The big problem was that the service didn't license any of the material it played or pay royalties either, and as a result, the service was hit with a lawsuit that could have resulted in the company owing the record labels as much as $756 million.
That legal battle was finally found in favor of the labels, and as part of the settlement, Grooveshark has been shut down immediately. The company had as many as 20 million users, who must now look for a new music service.
The technology to distribute music is easier to create than obtaining the necessary licenses to make it operate, which Grooveshark unfortunately discovered way too late. That's a main reason why technologists and venture money have been discouraged from entering the business in recent years.
Is that stifling innovation? Maybe, but it's more important that creators get paid at least something for their efforts whenever possible. Now if you could only find a way for more of it to find its way into the pockets of artists and songwriters and less into the label coffers.