File-Sharing Sites Find Perfect Pitch
Music industry arch-nemesis Napster Inc. is dying for lack of cash, but a new generation of companies that also allow legions of home pirates to swap music is thriving in its aftermath.
Morpheus, Kazaa, Grokster and other networks that allow users to trade music files have done something Napster never did: convert a huge following of users into a cash-producing enterprise. Night or day, more than 2.6 million computers are connected to the new networks.
Advertisers are flocking to support the new networks and underwrite their growth, though Hollywood studios, record labels and music publishers say they’re a global swap meet for pirates.
The new systems--known as peer-to-peer file-sharing networks--can deliver massive amounts of advertising to audiences that rival network television’s. Advertisers using the new networks range from online casinos and direct marketers to such companies as AT&T; Wireless and Orbitz, the online ticket agency owned by major airlines.
Even Columbia House DVD Club, a venture co-owned by Sony Corp. and AOL Time Warner Inc., advertised on Morpheus--despite the fact that both companies are suing the service for copyright infringement.
“I don’t want to be associated with anything if there’s illegal activity,” said Aaron Finn, director of online marketing for Classmates.com, a frequent advertiser on many file-sharing networks. “[But] I do feel that it’s a very valuable technology that’s been developed, that will be used in many more legal ways than illegal ways.”
The new networks differ from Napster enough that they hope to dodge the legal bullets that felled their predecessor. Napster kept a central directory of its users and the songs they stored, making it liable for its users’ copyright infringement.
By contrast, the new peer-to-peer networks have no central control--users connect through the Internet to search for and retrieve files directly. Their hard drives essentially form a giant library of music, pictures, movies and other software.
Hollywood studios, record labels and music publishers disagree that the new networks are more legal than Napster. They sued the owners or creators of Morpheus, Grokster and Kazaa in federal court in October.
“The reason we brought this litigation is to make clear that what these people are doing is illegal. That’s what we plan to prove in court,” said Mark Litvack, director of legal affairs for the Motion Picture Assn. of America’s worldwide anti-piracy efforts. “When the court renders that decision, I assume Mr. Finn will respond accordingly.”
Unlike traditional broadcasters, Morpheus, Grokster and Kazaa don’t pay for the content that makes the networks so popular with consumers, nor do they incur any of the costs of transmission. Instead, their biggest expenses these days may be legal fees.
A federal appeals court in California has ruled against Napster’s free service, providing precedents that lawyers for the music and movie industries hope to use in the current lawsuits. The three upstarts counter that their decentralized networks, unlike Napster, prevent them from knowing or controlling what their users do, so they can’t be held liable if users make pirated copies.
The latest lawsuit has kept some big-name advertisers off the file-sharing networks, but Steve Griffin, chief executive of Morpheus’ parent company, said it hasn’t stopped Morpheus from selling most of the advertising slots it makes available. The company would have been profitable last year if not for its “extraordinary” legal costs, Griffin said, and it expects to be profitable this year even with those expenses.
Neither Morpheus nor Kazaa, which are privately held, would disclose financial results. But estimates from vendors suggest that each is collecting more than $450,000 a month from advertising.
And advertising is just the starting point for many of the file-sharing companies, which plan to capitalize on their sizable followings in several new ways in the coming months. These include “premium” advertising-free versions of the software; shopping services that collect a fee for referring buyers to online retailers; and secure delivery systems for copy-protected songs, books and films.
Several direct-marketing and advertiser-supported firms also pay to have their programs bundled with the software needed to use a peer-to-peer network. Although the fees are only a few pennies per user, they add up to huge sums because millions of people download the core software for Kazaa, Grokster and other file-sharing systems.
By having consumers transmit files to each other, the networks drastically cut the cost of distributing digital goods. Although some peer-to-peer systems have worked with media companies to deliver those goods efficiently for a fee, the most popular ones have enabled consumers to copy whatever they like from each other for free.
That’s why the major record companies and music publishers sued Napster in 1999, arguing that it was a tool for pirates. That lawsuit shone a spotlight on Napster’s free service, transforming it into a global phenomenon with more than 70 million registered users.
Federal court orders shuttered Napster’s service, though, and the company went broke trying to launch a copyright-friendly version that charged users and compensated artists. The Napster lawsuit is on hold for two weeks, giving the company time to find new backers or to seek bankruptcy protection.
When Napster began blocking the flow of copyrighted songs last year, its users flocked to new networks, with Morpheus and Kazaa building the largest followings. They’re still growing fast, with 4.2 million consumers downloading Kazaa last week and almost 900,000 downloading Morpheus.
On the most popular peer-to-peer systems, advertising is pervasive and relentless.
The pitches come in three forms. Some are fixtures on the file-sharing network’s main page, like logos on a race car. Some take turns occupying a portion of the screen, rotating every three minutes or so. And some pop up in separate windows scattered across the screen, holding their ground until the viewer closes or responds to them.
