Napster is dead, but it didn't die in vain. The revolutionary renegade's martyrdom simply cemented file sharing, as the Internet's killer app and peer-to-peer networking is hotter now than it ever was in the gravy days of Shawn Fanning and Metallica bashing.

Song files continue to suck up the bandwidth, with trading networks such as KaZaA, Morpheus, and WinMX leading the way. They learned from Napster's rise and especially its fall. When the 9th U.S. Circuit Court of Appeals put the kibosh on Napster, it only inspired the next generation of file-sharing software to become more elusive and effective. For every AudioGalaxy Satellite the music industry snuffs out, more nimble trading systems, such as BearShare or LimeWire, are filling the void without the centralized servers.

The $200 million mistake
In July, KaZaA's Media Desktop program topped the 100 million cumulative download mark. There's more singles-swapping going on out there than New Year's Eve at Hugh Hefner's place, and the recording industry is seemingly powerless at putting an end to the piracy. And, let's be frank, it is piracy.

But the major labels blew it when they chose to stomp out Napster, when it would've been more lucrative to follow Bertelsmann AG's lead and learn to love the bomb. With the online rebel on the ropes, Napster offered a desperate olive branch. The company offered $200 million a year, to be distributed between the labels in exchange for a stay of execution. The labels balked. Rather than romance the Hydra, record companies chose to swing, letting the only real shot at profiting from the pilfering of its own music slip away. The movement went underground, where revenue streams ran dry.

The interest of conflict
As meaty as the Recording Industry Association of America may have seemed, it was no match for the momentum of peer-to-peer technology. The looting of intellectual capital found surprisingly little in terms of sympathy, and it didn't help much that music labels were lighting the candle in the wind at both ends.

Sure, AOL Time Warner(NYSE: AOL) was worried about its Warner Music catalog. However, it was also profiting from the file-sharing craze by wiring the musical youth and upselling them to the more lucrative world of high-speed broadband. Yes, Sony(NYSE: SNE) saw its music label take a hit. Yet it did so while its MP3 players and CD burners sold briskly. Hypocrisy proved to be a most unflattering B-side.

Putting the "harm" in harmony
Like selling cows in the middle of a milk flood, the five major record labels came up with a laughable solution to profit from the MP3 revolution. They would start their own music subscription services, charging about $10 a month for limited catalogs and restrictive reproduction rights. Sony and Vivendi Universal(NYSE: V) launched pressplay, while Time Warner, EMI, and BMG settled on MusicNet.

The labels turned down Napster's offer that would've netted each record company tens of millions annually for the right to invest tens of millions into doomed business models. The services were a reactionary move that spoke of either the industry's desire to blow seed money or its acute case of terminal naivete. 

Maybe in a pre-Napster world it would've been a savory notion to pay up for limited access to online label libraries. Without the plethora of free and thorough peer-to-peer solutions presently available, the convenience of running a tab on single downloads would've had a shot. But it didn't work out that way. Instead of harvesting Napster as a worthy hub of traffic and promotion, rendering the me-too programs useless, the piracy prohibition created a moonshine monster.

Down the downloading downside
It's not all a bowl of sharing in this pilferer's paradise. The free swap sites are ripe with viruses, mislabeled tracks, and disrupted connections. In the p2p universe, you just can't be sure of what the other p is up to. With the pathetic popularity of spyware-tainted programs, it's not as if the 2 in the p2p is checking its scruples at the door, either. Still, it's a process that beats trolling the beach sand with a metal detector in pursuit of found value.

The labels have tried to fight back with copy-protected CDs, but that has been yet another experiment leaving the record companies singed with backfire. For starters, rigging CDs makes them a less appetizing purchase for the legitimate connoisseur whose archival intentions are honorable. More self-defeating is the fact that tracks will get hacked and ripped, starting the viral online circulation anyway. Besides, even a simpleton can run to RadioShack(NYSE: RSH) for RCA cables to pipe CD contents from an external player into a computer's hard drive.

This places the music industry -- and the aficionado -- in a vulnerable position right now. With artist-development money more at risk than ever, the major labels may be reluctant to take creative chances. Who will that ultimately hurt? The song trader. And, yes, Napster is dead (today the only thing left at napster.com is the company's logo and a message saying "Napster was here"). However, it's the recording industry that's, ironically enough, shedding tears at the wake.

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Rick Aristotle Munarriz has written way too many songs in the key of C-minor. He is also a member of the founding group of 1Sound.com. Rick's stock holdings can be viewed online, as can the Fool's disclosure policy.