsewhere, they landed free server space and taught themselves how to encode music in the MP2 compression format. They posted Ugly Mugs songs on internet newsgroups. They were surprised to hear from fans in Turkey and Russia via email, asking for more Western music. Lord and Patterson started the Internet Underground Music Archive, one of the first major music web sites, offering free MP2s by unknown bands-but they had the foresight to stay away from copyrighted music owned by major record labels.
As internet connections evolved from frustrating to tolerable to enjoyable, Winamp, designed by Justin Frankel, a nineteen-year-old college dropout and programming genius from Sedona, Arizona, became the first standard for playing MP3s online. It was free. Using such tools, voracious music fans started to post MP3s on their web sites-usually well-known songs by artists like Metallica and Madonna. The dam broke in late 1997, when entrepreneur Michael Robertson created MP3.com, a hub for finding free music on the web.* The media started to notice, as "MP3" displaced "sex" as the most-searched-for term through internet search engines such as Yahoo! and AltaVista. The media started to notice, as "MP3" displaced "sex" as the most-searched-for term through internet search engines such as Yahoo! and AltaVista.
In 1999, the heart of the internet gold rush, there were only two ways for an entrepreneur to get into online music. The first was to play by the rules of copyright. But that meant dealing with the major record labels, whose executives were in no hurry to change their CD-selling model. IBM developed something called the Cryptolope, a locked electronic "envelope" containing music or other content that could be passed around via email or the web. It didn't get anywhere. "A few other companies got into that technology game," recalls Bob Buziak, former president of RCA Records, who went on to consult with AT&T and other high-tech companies. "But the record industry basically said no. They didn't feel they were going to give anybody their content." Gerry Kearby started Liquid Audio, a format that included encrypted locks on digital music files, and tried to make licensing deals with the industry. He wound up negotiating with executives like Sony Music's Al Smith, a charming guy who enjoyed meeting with tech people but never committed to a deal. In large part, sources say, that was because he couldn't. couldn't. Tommy Mottola, Michele Anthony, and the rest of the Sony Music brain trust were opposed to licensing content online. "One day in a moment of pure honesty, [Smith] said, 'Look, Kearby, my job is to keep you down. We don't ever want you to succeed,'" Kearby says. "Some of them were more interested in experimenting than others, there's no doubt about it. But they were, in effect, buggy-whip manufacturers, trying to keep the auto at bay as long as they could." Tommy Mottola, Michele Anthony, and the rest of the Sony Music brain trust were opposed to licensing content online. "One day in a moment of pure honesty, [Smith] said, 'Look, Kearby, my job is to keep you down. We don't ever want you to succeed,'" Kearby says. "Some of them were more interested in experimenting than others, there's no doubt about it. But they were, in effect, buggy-whip manufacturers, trying to keep the auto at bay as long as they could."
The second way to succeed in online music was through theft-allowing people to download MP3s for free. This was illegal, and dangerous.
The first person in the record industry to notice online song-swapping-officially, anyway-was Frank Creighton, a former computer systems analyst and head of the RIAA's antipiracy division. The files were huge-50-megabyte WAVs took a long time to download, especially over dial-up connections. This couldn't possibly catch on This couldn't possibly catch on, he thought. Then Creighton saw users trading compressed files-MP3s-over file-transfer protocols, chat rooms, and plain old websites. He sent his first cease-and-desist letter to a website in 1997. The pirates ceased and desisted. That approach worked pretty well.
In late summer 1999, Creighton was surfing the 'net and happened across a website with downloadable software. Napster.com. Napster.com. He checked it out and peered more deeply into his computer screen. Fans were exchanging messages, just like they did via chat rooms or Internet Relay Channels. Only all the messages were about how they could trade songs for free. And they were actually doing it- He checked it out and peered more deeply into his computer screen. Fans were exchanging messages, just like they did via chat rooms or Internet Relay Channels. Only all the messages were about how they could trade songs for free. And they were actually doing it-right there. Hundreds of them at a time. Hundreds of them at a time. Thousands Thousands of them! He turned to his boss, Hilary Rosen, then chairman of the RIAA. "You've got to look at this," he said. of them! He turned to his boss, Hilary Rosen, then chairman of the RIAA. "You've got to look at this," he said.
"Oh my God," Rosen responded. It was as if vandals had broken the locks on all the record stores and were looting merchandise in bulk.
Creighton sent an email to the registered user for the Napster website. "We're happy to talk with you," responded two names Creighton had never heard of-Shawn Fanning and John Fanning. "We're glad you find our technology interesting and we want to figure out internally who are the right people to sit down with you." Unbeknownst to Creighton at the time, Napster creator Shawn Fanning and his uncle, John, who controlled most of the company, were stalling. A round of venture-capital financing was about to come through for their business, and the Fannings didn't want to damage it. Creighton received two more responses over the next few weeks, then nothing. He called again. And again. Finally, another name at Napster, Eileen Richardson, returned his call. She said she had no idea why he was calling. When he mentioned his concerns about copyright infringement, she said she'd talk to others within the company and get back to him. He flew to California for business and tried to reach Richardson between meetings. He called several times. No response. That pissed him off.
IN 1996, S 1996, SHAWN Fanning was a seventeen-year-old hacker. Not the evil-genius kind. Shawn was more the type to hang around in Internet Relay Channels, or IRCs, and absorb as much as he could about computer security at banks and brokerages. He didn't do any of this to make mischief, or so he told friends. It was mostly to learn as much as he could on his own about computers and programming. Fanning was a seventeen-year-old hacker. Not the evil-genius kind. Shawn was more the type to hang around in Internet Relay Channels, or IRCs, and absorb as much as he could about computer security at banks and brokerages. He didn't do any of this to make mischief, or so he told friends. It was mostly to learn as much as he could on his own about computers and programming.
When Shawn was born, on November 22, 1980, he lived with his single mother, Coleen, and a rotating cast of her eight brothers and sisters and their families in working-class Rockland, Massachusetts. Within a few years they started moving around, near the projects of Brockton, outside Boston, as Coleen found work as a nurse's aide. She also married a bakery delivery truck driver and ex-Marine, Raymond Verrier, and had four kids with him. Shawn's father was Joe Rando, who at age eighteen started a romance with sixteen-year-old Coleen after performing with his Aerosmith cover band on the Fannings' block. He didn't come around much. "Money was always a pretty big issue," Shawn later told Business Week Business Week in a Napster cover story. "There was a lot of tension around that." When the Verriers broke up temporarily in the early 1990s, when Shawn was twelve, he and his four younger half-siblings lived for a few months in a foster home. "I told him that I had talked to my wife and we only had a small apartment, but he could come live with us," his uncle, John Fanning, told the in a Napster cover story. "There was a lot of tension around that." When the Verriers broke up temporarily in the early 1990s, when Shawn was twelve, he and his four younger half-siblings lived for a few months in a foster home. "I told him that I had talked to my wife and we only had a small apartment, but he could come live with us," his uncle, John Fanning, told the Boston Globe Boston Globe. "He was just a kid, twelve or thirteen, but he said, 'I guess I've always known that was an option for me, but to tell you the truth, there's no way I can leave my brothers or sisters.'"
In a way, Shawn was lucky. He was shy, but smart and focused. He taught himself how to get good at various things. He played tennis, basketball, and baseball, and hit .650 one year at Harwich High School, in small Harwich Port, part of Cape Cod. And he had an uncle who recognized his talents and became a sort of older-brother-and-mentor figure. John Fanning bought him lavish gifts, like a purple BMW Z3, which would fuel Shawn's lifelong interest in fast cars. In 1996, John also bought Shawn an Apple Macintosh-his first computer. "He set me up with internet access. I was pretty much on the internet right away," Shawn says, in his polite, no-nonsense, borderline self-deprecating way. "I used it for him at his house. I think the first time I used it was to play chess. I was amazed by it. I loved it. Completely sucked in like everybody."
Uncle John was an entrepreneur, a self-made man who had a vocational high school diploma and a few Boston College course credits spread out over eight years. He claimed to have worked as a senior trader at the prestigious Fidelity Investments, but all he really did was take incoming phone calls and route them to actual traders who made actual deals. He tried and failed at two businesses-computer company Cambridge Automation, which he rode to the bottom in the early 1990s, and Chess.net, run by low-paid Carnegie Mellon students he'd recruited personally. On his own, John Fanning was never successful at business by any objective standard, but he had a talent for staving off debt, ignoring creditors, and fighting back in court. Even during his worst periods, he had no problem buying expensive suits and cars for his nephew.
Shawn interned for Chess.net in summer 1997, sleeping on a living room couch in a house rented by the firm's six employees. "We set up a little computer for him in the living room-I think it was something we made with spare parts-and taught him to program. He was fifteen years old," recalls Ali Aydar, a Chess.net employee. "You give him one or two little things and he sort of goes with it from there." Shawn threw himself into hacker IRCs like w00w00, learning about MP3s, and amassing his own digital music collection within weeks. John bought him a second computer, a $7,000 laptop. "I remember having a technical discussion about MP3s online-people explaining compression ratios," Shawn says. "It gained some popularity. I heard quite a bit on IRC." Eventually Chess.net crashed. Most of Fanning's employees took off. John had tens of thousands of dollars in debt. He needed new business-something in the big and moneymaking department.
Shawn badly wanted to attend Carnegie Mellon, from which some of his Chess.net mentors had graduated, but he didn't get in. He settled for Northeastern University, near home. At the time, Shawn didn't much like college. The beginning computer courses were beneath him, so he spent most of his time partying-and hanging out on w00w00. For the next several months, rather than actually attending school, Shawn spent time at his uncle's office, fiddling with the computer.
Looking for a way to trade MP3s online that was faster and less frustrating than web search engines, Shawn was in his dorm room when he conceived the idea for Napster. He was inspired by the easy-to-use format of IRC, in which users' names appeared on the screen when they were logged on, and vanished when they weren't. His plan was to set up a central server, where users would connect, see their log-on names, and view the titles of MP3s they were storing in folders on their hard drives. A search box, set up like Google or AltaVista, would make it easier than ever to find a piece of music by artist or title. The trick was that the central server contained only information on user names and MP3 text information. The actual file sharing took place between individual users' computers. Shawn named his invention after his IRC nickname: Napster. This was a haircut he had as a kid, although by the time he went to Northeastern he already had his familiar look-Marine-doubling-as-Metallica-fan.
As master programmers go, Shawn was a hard worker but not brilliant. He needed help. One of his w00w00 mentors, underachieving geek Jordan Ritter, was intrigued by his online friend's idea. For free, Ritter debugged the code and updated some of Shawn's unsophisticated programming in the C++ language. Some of Shawn's other mentors weren't quite so supportive. "I was living in downtown Chicago, working as a banker," Ali Aydar recalls, "and Shawn popped up on my IM. He started telling me about this software application he was writing and how it was about sharing music and how it was going to work and all this other stuff. I said, 'Stop wasting your time. No one's ever going to share an MP3.' I encouraged him to concentrate on school. Obviously, he didn't listen to me."