SAN FRANCISCO (AP) _ Napster Inc., the dorm-room experiment that revolutionized the music business, is in turmoil.
The chief executive and co-founder both stepped down Tuesday after the company's board rejected an agreement to be acquired by German media company Bertelsmann AG _ raising the possibility that the Internet pioneer might go under.
Napster is rapidly running out of cash and may soon file for bankruptcy protection, according to a source close to the company who spoke on condition of anonymity.
Napster's swoon comes three years after Shawn Fanning and Sean Parker created an Internet sensation when they founded the service, which allows users to swap music for free online. It boasted 60 million users at its peak.
But the service angered the music industry, prompting a string of legal problems. Napster has been offline for nearly a year as it tries to meet a guidelines handed down by a federal judge last year.
Konrad Hilbers, a veteran from Napster's financial backer Bertelsmann who joined Napster last year, was the first to go Tuesday, announcing he would leave the company after its board rejected an offer from the German media conglomerate to purchase the company.
Late in the day came confirmation from Napster that Fanning had also resigned. Fanning created the program, along with Parker, when he was a freshman at Northeastern University as a way to quickly share MP3 music files over a computer network.
In an internal memo to Napster employees sent by Hilbers and provided to The Associated Press by sources close to both companies, the chief executive bashed Napster's board for refusing Bertelsmann's offer.
``I am convinced that not pursuing the offer is a mistake and it will lead the company to a place where I don't want to lead it,'' Hilbers said in the memo.
Fanning had a high profile in Napster's early days but was relegated to a behind-the-scenes role as chief technology officer as legal troubles and discord over Napster's future grew.
The company said Fanning had no immediate public comment on his resignation, but a representative for Napster confirmed that he sent a letter to fellow employees at the Redwood City-based company expressing his pleasure at being involved with the groundbreaking service.
Napster has struggled ever since losing key court rulings and the refusal of major record labels to license popular music works to the company have kept it wanting for crucial deals and partnerships vital to its proposed comeback.
But legal battles quickly ensued, and Napster has struggled ever since. And the refusal of major record labels to license popular music works to the company have left it without crucial deals and partnerships vital to its proposed comeback.
Napster's very future appears in question as Hilbers' departure represents a loss in confidence in the company's leadership.
Though it did not release details, Napster said Tuesday it would move to cut costs.
``We deeply regret that we have not yet been able to find a funding solution that would allow Napster to launch a service to benefit artists and consumers alike,'' a Napster statement said. ``We will be looking at additional steps in the coming week to further reduce expenses.''
Bertelsmann extended about $85 million in loans to Napster, but the company has failed to generate revenue or launch a paid service.
Since Napster's service went dark last year, the five major record labels suing Napster for copyright infringement _ EMI, AOL Time Warner, Sony, Universal and Bertelsmann's own BMG Entertainment _ all launched their own subscription services.
Sean Badding, an analyst from The Carmel Group, faulted Napster for not accepting Bertelsmann's offer.
``If this does happen and Napster does file for bankruptcy, I think it would be one of the most compelling technologies to capture the American culture in recent times and then go on to failure,'' Badding said. ``From boom to bust, it had the most potential.''