Copyright Infringement Is Not a Business

Napster, the titular leader of the modern peer-to-peer movement, may die a pauper.

Napster, the titular leader of the modern peer-to-peer movement, may die a pauper.

More than two years after Napsters birth, one big question remains unanswered: Can peer-to-peer Internet "communities" become viable businesses? Some observers believed Napster was a revolutionary P2P application that would force the music industry to adapt or die. Napsters popularity made its viability practically self-evident: More than 80 million people, according to the company, have signed up to use it. Many people, including the principals at Hummer Winblad Venture Partners, which pumped at least $13 million into Napster, assumed the company would eventually figure out a winning business model.

Napster was popular, yes. Profitable? Not yet. Legal? Not entirely. Two federal courts have ruled that Napsters role in facilitating the free exchange of copyrighted music is tantamount to large-scale copyright infringement. Legal experts expect those judgments to stick, and entertainment companies are hell-bent on stopping other P2P exchanges of copyrighted material.

"We dont want peer-to-peer to go away — we think its phenomenal technology," said Mitch Glazier, chief lobbyist at the Recording Industry Association of America. "But when a company like Napster is trying to abuse the technology to profit from our work, were going to go to court."

In this climate, two types of P2P file sharing companies are emerging: those that are trying to work with content owners, and those that arent.

The first group can be described as "gated" P2P communities, a term used by research firm Webnoize. The gated P2Ps hope to work with entertainment companies, allowing users access only to approved, digitally protected content. The selling point to content owners is that they can rapidly distribute large media files without needing tons of expensive bandwidth or server capacity, since P2P distribution requires little more than the users own PCs. Of course, the value to users of this model is not clear: They receive less content and more restrictive access to it.

Napster now falls into this category. A new version of the Napster service, created in partnership with Bertelsmann and due later this summer, will offer a limited selection of licensed music downloads for a subscription fee. Last week, Napster secured a deal with MusicNet — a joint venture of AOL Time Warners Warner Music Group, Bertelsmanns BMG Entertainment and EMI Group — to use licensed music as part of the new Napster subscription service. Napster exec-utives declined to be interviewed for this article. Other start-ups creating similar gated P2P communities include CenterSpan Communications, which last year bought file-swapping service Scour; OpenCola; PeerGenius; and Uprizer.

The second type of P2P service lets users share files — everything from MP3s and software to porn videos and viruses. This smaller group includes Aimster — being sued by the RIAA — as well as BearShare and Lime Wire, which operate decentralized networks based on the open-source Gnutella protocol. These companies hope to avoid legal trouble by asserting they have no control over network activity. "We offer the tool, and the user decides what to do with it," said Vincent Falco, who runs BearShare from his home in West Palm Beach, Fla.

But none of these P2P file sharing services is expected to be as popular as Napster 1.0, and financial success is uncertain for these companies — including Napsters "legitimate" iteration, said Webnoize analyst Gregor Rohda. The decentralized P2P players will face problems of scaling and improving usability, he said, and will find it difficult to make money from networks they cant control.

"Napster spoiled it for everyone," Rohda said. "We started talking about a world where users could get any music they wanted for free." Now, as content owners file lawsuits and force swapping underground, that world is receding.