One day after the Grokster file-sharing service announced a settlement with the recording industry and pulled the plug on its illegal peer-to-peer computing network, sources close to the company confirmed that its assets have been purchased by MashBoxx.
Under the deal, the terms of which were not immediately clear, MashBoxx will buy out all the remaining holdings of Grokster, including its directory of registered users, and fold the file-sharing networks operations into its soon-to-be-launched P2P download service.
Sources said that the two companies actually reached the buyout agreement several months ago, and indicated that MashBoxx Chief Executive Wayne Rosso, a former president of Grokster, facilitated the deal with the recording industry in order to help move his firms launch plans forward.
On Monday, Grokster filed paperwork in a Los Angeles federal court reporting that it reached a $50 million settlement in its 3-year-old legal case with the nations largest record companies, motion picture studios and music publishers.
As part of the settlement, the firm shuttered its popular P2P service, through which individuals traded MP3 digital audio and video files for free, and said on its Web site that it planned to have a “safe and legal” replacement available soon.
The Grokster settlement came four months after the U.S. Supreme Court ruled that companies running P2P networks that allow consumers to trade files without regard for copyright laws could be held liable for piracy.
MashBoxx, based in Virginia Beach, Va., plans to introduce a beta version of its content file-sharing software and network some time in the next several months.
Unlike Grokster, the new file-sharing service is partnering with Hollywood studios and recording companies to license content legally, and will charge customers to download files that bear so-called DRM (digital rights management) software to prevent the content from being illegally copied.
According to parties familiar with MashBoxxs dealings, the firm is also in talks to provide its P2P software to at least one other major file sharing network operator, and will maintain roughly 6 million user accounts by the time it launches, based on its planned acquisitions.
Reached by phone, MashBoxx CEO Rosso declined to comment on any pending deal for Grokster, but admitted that the two companies have been in talks to form a partnership.
Rosso also refused to speak about any other rumored deals, but said that his firm is actively seeking pacts with other file-sharing networks to license MashBoxx P2P client application for legal downloads.
Once taken legal, Grokster would become the second well-known file-sharing service to attempt the move into a paid download model.
Last month, Israel-based iMesh launched a beta version of its new copyright-friendly P2P software in an effort to transform its own operations.
In July 2004, iMesh promised to move to a legally approved file download model as part of a $4.1 million settlement it reached with the RIAA (Recording Industry Association of America) in a copyright infringement suit.
Despite industry watchers reservations over the ability of companies like MashBoxx to lure people conditioned to accessing free downloads into for-pay content services, Rosso said the market is ready for just such an offering.
By giving consumers a P2P interface similar to the illegal services, and offering a wide range of free content, he said that users will be convinced to change their habits and begin forking over dollars for music and video files.
“We believe these people will embrace new services that can retain the same experience as file sharing, with the high volume of content and the freedom of navigation and interaction within a community of users,” said Rosso.
“Almost as much as any free downloads, its been that unique file-sharing experience that has kept people so loyal to these platforms.”
Using MashBoxx software, Rosso said customers will be allowed to download and listen to a song five times before they are asked to pay for it.
The free music files are protected against copying, or transfer from a PC to mobile device by MashBoxx until a user has paid for them.
Once purchased, the files are released with a DRM software wrapper that allows a customer to use, but not duplicate, the content.
In order to prevent network users from trading unlicensed content, MashBoxx will employ an “audio fingerprint” technology developed by Philips Electronics that examines every file on the companys servers in an effort to track down unauthorized copies of songs and delete them from its database.
Rosso claims the technology is 99 percent accurate at discerning copyrighted materials from other files.
MashBoxx has already signed a distribution agreement with recording house Sony BMG, and Rosso said the firm has similar deals on the table with EMI Group and Warner Music Group.
However, the executive said that part of the attraction of services such as MashBoxx, as with illegal file sharing networks, will be the range of other content available alongside the copyrighted materials, such as music from independent artists and eventually movies and other video content.
“Between 80 and 90 percent of the content on traditional file-sharing networks was, in fact, legal,” said Rosso. “Essentially were offering users the ability to find all of that same great stuff and have it for free in a safer environment than before and to pay for downloads where appropriate; thats what will bring people over.”
Despite his belief that MashBoxx will take off, Rosso said that it has been hard for the company to make recording companies understand how the firms file-sharing system works, and he said that the process of educating those firms about a for-pay P2P music service has been the most significant obstacle to getting the product to market.
Television and movie producers have been more open to the idea, he said, and as a result Rosso believes MashBoxx will soon win content distribution deals with major film and TV studios.
Market watchers observed that it will be hard for legal P2P services such as MashBoxx and iMesh to convince experienced file-sharers to begin paying for content theyve been getting for free, and to convince content producers that their software is capable of thwarting piracy, but said there are some potential advantages to the companies emerging business models.
“You have to step back and consider [P2P] technology separately from how it has traditionally been offered to consumers,” said Susan Kevorkian, analyst for Framingham, Mass.-based IDC.
“As P2P services move to a paid model, you see efficiencies and benefits for the companies offering the services, such as being able to leverage a network of users for content distribution versus a central download, and for reaching out to existing users of these services to introduce those people to paid models.”
Yet, the analyst said that people have been using P2P networks primarily because theyre easy to navigate and the content has been free, and believes that when you take away some those benefits to the consumer and replace them with a paid service, “it becomes a very different ballgame.”
Kevorkian said that other forms of illegal download networks, including smaller operations shared among people who actually know each other, such as college students, will also pose a continued threat to paid file-sharing services.
“Even in this environment after the Supreme Court decision, we expect that consumers who want to find free music online will do so through different types of networks, perhaps smaller or more private networks that are under the radar of the authorities,” she said.
“For paid online music services, companies will need to make the experience of using [their products] more worthwhile to drive adoption and help this market to take off.”
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