The Race to Kill Kazaa
The servers are in Denmark. The software is in Estonia. The domain is
registered Down Under, the corporation on a tiny island in the South
Pacific. The users - 60 million of them - are everywhere around the world.
The next Napster? Think bigger. And pity the poor copyright cops trying to
pull the plug.
By Todd Woody
On October 2, 2001, the weight of the global entertainment industry came
crashing down on Niklas Zennstr�m, cofounder of Kazaa, the wildly popular
file-sharing service. That was the day every major American music label and
movie studio filed suit against his company. Their goal was to shutter the
service and shut down the tens of millions of people sharing billions of
copyrighted music, video, and software files. Only problem: Stopping
Napster, which indexed songs on its servers, was easy - the recording
industry took the company to court for copyright infringement, and a judge
pulled the plug. With Kazaa, users trade files through thousands of
anonymous "supernodes." There is no plug to pull.
Michele Aboud
Nikki Hemming, CEO of Sharman Networks, contracted by LEF Interactive,
owner of Kazaa.
Nor, as attorneys would soon discover, was there even a single outfit to
shut down. That's because on a January morning three months after the suit
was filed, Amsterdam-based Kazaa.com went dark and Zennstr�m vanished. Days
later, the company was reborn with a structure as decentralized as Kazaa's
peer-to-peer service itself. Zennstr�m, a Swedish citizen, transferred
control of the software's code to Blastoise, a strangely crafted company
with operations off the coast of Britain - on a remote island renowned as a
tax haven - and in Estonia, a notorious safe harbor for intellectual
property pirates. And that was just the start.
Ownership of the Kazaa interface went to Sharman Networks, a business
formed days earlier in the South Pacific island nation of Vanuatu, another
tax haven. Sharman, which runs its servers in Denmark, obtained a license
for Zennstr�m's technology, FastTrack. The Kazaa.com domain, on the other
hand, was registered to an Australian firm called LEF Interactive - for the
French revolutionary slogan, libert�, �galit�, fraternit�.
Confused? So were the copyright cops. "It's hard to know which one to sue,"
complains Michael Speck, an investigator with the Australian Record
Industry Association. Hollywood lawyers figured the best way to bring Kazaa
to justice was to squeeze Sharman. Trouble was, Sharman, which operates out
of Sydney, had no employees. All its workers, including CEO Nikki Hemming,
are contracted through LEF. The names of Sharman's investors and board
members are locked away in Vanuatu, a republic that bills itself as an
asylum whose "strict code of secrecy" is "useful in any number of
circumstances where the confidentiality of ownership, or control, want to
be preserved."
Why all the subterfuge? It's an international business model for the
post-Napster era. A close look at Kazaa reveals a corporate nesting doll
that frustrated Hollywood attorneys for more than a year. From Estonia to
Australia, they pleaded with courts to force Kazaa's operators out from the
shadows. Meanwhile, every week that Sharman was able to hold the law at
bay, countless copies of Kazaa software were being downloaded. In the last
six months alone, PC users have downloaded more than 90 million copies.
Kazaa has 60 million users around the world and 22 million in the US - an
irresistible audience to marketers. Last year, Sharman raked in millions
from US advertisers like Netflix and DirecTV, without spending a penny on
content. The chase could have gone on forever.
And then, suddenly, a few days before Thanksgiving, it ended.
Hollywood's disdain for file-sharing can be measured in the 10-foot stack
of papers that make up Metro Goldwyn Mayer Studios v. Grokster et al.,
which sits on file in the Los Angeles federal courthouse. In the suit, a
roster of entertainment conglomerates accuse FastTrack-enabled services
Kazaa, Morpheus, and Grokster of profiting from a "21st-century piratical
bazaar." Record labels and movie studios want the services closed and fined
$150,000 for each illegally traded song or movie. Given the billions of
files changing hands every week, the damages could be astronomical.
With US operations, Grokster and Morpheus were easy to pin down. But before
attorneys could make their case against Kazaa, they had to find Sharman,
which hadn't left so much as a paper trail to the US. Many of its contracts
with US companies are negotiated through LEF, whose sole director is, not
coincidentally, Nikki Hemming. So the lawyers asked their Australian
counterparts to track her down. "They're doing everything they can to avoid
being located," grumbles Richard Mallett, an executive with the
Australasian Performing Right Association. One Australian attorney invoked
the Hague Convention to obtain a court order compelling Hemming to turn
over documents. Even then, the lawyer claims it took the subpoena server a
week of cat-and-mouse games to corner her.
Finally, the company decided to stop running. Hemming chose to be deposed
in Vancouver; she feared that simply stepping foot in the US could
complicate matters. Likewise, she didn't show up at the late-November
jurisdiction hearing in Los Angeles. Sharman's lawyers were there, however.
The question before US District Court judge Stephen Wilson was simple: Does
Sharman do enough business in the US to be lawfully included as part of the
Morpheus-Grokster lawsuit? But the proceeding quickly became a referendum
on the company's alleged sins. "Sharman has done everything it can to
exploit and enhance the copyright-infringing activity of its members," said
the industry's lead attorney David Kendall. "There is no intention to
promote wrongful uses," countered Sharman lawyer Rod Dorman. "Is my client
aware that people do that? Yes."
"I realize that some of these issues are uncharted," the judge told the
attorneys. "I'm inclined to find there is jurisdiction against Sharman."
It was bad news for Sharman but, with the hearing on the industry's home
turf, not surprising. Sharman has been preparing for litigation. For
months, the company has been bundling Kazaa with Altnet, a P2P network that
delivers encrypted songs, movies, and videogames. But while Kazaa downloads
are free, Altnet works on a micropayment model - and has attracted
legitimate technology and entertainment clients. As a result, Sharman is
ready to argue that Kazaa can be put to legal uses and so, under the law,
does not violate copyright statutes. With Altnet, Sharman has begun the
transformation to an upstanding business.
Can a company built on the trafficking of other people's property shed the
secrecy surrounding its operations and go legit? Hollywood's pinstriped
suits think they know the answer to that question - it's a ruse. For every
legal file on Altnet, there are millions of illegal ones on Kazaa. Altnet
may be a good idea by itself, but on the back of Kazaa, it's one more
tactic to delay prosecution while Sharman sells more advertising.
Wired.
