Local file sharing companies facing uncertain future.

The squabble between the major music labels and file-sharing companies, Altnet and Streameast Networks Inc., both Woodland Hills based, is rapidly coming to a head and the results could prove fatal for the local businesses.

In the latest round of litigation, Altnet, along with its parent company, Brilliant Digital are in an Australian courtroom, battling Universal Music Australia, EMI, Sony/BMG, Warner Music, Festival Mushroom and 25 additional plaintiffs. The case is located in Australia because of Kazaa, the widely used file-sharing firm that has partnered with Altnet and Brilliant Digital. Kazaa is incorporated in the island nation of Tuvatu but conducts its operations in Australia.

Additionally, Streamcast Networks Inc., the company behind Morpheus, another file sharing network, will likely see its future decided in the spring, in a case brought before the United States Supreme Court. Streamcast had been sued earlier this year by a variety of major corporations including MetroGoldwyn Mayer, Walt Disney Corp., Universal Studios and Sony, among others.

The imbroglio involves a type of file sharing known as p2p, or peer to peer. Unlike Napster, the infamous file-sharing network that relied upon a central database to distribute copyright protected songs and films, both Morpheus and Altnet (along with Kazaa, to which Altnet has paired its software technology) depend on a de-centralized network of user's scattered throughout the globe. The record companies are aiming to prove that the software used in Morpheus and Altnet/Kazaa provides the means for millions of users to illegally trade music and movie files. The p2p companies admit that some users traffic in illegal material but claim that they are not liable for network users' breaking of copyright law, citing the 1984 Sony Betamax decision that ruled that VCRs were legal.

Earlier in the year, the United States 9th Circuit Court of Appeals had ruled in favor of Streamcast, arguing that while most of the files on the network were exchanged illegally, the company did not know that users were making illegal copies until after they had done so. Furthermore, the court ruled that the Morpheus software had not been built to detect or deter copyright violations.

If the companies are found liable, penalties are expected to be astronomical which could leave the companies broke. James Gibson, a University of Richmond Law professor and the lead author on the academics' brief filed with the Supreme Court requesting that the court hear the case, argued that while the penalties might put Streamcast and Altnet out of business, completely halting the already-written software will be impossible.

Harsh penalties

"The penalties are potentially quite harsh. You can be forced to pay $150,000 for every song infringed. I'm sure that's the amount the record labels will argue for. Obviously, that's more than anyone can afford," Gibson said. "Napster shut down during litigation because the liability was too much. With Morpheus and Kazaa, the software will still be largely available. With this de-centralized architecture, the genie is out of the bottle."

Marty Lafferty, CEO of the Digital Computing Industry of America, a p2p trade group dedicated to developing the technology through legal means, bemoaned the intransigence of the major labels.

"It's unfortunate that there is that sort of dispute or conflict. Our whole focus is trying to replace legislation with true commerce, which involves licensed material from major content providers. P2p has quietly become the largest content distributor on the Internet. We have about 50 million licensed transactions a month, which is bigger than itunes."

Lafferty's figures include all transactions conducted on the Internet via p2p, including downloads of video games, movies and various software programs. The head of the DCIA pointed out that the 12 major video game publishers have inked deals with p2p companies to distribute their games over the Internet. He maintained that consumers are still willing to fork over money for the licensed copies of the games, in spite of the ease with which they can obtain them illegally.

Approach criticized

Lafferty asserted that the lawsuits are typical of the way in which the entertainment industry has attempted to halt innovation until they can harness it effectively for profit.

"The record labels are upset because they hadn't given their permission to the p2p companies. They're following the typical pattern of the industry. The first thing they traditionally try to do is to put the brakes on it," Lafferty said. "'Stop the VCR' was what they once said, until they figured out how to own it, control it and make it fit within their existing distribution network. When they finally accepted it at the end of the day, it was better for content owners and for consumers."

Yet the Recording Industry Association of America maintained that the lawsuits' goals are not to stunt innovation. It argues that the suits are solely attempting to prosecute the myriad copyright violations.

"It is not an attack on technology. We are attacking groups that use technology to promote copyright infringement, groups that do not respect copyright laws," Stanley PierreLouis, senior legal adviser for the RIAA said. "The future looks bright for legal online music ventures such as Snocap, Napster and itunes. But there comes with it a lot of responsibility to respect copyrights. People need to find technologically feasible ways to distribute copyright protected material."