File-Sharing Services May Reform Themselves

Two months after the Supreme Court ruled that online file-sharing services can be held liable for the copyright violations of their users, some of the biggest names in song swapping are looking to go legit.

The head of EDonkey, which built one of the most popular ways for finding pirated music and movies, said Monday that a transformation of the software was “certainly imminent.” And Grokster Ltd. wants to combine forces with Mashboxx, a coming service that will pay copyright owners for their songs, according to people familiar with the talks.

Other companies are expected to make similar moves after the Supreme Court’s June ruling that file-sharing firms that encourage people to download unauthorized copies of music and movies can be sued for the sins of their customers.

A multimillion-dollar question: whether the entertainment industry -- which wants to recoup some of the hundreds of millions of dollars it says online piracy has siphoned away -- will bless the conversions, or continue its relentless legal and legislative battle against file sharing, or a little of each.

The Recording Industry Assn. of America declined to comment Monday, but last week it sent cease-and-desist letters to EDonkey, BearShare, LimeWire, WinMX, Warez and two other firms. The entertainment industry is already suing Grokster and Streamcast Networks Inc. in U.S. District Court in Los Angeles.

“There is considerable momentum out there because the current peer-to-peers in my view would be foolish to ignore what’s taking place,” said Robert Summer, chairman of IMesh.com Inc., which settled with the recording industry before June’s ruling. “They will be pursued.”

IMesh agreed to pay $4.1 million and stop its millions of users from making unauthorized copies of songs. Those sorts of restrictions generally end up driving away users, who flock to file-sharing networks for free music, movies and other digital goods. The program distributors give their software away and make money by selling ads.

Both the file-sharing networks and the entertainment industry recognize that if new online offerings are too cumbersome or restrictive, users may turn to overseas services or to technologies such as BitTorrent, which are harder to control.

Even if all the companies comply, piracy rates might not change much. That’s because the programs that sit on users’ computers find each other on a variety of networks, and those programs can be made by different people.

“None of these companies are essential in the mix,” said Eric Garland, chief executive of BigChampagne, a Beverly Hills firm that monitors the networks. “They’re afterthoughts.”

EDonkey CEO Sam Yagan said his company was “exploring” ways to make money and avoid the wrath of the entertainment industry. He said he did not know whether the next version of EDonkey software would use filters, a payment scheme or other means for cracking down on piracy, but that some fix “is certainly imminent.”

“It’s important to us that we’re operating within the letter of the law and the spirit of the law,” he said, “and up until [the Supreme Court ruled] I was confident that we were.”

Potential Grokster partner Mashboxx is allied with Snocap Inc., which is keeping a registry of the ownership of songs and how those owners want the songs to be stored, played and paid for. IMesh has a deal with Audible Magic Corp., which controls a similar database.

Grokster and Mashboxx executives declined to comment. Wayne Rosso, head of Mashboxx, used to run Grokster.

Some of the other peer-to-peer companies are talking to multiple possible partners, a top record industry executive said. “They’re involved in something akin to the dating game.”

While Grokster has been in settlement talks with the entertainment industry for months, other firms weren’t moving or were going slowly until they were prodded by the RIAA letters. “It’s a call to action,” said an industry executive involved with the process. “We’re going to see something happen within the next few weeks.”

Despite concessions by his rivals, though, Streamcast CEO Michael Weiss wouldn’t say whether he would settle with the entertainment industry because he believed he could win at trial.

“I believe that we could prove that we have not induced any of the users to violate the copyright law,” Weiss said.