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Kazaa to pay $115M, go legit
Music industry hopes settlement with the former stalwart of the illegal P2P file-sharing movement "will drive digital revenues in a major way."
With a payout of more than $100 million and a promise to go legit, the operators of file-sharing giant Kazaa settled the music industry's lawsuits against it over music downloaded illegally on its network.
Sharman CEO Nikki Hemming
The deal ends years of bitter legal battles between Kazaa operator Sharman Networks and the major record labels--Universal Music, Sony BMG, EMI Group, and Warner Music Group--in both the US and Australia, which is where Sharman is based.
"It has been our long standing goal for Kazaa to play a significant role in the growing market for licensed online distribution and authorized exchange of copyrighted content using peer-to-peer technology,'' said Nikki Hemming, chief executive officer of Sharman Networks, in the statement posted on the company's Web site. "This settlement ensures that we will be working together with the content providers to the benefit of consumers, businesses and artists.''
The deal was accompanied by a similar announcement from the Motion Picture Association of America, which had also sued Kazaa for illegally traded movies on its network.
Although P2P file sharing continues to surge, with the number of people using P2P services jumping from 8.7 million in May 2005 to more than 9.7 million in May 2006, according to P2P research firm Big Champagne, the deal removes a major thorn in the entertainment industry's side. At its peak, Kazaa had 4.2 million simultaneous users worldwide and in 2003 boasted of being the most downloaded software ever with 239 million downloads.
John Kennedy, CEO of the London-based International Federation of the Phonographic Industry, said in a statement that the deal should be a boon to legal download services like iTunes, Napster, and Rhapsody.
"For the industry we consider it a great success," he said. "It sends a huge deterrent message to other similar sites. We hope it will drive digital revenues in a major way.''
But while the industry touted the deal as a huge win and Kazaa laid claims to legitimacy, some industry analysts were skeptical of Kazaa's ability to transition from P2P pariah to industry-backed legal download service. Other P2P services that have gone legit, particularly iMesh, have remained quiet over user numbers.
"It won't be easy to turn a file-sharing network into a viable business," Jupiter Research analyst David Card wrote in his blog today. "The competition is brutal and file-sharing networks' assets really boil down to their user base (at least 14 million in the US across the various services) and their catalog. There are possibly as many as 25 million songs on those networks, as compared with the 3 million cleared digitally, and 4 to 5 million on CDs available from online retail."
"Converting the free users will be tough," he continued. "So will [be] making a business out of the catalog. In theory, songs that the rights holders want to be shared for free could be made available, along with unclaimed songs labels and publishers can track down with a network's help."
Ready to go legit.
Kazaa had been facing an increasingly uphill battle to stay alive in its free music-laden form.
In June 2005, the US Supreme Court found that file-sharing networks could be held liable for copyright violations committed on their networks. The move bolstered the legal case of the Recording Industry Association of America, which subsequently sent cease-and-desist letters to most of the major P2P services, many of which have either folded or gone legit. Grokster, the named defendant in the case that went to the Supreme Court, settled with the RIAA in November 2005 for $50 million and the promise to go legit.
In September 2005, after the court ruling, an Australian court ruled Kazaa encouraged users to breach copyright and ordered Sharman Networks to build a filtering system that would block users from finding copyrighted material on Kazaa.
Sharman and the music industry had squabbled in recent months over the implementation of the filtering system, with Sharman arguing that simply blocking Australian users from downloading the software sufficed.
Under the just-announced settlement, Kazaa's specific plans and timeline to go legit are unclear. Music was still available for free on its network as of early this morning.
"This is welcome news for the music community and the legal online music marketplace," RIAA Chairman and CEO Mitch Bainwol said in a statement. "Steadily but surely, we are passing another important marker on the remarkable journey that is the continuing transformation and development of the digital marketplace."
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