PeerCache next foe in copyright war

The Swede behind the world's most popular song-swapping software is at it again.

Niklas Zennstrom, who co-founded Kazaa B.V., the company that created the program of choice for sharing songs and videos online, now is offering Internet service providers PeerCache -- software that lets the ISP's users download commonly shared files from the ISP itself, rather than over the Internet from another user's hard drive.

The recording industry is taking note. The International Federation of the Phonographic Industry, a trade group, is investigating whether to sue Joltid Ltd., maker of PeerCache, or ISPs that use it.

Legal experts say Zennstrom's new product poses a fresh threat for the music industry, which already blames Kazaa and similar programs for its sharp drop in sales in recent years.

Sony Corp. estimates that file-sharing cost music companies $7 billion in sales over the past two years. Two weeks ago, Vivendi Universal S.A.'s Universal Music Group slashed wholesale compact-disc prices some 30 percent to try to lure buyers back.

And last week, the U.S. recording industry sued 261 individuals that it claims illegally share large numbers of music files online, an attempt to strongly deter the dissemination of copyrighted materials via file-sharing services.

"PeerCache is going to reduce the cost of file sharing to Internet service providers, which means the ISPs will have less incentive to cut down on the file sharing," said Ben Edelman, a fellow at Harvard Law School's Berkman Center for Internet and Society. "And it increases the speed for the users, which means they will just do it more."

Zennstrom counters that he has three paying Internet-provider customers, including Wanadoo Netherlands, a unit of France Telecom S.A. He will not, however, name the other two or say how much the ISPs paid for the service.

He said he has not yet approached any U.S. ISPs. However, a spokesman for America Online Inc., a unit of AOL Time Warner Inc. based in Dulles, Va., said the company has looked at the PeerCache technology and decided not to deploy it.

Microsoft Corp., based in Redmond, Wash., wouldn't comment on whether it is considering using Kazaa technology for its MSN service.

Bracing for a fight

It would seem that Zennstrom would be wary of taking on Big Music. The industry sued him last year, brandishing threats of criminal prosecution and millions of dollars in fines. He sold the Kazaa software and Web site in 2002 as his company's legal bills exceeded $100,000 a month.

Despite Kazaa's popularity, Zennstrom never struck it rich. He barely recouped the money, some $220,000, he put up to finance the company -- and he still rides a bicycle to work.

But he is bracing for another fight.

"Basically, what the [music industry] should do is outlaw the Internet," he said. "That's what they want to do."

Napster silenced

Zennstrom, 37, said he doesn't download music; he buys compact discs. He spent the 1990s working for Internet and telecom affiliates of Sweden's Industriforvaltnings AB Kinnevik and a European telecom consortium.

He and a partner, Janus Friis, decided to create Kazaa in April 2000, after seeing how traditional Internet file distribution -- using centralized computer servers -- strained networks. To write the software, Zennstrom hired a trio of whiz kids in Estonia who answered an online ad.

As they were gearing up to launch Kazaa, a U.S. judge ruled that Napster Inc. had to stop illegal music sharing, a ruling that contributed to the eventual shutdown of that service.

Zennstrom gambled he wasn't vulnerable to a similar crackdown. He was a Swede running a Dutch company with programmers in Estonia, and he said he didn't expect many U.S. users.

Unlike Napster, Kazaa did not require his company to host a central directory, making it tougher to blame him for illegal swapping by others. And he planned to negotiate with a Dutch trade group to allow Kazaa's users to pay to legally share songs from musicians around the world.

Threat of prosecution

When 500 people downloaded Kazaa from the Web in a single day that autumn, Zennstrom and Friis went out for ice cream to celebrate. By this summer, almost three million people were downloading Kazaa every week, for a total of more than 270 million downloads world-wide, five times as many as with Napster.

The recording industry, through the Recording Industry Association of America, fired back with legal actions in the United States and Europe.

When news leaked that music and movie companies were planning a lawsuit against Kazaa in October 2001, Zennstrom and Friis were in the United States. They worried they would be served subpoenas there, complicating any claims that they were outside of U.S. jurisdiction. So they had their lawyers negotiate a 72-hour moratorium with the RIAA.

The men say they drove around in a rental car outside the Beverly Hills, Calif., offices where the talks were taking place. After getting a cellular telephone call saying an agreement had been reached, they walked into a room packed with lawyers.

An RIAA staffer pointed at them and threatened criminal prosecution, recalled their Dutch lawyer, Christiaan Alberdingk Thijm.

Zennstrom had an informal offer to sell Kazaa potentially valued at around $5 million, he said. But possible buyers disappeared once the lawsuit became public. He decided to sell the software and the Web site to Sharman Networks Ltd., located in the South Pacific island nation of Vanuatu, for roughly $500,000 in January 2002.

Still, in July 2002, Zennstrom personally was added to the U.S. lawsuit, and a judge ordered Kazaa's programmers to turn over information. An Estonian court blocked the order, but the lawsuit is still alive.

Zennstrom's solution

So is Kazaa, whose success has created a headache for Internet providers by swamping their networks with music files. Re-enter Zennstrom.

He said file sharing represents 50 percent to 80 percent of many ISPs' traffic. It's the majority of traffic for some European broadband Internet providers, according to Jupiter Research in Darien, Conn. That slows service for everybody and can force providers to invest in bolstering their networks.

Zennstrom's solution: Install a massive hard drive that temporarily stores commonly swapped files. This way, files can be quickly routed, and providers can avoid paying fees to other telecom companies for carrying the extra traffic.

He argues that the technique used by PeerCache, introduced this summer, is legal in the United States and Europe. Even so, with hard drives holding copyrighted material being traded, the ISPs -- and perhaps Zennstrom himself -- could be vulnerable to legal attack.

The potential for legal action already has one PeerCache customer distancing itself from Zennstrom.

After its use of PeerCache became public, Wanadoo's Paris headquarters put out a statement denying any connection with Kazaa. A spokeswoman says the Dutch unit was testing PeerCache and no longer uses it.

Zennstrom said Wanadoo Netherlands paid Joltid to roll out the software across its network.

Irking the industry

Kazaa is downloaded more often than any other software program. Downloads, in millions:

Kazaa Media Desktop 2.8 271
ICQ Pro 2003a beta 0.3 234
Morpheus 0.3 115
WinZip 0.4 102
Note: Most-recent week is Aug.28 to Sept.3; total is from inception to Sept.3.

-Source: CNETNetworks'