Some See Benefits of File Sharing

Many record industry executives think of file-sharing networks as a den of music thieves, but Brady Lahr sees a vein of gold waiting to be tapped.

Lahr, co-founder and president of Kufala Recordings, is one of a number of file-sharing advocates who argue that the networks can play an important role in e-commerce.

While the major entertainment conglomerates argue that popular file-sharing networks have no “commercially significant” use, Lahr and numerous other independent artists, labels and filmmakers are trying to sell their digital wares amid the profusion of bootlegged goods.

So far, though, the results have not lived up to many of the pioneers’ hopes.

Despite the enormous number of users on the networks, sales have been slight. Labels that use the peer-to-peer networks say they generate less than 10% of the sales that industry-sanctioned outlets such as Apple Computer Inc.’s iTunes Music Store do.

The networks’ ability to become legitimate sources of music, movies and other goods is a key issue for the Supreme Court, which is considering whether two popular file-sharing companies should be held liable for their users’ rampant piracy. The major labels, studios and music publishers have asked the court to overturn the U.S. 9th Circuit Court of Appeals, which shielded StreamCast Networks Inc. and Grokster Ltd. from liability.

The court’s ruling is expected this month.

Regardless of the low music sales, file-sharing advocates believe the networks are too good an opportunity to ignore.

“We really want to sell our material through this new sales channel,” said Lahr, whose Santa Monica-based label specializes in concert CDs. “It really gives new artists or breaking artists an opportunity to expose themselves to a new audience.”

To many independent labels, the main goal is simply to introduce music fans around the globe to little-known artists who have no chance of being played on commercial radio stations. The payoff they hope for in the long term is greater CD sales; any downloads they sell on the networks are icing on the cake.

“It is small, but everything starts small,” Chief Executive Daniel Glass of Artemis Records said of his company’s revenue from Kazaa and other popular file-sharing networks. “To not be part of it is insane.”

The amount of piracy on the networks is staggering, with estimates running into the billions of files per month. Executives at four companies that distribute authorized copies of songs and games said demand for their wares was small by comparison yet growing quickly.

The four -- Altnet Inc., a subsidiary of Brilliant Digital Entertainment of Sherman Oaks; Intent MediaWorks of Atlanta; Shared Media Licensing Inc. of Seattle; and Trymedia Systems Inc. of San Francisco -- estimated that authorized downloads accounted for as many as 20 million files a month. Less than 5% of those downloads generate revenue, either through sales or advertiser sponsorships, according to the companies.

The iTunes Music Store, by contrast, has been selling more than 40 million tracks a month. But iTunes has a distinct advantage: It can offer music from the major labels, which have refused to let their songs be sold on virtually every file-sharing network.

That’s a crucial problem for the file-sharing networks, said Chief Executive Eric Garland of BigChampagne, a firm in Beverly Hills that monitors those networks. “If you don’t have any top sellers available for sale, then you are not, first and foremost, a place to buy music. I think that’s the perception,” he said.

President Sam A. Yagan of MetaMachine Inc. said copyright laws forced his company to keep its distance from users of its eDonkey network.

“We have virtually no information on who our users are, what their preferences are, what their tastes are, what their demographic profile looks like,” he said. “So we are really shooting blind when we try to market products to them.”

Executives of Artemis Records, home to Steve Earle and the late Warren Zevon, said they collected less than $10,000 a month from sales on file-sharing networks, or 3% to 5% of what they are seeing from iTunes. Still, Glass remains enthusiastic, noting the steady growth in sales and the relationships the label is building with advertisers on the networks. “We’re not encouraging stealing,” he said. “We’re going where they want to be.”

Beth Appleton, head of new media and business development for V2, the independent label whose roster includes the White Stripes and Moby, said it was important just to give users the opportunity to pay for what they copy. “The Kazaa environment is where we’re converting and educating people who download music illegally into legal downloaders,” she said.

Part of the process is trying alternatives to the 99-cents-per-download model championed by Apple. For example, Intent MediaWorks and Altnet are using ad revenue to subsidize downloads, and Shared Media Licensing is encouraging people to sell its files to other users by giving them some of the proceeds.

Still, to some executives, trying to sell music on file-sharing networks is a fool’s errand.

“The theory that ‘if you just give these peer-to-peer users an opportunity to pay for something, they will’ is completely wrong,” said Tuhin Roy, managing director of the Digital Rights Agency, which helps independent labels and artists sell music online. “The people who are on those networks are there because they want free content.”