Why did the music industry snuff the original Napster?

Question

Don't they realize Napster could have been what ITunes is today, except Napster would have been many times larger and would have had the market to themselves, similar to the way America Online did in the 1990's. No one would have been able to compete with them, because they would have been the first, biggest and best.

Answer 1

In hindsight they should have but it wasn't as obvious as it is today.

Answer 2

They should have given Dr. Dre's music back when he asked for it.

Read on from Wikipedia:

Shutdown
Napster's facilitation of transfer of copyrighted material raised the ire of the Recording Industry Association of America (RIAA), which almost immediately — in December 1999 — filed a lawsuit against the popular service.[4][5] The service would only get bigger as the trial, meant to shut down Napster, also gave it a great deal of publicity. Soon millions of users, many of them college students, flocked to it.

After a failed appeal to the Ninth Circuit Court, an injunction was issued on March 5, 2001 ordering Napster to prevent the trading of copyrighted music on its network. In July 2001, Napster shut down its entire network in order to comply with the injunction. On September 24, 2001, the case was partially settled. Napster agreed to pay music creators and copyright owners a $26 million settlement for past, unauthorized uses of music, as well as an advance against future licensing royalties of $10 million. In order to pay those fees, Napster attempted to convert their free service to a subscription system. A prototype solution was tested in the spring of 2002: the Napster 3.0 Alpha, using audio fingerprinting technology licensed from Relatable. Napster 3.0 was, according to many former Napster employees, ready to deploy, but it had significant trouble obtaining licenses to distribute major-label music.

On May 17, 2002, Napster announced that its assets would be acquired by German media firm Bertelsmann for $85 million. Pursuant to terms of that agreement, on June 3 Napster filed for Chapter 11 protection under United States bankruptcy laws. On September 3, 2002, an American bankruptcy judge blocked the sale to Bertelsmann and forced Napster to liquidate its assets according to Chapter 7 of the U.S. bankruptcy laws. Most of the Napster staff were laid off, and the website changed to display "Napster was here".