Participants’ Distrust Exposed in Piracy Battle

With the courts making it harder for the music industry to battle online piracy through lawsuits, you might think that the major record labels would be ready to cut deals with the leading file-sharing networks, transforming them from hotbeds of illegality into revenue-generating partners.

Think again.

The gulf between the labels and the companies behind Kazaa, Blubster and other file-sharing networks seems as wide -- and impossible to bridge -- as ever. Not only are significant business and legal hurdles in the way, but there’s also an ocean of bad blood between the two sides.

Label executives continue to hold hush-hush meetings with leading distributors of file-sharing software, trying to find common ground. But they also seethe at the companies’ refusal to change their software in ways that might deter piracy, using words like “extortion” and “rape” to describe their situation.

Said Cary Sherman, president of the Recording Industry Assn. of America: “It reminds me of negotiating with the mob. ‘If you just pay us some insurance, your storm window won’t break anymore.’ There’s an emotional reaction to that.”

For their part, executives at file-sharing, or peer-to-peer, networks are feeling frustrated, hounded and insulted. They say they’ve built huge followings among music fans -- an estimated 63 million people in the U.S. use their services -- but the record companies insist that they abandon this audience and start from scratch with new technology.

“I think that the peer-to-peer guys are more willing to let bygones be bygones,” said one file-sharing executive who, like most of those interviewed for this story, spoke only on condition of anonymity. “But it doesn’t negate the fact that we’re dealing with a bunch of idiots.”

The major record labels have said peer-to-peer networks are one of the biggest factors in the prolonged slump in CD sales. Total U.S. music sales -- including digital music, albums and commercially released singles -- are down 2.2% for the year through mid-December. Without the digital songs, overall sales this year are down 4.7%.

File-sharing networks made their debut in mid-1999, when the original version of Napster was launched. Within months, the major labels were suing to stop them. Three months ago the labels expanded their litigation campaign by suing hundreds of individual file sharers.

The campaign suffered its first major defeat in April, when a federal judge in Los Angeles ruled that the Morpheus and Grokster file-sharing networks weren’t in and of themselves illegal, despite extensive piracy by their users.

Then Friday, the industry lost on two more fronts: the U.S. Court of Appeals for the District of Columbia outlawed a procedural shortcut that the RIAA had used to identify file sharers, and the Supreme Court of the Netherlands ruled it legal to distribute the Kazaa software.

As a result of the U.S. ruling, attorneys say, suing file sharers will be much more cumbersome and expensive for the labels and other copyright holders. Nevertheless, the RIAA’s Sherman said the labels would keep suing because these actions appear to be driving people off the networks.

File-sharing advocates counter that any drop-off is merely temporary. In fact, nearly 2.4 million people downloaded the Kazaa software from CNet Networks Inc.’s Download.com in the week ended Dec. 14. That almost matches the 2.5 million copies downloaded each week in May, before the RIAA announced plans to sue.

And in a recent survey by Encino-based E-Poll.com, 62% of the respondents said the RIAA was wrong to sue, while only 47% said it was wrong to download music without the labels’ permission.

Supporters of peer-to-peer networks have proposed several ways to authorize file sharing and pay the labels, songwriters and artists for their work. The most common suggestion is for the labels to grant a blanket license to the peer-to-peer networks, and for users of the networks and related technology to pay a small monthly fee in exchange for the right to download music.

This approach could generate several billion dollars for the music industry, end the rancor over file sharing and bring about a distribution model built for the Internet age, advocates say.

Label executives, however, are quick to point out numerous practical problems. For example, they say, movie studios, game developers and other industries would demand a piece of the pot, driving up the monthly fee. And unless every file-sharing network around the globe was forced to participate, users would move to the networks that didn’t charge them -- or pay royalties.

One goal of the lawsuits is to win a court ruling that forces file-sharing networks to do everything technically feasible to stop piracy. To the RIAA, that means changing the software so that it allows files to be reproduced only if the copyright owner has granted permission.

None of the popular networks is built to do that, but the technology is being developed by at least three companies -- including a firm headed by Shawn Fanning, the inventor of the original Napster.

“They’ve never really said, ‘We’ll stop infringing, we’ll filter [out] your copyrighted works,’ ” Sherman said. “They have been unwilling to do what they are technically capable of doing.... That’s outrageous.”

File-sharing executives vigorously dispute that view, saying their networks can’t identify, track or filter out copyrighted files -- no matter how much the RIAA wishes they could.

“Perhaps the biggest lie of all is the promulgation by the music industry of the preposterous notion that there is some magic ‘switch’ out there ... [that] somehow will disable all file-sharing networks or filter out all copyrighted content,” Wayne Rosso, president of peer-to-peer software developer Optisoft and former president of Grokster, said at a recent online-music conference.

Beyond the legal and business reasons the labels cite for not coming together with the file-sharing networks, there’s something cultural and emotional at work -- right down to an apparent distrust of peer-to-peer technology itself.

Among those that have witnessed the distrust is Wippit, a small London-based file-sharing network that uses peer-to-peer technology just the way the record labels say they want it used. Wippit has set up a file-sharing system that permits only authorized downloads, rather than letting users copy and share whatever they wish.

The firm has signed up 200 independent labels in the last two years. But it has yet to convince any of the majors to join in the file sharing -- even though the company has been paying higher royalties per song than Apple Computer Inc.’s iTunes Music Store, said Wippit Chief Executive Paul Myers. (Apple’s iTunes does not use a peer-to-peer network to distribute material.)

Wippit does have one licensing deal with a major record company, British music giant EMI Group, and Myers said three of the other four majors are close to granting him licenses. But all have insisted that users download their music from a central computer controlled by Wippit -- not from each other. That significantly raises the company’s costs.

“It’s absurd,” Myers said. “We’ve got two years of business history. We’ve got 200 labels, 200 advocates. These guys can phone up and say, ‘Did it work? Is it safe? Why haven’t you canceled your contract?’ And still they don’t participate. We as a company are coerced away from using peer-to-peer as a platform.”

The Distributed Computing Industry Assn., a file-sharing advocacy group founded by Kazaa distributor Sharman Networks, has been working publicly and privately with technology companies, labels, studios and Internet providers, trying to develop an approach that all sides can embrace.

So far, that has proved elusive. Part of the problem is that entertainment companies often make deal-seekers cool their heels, and that attitude puts off some file-sharing executives, who are more accustomed to the fast-moving online world.

“On the flip side, rarely do peer-to-peer software companies talk about restitution or retribution,” noted Marty Lafferty, chief executive of the distributed computing association. “When they come to the table, that’s not in their vocabulary.”

So for now, at least, more acrimony seems certain.

In addition to pursuing lawsuits, the RIAA has asked Internet service providers to send letters to customers whose online addresses have been found on a file-sharing network. The message: What you’re doing is illegal -- and traceable.

On the other side of the world, literally and figuratively, an executive at Sharman Networks in Australia calls for peace.

“We’ve spoken to record company executives who recognize that peer-to-peer applications are a paradigm shift that they can profit from,” Sharman Executive Vice President Alan Morris said. “It’s time for these executives to take their business back from their lawyers and steer it into the future of digital distribution.”