In the first weeks of 2000 the founders of Napster were in their office above a bank in San Mateo, California, considering dizzying numbers. Figures scrawled on a whiteboard told how many people around the world had installed their file-sharing application and were using it to download music from each other's computers. As recounted in Downloaded – a documentary soon to premiere at the SXSW film festival, telling the story of a piece of software that came and went and whipped up a new digital music industry in its slip – Napster had 20 million users at the time. Some way from San Mateo, in suburban London I had just become one myself.

I was 17, and the owner of an irregular music collection that numbered about 20 albums, most of them a real shame (OMC's How Bizarre, the Grease 2 soundtrack). One day I had unsupervised access to the family PC and, for reasons forgotten, an urge to hear the campy orchestral number from the film Austin Powers. I was a model Napster user: internet-equipped, impatient and mostly ignorant of the ethical and legal particulars of peer-to-peer file-sharing. I installed the software, searched Napster's vast list of MP3 files, and soon had Soul Bossa Nova plinking kilobyte by kilobyte on to my hard drive.

"It's difficult to describe to people... how much material was suddenly available," the technology guru John Perry Barlow tells Alex Winter, the director of Downloaded, in his new documentary. Speaking to me on the phone from the US, Winter added: "There was no ramp up. There was no transition. It was like that famous shot from 2001: A Space Odyssey, when the prehistoric monkey throws a bone in the air and it turns into a spaceship. Napster was a ridiculous leap forward."

They're right, it was seismic. I was part of the web-straddling generation. The internet, when it came in our teens, was welcome, exciting and fathomable, but it changed things briskly and sometimes bewilderingly. Music was something you bought after protracted debate with friends in the aisles of Our Price, and then, suddenly, songs were accessible from home. They didn't cost anything. We were wilfully blinkered, probably, on the exact details of this last point.

I asked colleagues of a similar age what they remembered of Napster's arrival. "The thrill," said one, whose first download was by Smashing Pumpkins, "even when I listened to the music through my mum's tinny computer speakers." Another quickly sought to mine Marlena Shaw's backlist and "couldn't believe it worked". For my part – plundering singles by Artful Dodger, by Semisonic – I have a memory of actually looking over my shoulder. How was this possible? It was as if the door to a bank vault had been left open, no guards in sight.

Getting music off the internet before Napster was tricky, unreliable – as someone remarks in Downloaded, "a colossal pain in the ass". Winter says he had "friends who would spend 14 hours trying to pull a Butthole Surfers song offline. And it would fail. And they would try again. And it would fail."

In about 1998, someone with the username "napster" revealed to those present in an internet chatroom that he'd been working on a piece of software to fix the problem. It would allow people to dip into each other's hard drives, and share their MP3 music files. (The MP3, devised in the mid 1990s, had become the dominant format for digital audio in the emerging internet age, and has pretty much remained so.)

In the chatroom, people scoffed. Share? Why would anyone do that? But Sean Parker, an aspiring entrepreneur, liked the idea. He was 18, skinny, with gelled-up red hair and a tendency to look at the floor when he spoke. Parker suggested they collaborate and he met "napster", or Shawn Fanning, for the first time in person. Fanning was a year younger, an unsmiling boy from Massachusetts who shaved his head against the curled, or "nappy", hair that had earned him his nickname.

The term Napster passed, of course, to the piece of software Fanning was coding. Working on a borrowed PC in his uncle's Massachusetts office, sleeping in a nearby utility cupboard in order to conduct days-long programming sessions, Fanning had a finished product by the spring of 1999. Parker, meanwhile, had wheedled $50,000 from investors, and the pair moved to California. Friends from the chatroom were hired as staff, and Napster was launched in May 1999. By October it had 4m songs in circulation. By March 2000 – when, for my part, I'd already siphoned off a few hundred of those 4m – the Napster community numbered more than 20 million.

By now the heads of the major record labels had gathered for a summit. In the Washington offices of the Record Industry Association of America (RIAA), execs were encouraged to play a game that was informally called Stump the Napster – in other words, try to find at least one of their new singles that wasn't being shared online. All were appropriately horrified and an action was launched against Napster for breach of copyright.

The first year of the new millennium was the first to register a dip in global record sales. That scared the labels, and before long individual Napster users were being sued too, some 18,000 all told. Alex Winter told me he met a woman, in the course of making his documentary, who over a decade later was still embroiled in a multi-million-dollar action. She'd once used Napster to download 26 songs.

"The world had changed [because of the internet] and it was never going back," Winter says. "Well, I have a problem with black-and-white thinking when it comes to big cultural changes. People at the time were saying: 'It's fine for me to take whatever I want. Get over it, grandpa!' And on the other side they were saying: 'This is piracy and you're a criminal.' I don't think either was right. With Napster there was an enormous amount of grey."

Opponents saw no grey. Litigation against Napster came from all angles. The RIAA sued, so did Metallica and Dr Dre. The court battles dragged on and on – long after Parker, millions of users and even Fanning himself had left Napster behind.

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Quick! Get to a computer! There was a weekend in February 2001 that felt like the last days of Rome. In the US courts a judge had found for the RIAA in the breach-of-copyright case, and Napster had been ordered to start charging or else close entirely. There were 48 hours of free music left and I remember the panic, trying to think of tracks I vaguely wanted (Pure Shores, Bound 4 Da Reload) but hadn't yet downloaded (Wild Wild West, Mi Chico Latino). Would there ever be such an opportunity again?

By now the individual songs on my hard drive vastly outnumbered those on the CDs I owned. I had not been using the service cannily, to complete an exhaustive music collection – as Winter had, for instance. He was in his mid-30s that manic February, and remembers booting up multiple PCs to leach off any Coltrane rarities he was still missing.

My approach had always been more of a woozy supermarket sweep, and it meant I'd built up a curious one-track miscellany. At an age by which I should have had a cataclysmic encounter with an album such as Blood on the Tracks, I'd sought out just one Dylan song, The Man in Me, because I'd heard it used to good effect in a film. Very occasionally I was helped to discover an alien band or artist (I remember accidentally getting a cover of Creep by the Cure, hoping for Radiohead, and thinking: hey, this Robert Smith sounds OK...), but by and large my appreciation of music was stunted. When you could download work on a millisecond's whim, there was no bond established. Being free meant no investment.

My experience was not typical. That Marlena Shaw-pilfering colleague told me: "Napster hugely expanded my musical horizons. I felt like one of those mantis shrimps with trinocular vision." Others used Napster to try before buying, something a company spokesman pointed out when the issue of file-sharing was brought before an exploratory US Senate committee in 2000: "A chorus of studies show that Napster users buy more records as a result of using [the software]."

The question was batted about in courtrooms. Were file-sharers really in the wrong? Was Napster? Not a single MP3 was stored on its servers; the software simply enabled users to download from each other. Anyway, might it not be it a good thing that so many people, 57 million users at Napster's peak, were excitedly seeking out music online?

Certain musicians thought so. Wyclef Jean wanted his music to be heard, however it was heard. Chuck D thought of file-sharing as "the new radio". Billy Corgan of Smashing Pumpkins was resigned: "There's no stopping it," he said. "This revolution has already taken place." Peter Gabriel even backed file-sharing software of his own, though the service, unromantically titled WebAudioNet, did not have much impact.

By the summer of 2000, Napster had dramatically expanded and about 14,000 songs were being downloaded every minute. Fanning was a star, sought out at a tech conference by two little-known developers, Larry and Sergey, who told him how much they envied what he'd built. When Time magazine put Fanning on its cover in October 2000, an accompanying article gushed: "[His] programme ranks among the greatest internet applications ever, up there with email and instant messaging."

But the truth was that, for Napster, terminal rot had set in. Sean Parker had been quietly, hurtfully ousted from the company after an email was unearthed in which he referred to file-sharers as pirates, something Napster's lawyers were always careful to deny. Shown the door, Parker asked Fanning for help, but his friend was so weary and disillusioned that he only said: "You're lucky. You can go and do something else." Before long, Fanning left too.

Napster had lost its zest. Rudderless and haemorrhaging relevance, it began a series of doomed manoeuvres. After the court-ordered shutdown, bosses flirted with the idea of reinstating free sharing, but with music that had the lo-fi quality of radio. They gave away free MP3 players. A UK collaboration was announced with Dixons, never the sexiest brand, and by the time Apple was ready to launch its slick iTunes Store in Britain, Napster had a new tie-up – with the Post Office.

As iTunes grew in stature, there was some hope, says Winter, that Napster might hang around as "Pepsi to iTunes' Coke". To that end, the brand was bought up by a succession of different corporations, each hoping to recapture some of its original cachet. Too late – by 2006 the digital music market, spurred into life by Fanning and Parker, was worth £560m but Napster had fewer than 1 million users left. By 2008 the numbers were no longer made public.

An intriguing hint is floated in Downloaded that Napster was not only a sinkhole for investors' cash; it only ever generated proper revenue by selling T-shirts. Fanning and Parker don't seem to have made any money from it, and were left with big legal debts to go with long-lasting frustrations. "They both spent a lot of time just free-falling after Napster's demise," Winter tells me. "I think it's taken a long time for them to reconcile what was actually good about what they did."

Latterly they have thrived. Fanning founded a gaming company, Rupture, which he sold for $30m. Parker partnered with Mark Zuckerberg in the early days of Facebook and then invested in the music-streaming service Spotify. He is now a billionaire, and in 2010 was portrayed as a quick-witted lady's man by Justin Timberlake in David Fincher's Facebook movie The Social Network. Not so bad.

"They were like a hydra, two heads," says Winter who has had some experience as part of a double act himself. As an actor in his youth, he played Bill alongside Keanu Reeves' Ted in the Bill & Ted films. "I can identify with having fame really early in a creative partnership, with the stress it puts on a friendship. But both Fanning and Parker were incredibly smart. What they created at 17, 18 – they were visionaries."

Selfishly, I'm glad Napster faded when it did. Though copycat software rose up afterwards, downloading music never again felt cloudless. By the time Napster turned off the tap, I'd left home for university, and had got to know a record shop in my new area. The staff there were mercilessly good at convincing wide-eyes like me that the new Belle & Sebastian was worth paying for, and I belatedly started to consider albums as complete packages, to be listened to from start to finish, to invest in.

Just how pervasive Napster was, for a particular generational slice, became clear to me a few years later. On a long drive through California, I put on a homemade CD of mostly legitimately bought MP3s plus a few old Napster downloads. There were three Americans in the car, and when Steppenwolf's grand road-trip anthem, Magic Carpet Ride, came on we all sang along – sang along, too, when a mechanical blip interrupted the chorus. Nobody could believe it. Years before, on computers thousands of miles apart, we'd all downloaded the same corrupted MP3 and got to know Steppenwolf with blip included.

Napster had weightier legacies. Facebook, iTunes and other towering digital giants have flourished using elements first teased or pioneered by Fanning's software. And Winter's documentary makes clear an authentic regret, these days, from inside the music industry that Napster was not embraced. Even while one executive remembers it as "an ambush… Pearl Harbour", others are damning of the hurry to crush such a thriving online community. Island Records' founder, Chris Blackwell, laments the fact that there wasn't a formal move to reach out to its 50 million users at a time when CD sales were tumbling. The industry might be belatedly wrestling a business model into shape in the online age, but an opportunity to do so a decade ago was probably missed.

Napster, I was surprised to find, lingers on in 2013. If you visit its website, you'll learn that it was acquired two years ago by the music subscription service Rhapsody. Prospective users are sunnily advised that file-sharing is fun, easy and possible on a variety of payment plans. Parker and Fanning, meanwhile, have reunited. They're now at work on a fresh venture, a video-conferencing application called Airtime, which seeks to pair up strangers who have similar interests. An online advert imagines two models, brought together because they're both fans of Skrillex and the film Inception, becoming great friends. Other new acquaintances are shown solving Rubik's cubes together, and duetting on the violin.

Well would it really be stranger than two teenagers, across a few hectic months, teaching the internet to share?

Downloaded (VH1 Rock Docs) premieres at the SXSW film festival in Austin, Texas on 10 March