Does Kazaa matter?

The top file-swapping network is facing lawsuits, junk downloads and strong rivals. Some say it's past its prime.

The owners of the popular Kazaa file-swapping software have withstood assaults from the record industry for years, but now they're facing a new enemy that may be even harder to fight: competition.

When a federal judge shut down Napster in 2001, Kazaa parent Sharman Networks quickly stepped in as the replacement of choice, signing up millions of users and even surpassing its predecessor in some respects. Since then, however, newcomers such as eDonkey and BitTorrent have been coming on strong amid reports that millions of people are logging off Sharman's network.

Although it's too early to draw broad conclusions about Sharman's future, experts said many people appear to be shopping more intently than ever for file-swapping alternatives that incorporate improvements in peer-to-peer technology that have not yet made it onto Kazaa.


What's new:
Top file-swapping network Kazaa is facing lawsuits, junk downloads and strong rivals such as eDonkey and BitTorrent.

Bottom line:
File swappers are trading in Kazaa for a new generation of software, throwing a monkey wrench into Sharman's plans to turn its network into a legal and profitable media distribution channel.

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"At heart, most of these peer-to-peer users are lazy," said Chris Hedgecock, president of Zeropaid, a popular portal site dedicated to file-swapping services. "Kazaa was simply the easiest way to get things they were looking for. Now they're being frustrated. It's taking longer to get files, so they're looking elsewhere."

Having traded billions of files over Kazaa, file swappers are trading in the popular peer-to-peer client for a new generation of software, throwing a monkey wrench into Sharman's plans to turn its network into a legal and profitable media distribution channel. It's not clear how many people have jumped ship so far, but one recent study estimated that the service lost some 5 million users between November 2003 and February.

Signs of migration underscore the sometimes evanescent success of media rebels facing attacks from record labels and movie studios. Not only has Sharman itself been hit with lawsuits seeking to shut it down; thousands of its customers have been charged with civil copyright infringement violations, and media companies have flooded its network with fake files to interfere with file-swapping activities.

Sharman Networks declined requests to comment for this story. A company representative said reports of a decline in its user base were inconclusive.

Outside estimates of user numbers for Kazaa have fluctuated in recent months but appear to show some slippage overall. Kazaa's average simultaneous user base reached more than 4 million people a year ago. For May of this year, estimates from several network watchers put average daily usage between 2.9 million and 3.5 million people.

It's unclear whether the statistics point to a temporary or more lasting trend. Declines over the last few months may be seasonal. Many of Kazaa's most avid users are students at universities who go home or otherwise lose their fast Net connections during winter and summer breaks but return when school restarts.

Although Kazaa's numbers could yet rebound, they contrast sharply with results for some competitors.

The number of people using eDonkey and its associated Overnet network has doubled since the beginning of 2004. That network showed an average of more than 2 million people simultaneously online in May, according to BigChampagne, a company that sells peer-to-peer market research to record labels, among other customers.

Fast growth in newer networks may reflect a growing hunger among broadband users for video files such as movies and TV shows, a development that could spell trouble for Hollywood studios.

"I think people are more interested in larger content, like whole albums and movies," said Jed McCaleb, the founder of the rival eDonkey network. "People are looking for a wider variety of things than just MP3s."

Like another fast-growing technology called BitTorrent, eDonkey was designed from the outset to provide efficient distribution of big files. Copyright companies say they see these new networks as the focus of demand that is increasingly shifting toward downloads of video and software.

"We see eDonkey as being the file traders' network of choice now for large files," said Mark Ishikawa, chief executive officer of BayTSP, a company that monitors copyright infringement on file-trading networks.

Slow change
The file-swapping universe has already seen two generational changes in its short history. The first came when Napster was forced by courts in mid-2001 to begin filtering out trades of copyrighted songs, leading it to shut down.

The second was in early 2002, when Sharman disconnected competitor Streamcast Networks from the FastTrack network. The incident, attributed to a licensing dispute, affected millions of file swappers then using Streamcast's Morpheus client, pushing many to Kazaa.

Swapping rivals

In 2004, Kazaa's growth has slowed or reversed, while newer networks are expanding quickly. Average number of simultaneous users during a given month, in millions:


*Kazaa dominates the FastTrack network, which is also shared by Grokster and iMesh.
Source: BigChampagne

Change this time around has been more gradual.

Lawsuits from the Recording Industry Association of America have helped spread concern about liability among casual file swappers, many of whom previously were unaware of legal risks to trading files. Most of the RIAA's early subpoenas and lawsuits targeted Kazaa users, although it no longer breaks out this information in its filings.

In recent months, the practice of seeding networks with fake files that appear to be popular songs or movies has spiked, as copyright holders have tried to divert file swappers. Overpeer, one of the leading companies that provides this service to copyright holders, said it sends more than 25 billion files, or pieces of files, to file swappers every month.

"Kazaa has been the center of a lot of this activity, because it is a leading network," said Marc Morgenstern, Overpeer's chief executive officer.

Part of the plan?
Another force also may be at work.

Along with joint venture partner Altnet, a subsidiary of Brilliant Digital Entertainment, Sharman has said it ultimately hopes to turn the Kazaa network into a distribution platform for authorized, paid versions of music and movies, crowding out copyright-infringing trades.

"By relegating non-(copy protected) files to a subordinate and comparatively unattractive access location...Sharman intended to promote and encourage only business appropriate file sharing and to share the net payments for (copy protected) works lawfully exchanged by users of the (Kazaa) software with Altnet," court papers filed by Sharman last September said.

Sharman itself has not provided any financial updates, but Brilliant Digital Entertainment's publicly available financial statements show a project that remains in its financial infancy. The company has touted growing use of Altnet by independent musicians, filmmakers and video game companies. In February, it said it was distributing more than 50 million authorized files a month.

However, revenue from this venture remains small, and may even be shrinking. According to documents from the Securities and Exchange Commission, Brilliant made just $124,000 from its online content distribution in the first quarter of this year, down from $171,000 in the first quarter of 2003.

Altnet executives did not return requests for comment.

File-swapping observers say the coming fall will be a test for Kazaa's future. A strong surge back from its seasonal decline might mean that the onetime leader will simply have to share the limelight with rival networks. If it continues to drop, a more significant shift might be under way, they say.

"If in September we don't see massive pile on (back to Kazaa), it will be something worth looking at," said BigChampagne Chief Executive Officer Eric Garland. "If we see a whimper rather than a scream, there is a good argument to be made that at least some sizable population is moving on."

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