Building New Template for File Sharing

The Supreme Court’s ruling that file-sharing companies could be held liable for their users’ piracy was cheered loudly by one small corner of the file-sharing universe.

Call it the reform wing.

A handful of companies are trying to build an audience for legal file sharing, enabling people to swap songs for a fee, not free. Three of them -- Mashboxx of Virginia Beach, Va., IMesh of New York and Ruckus Network Inc. of Herndon, Va. -- plan to let users connect through some of the same file-sharing networks that have been hotbeds for pirated music and movies.

These ventures are closely allied with the major record companies, which are eager to transform the file-sharing world from a Wild West free-for-all into a more conventional, copyright-friendly place to sell music. Unlike the leading file-sharing networks, Mashboxx and IMesh will stop users from swapping tracks if the copyright owners object, and they will charge for permanent copies of songs that can be burned onto a CD.

The entertainment industry’s vision for file sharing, however, differs significantly from the networks operating today, which place no limits on downloading and offer free versions of virtually every song and movie.

As a consequence, companies like Mashboxx and IMesh are in for a long, tough slog as they woo users from the free downloading networks, said analyst P.J. McNealy of American Technology Research.

“It’s not just an economic change, it’s a cultural change,” McNealy said. “It’s reconditioning people to the realities of business, that people who create content have to get paid.”

Monday’s unanimous Supreme Court decision gave a boost to this new breed of service by overturning earlier rulings in favor of Grokster Ltd. and StreamCast Networks Inc., two well-known sources of free downloads. The justices said companies could be held liable if they actively encouraged users to infringe copyrights through their marketing, business plans and product designs.

Both Grokster and StreamCast have offered or announced ways for labels and artists to charge users for downloads. But the major record companies have refused to let file-sharing networks sell their songs unless they blocked unauthorized copying -- something leading networks were unwilling to do.

By contrast, former Grokster President Wayne Rosso, who now heads Mashboxx, said the record industry was “firmly behind us.”

He said a preliminary version of Mashboxx should be released soon. Noting that the record labels have sued thousands of people for unauthorized downloading on file-sharing networks, Rosso added, “The beautiful thing is, [Mashboxx] users will recognize they’ll have all of the content and none of the risk.”

Monday’s ruling is unlikely to generate a stampede of deals between record companies and file-sharing networks. That leaves two groups of companies trying to build legitimate distribution businesses around file sharing: some that are building piracy-proof networks from scratch, such as Wurld Media Inc.’s Peer Impact and Tennessee Pacific Group’s PassAlong Networks, and some that are giving users a piracy-blocking gateway to established networks, such as IMesh, Mashboxx and Ruckus.

The latter three plan to use sophisticated audio fingerprinting technology to identify music on a file-sharing network or, in Ruckus’ case, connected computers on college campuses. When users try to download a file, the software checks to see whether it is authorized for sharing, and if so, under what terms.

For example, users of the new IMesh service, which is slated to be launched this year, will have access to more than 15 million music files on the Gnutella networks, founder Talmon Marco estimated -- most of them free songs that copyright holders have not asked IMesh to block. For the vast majority of hit songs and major-label releases, though, IMesh probably will charge either for each download or for a monthly subscription.

The vast selection of titles on file-sharing networks -- which is 15 to 20 times what online music outlets such as Apple Computer Inc.’s iTunes Music Store offer -- is a key selling point, according to Shawn Fanning, founder of the original Napster peer-to-peer network. Fanning now is a top executive at San Francisco-based Snocap Inc., whose technology enables Mashboxx to substitute authorized music downloads for free MP3s.

“There’s a major demand for something in between what iTunes offers and what they have today in the [peer-to-peer] world,” Fanning said. “It gets back to the content. It gets back to the selection.”

To convert people from free file sharing to a paid service, however, companies have to understand why people use file-sharing networks in the first place, Ruckus Chief Executive William J. Raduchel said.

“There are five things about music in this online, interactive, digital distribution that matter to the kids,” Raduchel said, citing his company’s surveys of college students. These users want to be entertained, but more important, they use file sharing to obtain playlists, establish their identity, find friends and build prestige, he said.

File-sharing networks with a low, flat monthly fee are the best way to satisfy this kind of customer, Raduchel argued, because they make it possible to download hundreds of songs in minutes. Ruckus expects to offer such a service on 20 college campuses starting in August, charging less than $15 a semester for unlimited, temporary copies of songs.

President Sam A. Yagan of MetaMachine Inc., the New York company behind the popular eDonkey file-sharing network, said Monday’s ruling had no effect on “rogue” networks, foreign companies and non-commercial file-sharing programs such as Gnutella and eMule, a knockoff of eDonkey. If eDonkey puts out a version with restrictions that its users dislike, Yagan said, they will quickly switch to a competing network with no restrictions.

“I will do any deal with anyone where we get content and the users don’t run away,” Yagan said. “As soon as that offer gets proposed to me, I’m ready. But there’s no point in making dog food if the dogs aren’t going to eat it.”