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File-swapping leaders nearing D-day

With record labels' lawsuit threats pending, time left for eDonkey and its peers to make deals is running short.

The young chief executive of MetaMachine, distributor of eDonkey file-sharing software, appeared six months ago before a U.S. Senate committee and said his network--the world's most popular--was ready to turn over a new leaf.

Now Sam Yagan and his company are nearing the point when they'll have to deliver on that promise.

Music industry insiders say that pressure is building for eDonkey's makers and other peer-to-peer software companies to reach a final deal with record labels, turning off the free music and movie swapping that has gone on long after Yagan said it would stop. Yagan himself declined to give details on negotiations, but says he's hoping to have a final deal soon.

"I honestly had expected everything to move more quickly," Yagan said. "We look forward to a settlement (with the record industry) very soon. It's not months away, that's for sure."

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What's new:
Companies that make and distribute file-sharing software are under increasing pressure to settle their disputes with the record industry, which has been cracking down on illegal downloads of music and videos.

Bottom line:
Peer-to-peer software companies can shut down, merge with or be acquired by an existing online music service or devise ways to prevent illegal downloads and allow users to pay for the files they swap. But the software companies point out that converting to a legal, industry-sanctioned service can be very expensive.

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eDonkey is the largest of the peer-to-peer software companies that have yet to make official peace with entertainment companies. But many others, such Lime Wire and BearShare, are at the same critical juncture, and the decisions their executives make over the next month could transform the face of file swapping.

The companies are facing recording and movie industry attorneys emboldened by last summer's Supreme Court ruling saying that file-swapping services could potentially be held liable for people who use their software to download movies, music and software illegally.

In September, the RIAA sent a round of cease-and-desist letters to big file-swapping software companies threatening imminent litigation if they didn't agree to settle and change their business models. A few, including Grokster, WinMX and I2Hub, have since closed their doors.

But the 28-year-old Yagan is among the few who have tried to keep their services alive while figuring out how to morph into industry-approved businesses.

It hasn't been easy.

Narrowing options
With the threat of an expensive lawsuit looming in the not-so-distant future, eDonkey and its peers have only a few choices in front of them. They could shut down. They could sell the company or merge with an existing or planned online music service. Or, as Israel-based iMesh has done, they could try to build a service that filters out unauthorized swaps and charges consumers fees.

eDonkey has been in talks with existing and planned legal peer-to-peer services, according to sources familiar with the discussions. iMesh Chairman Bob Summer declined to comment on specific negotiations but said his service is eager to acquire the user bases of other file-swapping companies, such as eDonkey.

"There are a number of major players from the P2P community that are still active and are vulnerable to a rollup solution," Summer said. "To the extent that we were able to address a broader universe than the iMesh universe, that could only be seen as good for iMesh and similarly good for the industry."

Yagan said he has also had conversations with Audible Magic and Snocap, the two technology companies who have respectively helped iMesh and Mashboxx create label-approved file-trading services.

"A lot of this is questions of expertise," Yagan said. "What is my team good at doing, versus what other people are good at doing. We're going to need a lot of help to move."

Executives at both iMesh and Mashboxx, which have spent much of the last 18 months developing authorized swapping services, argue that it is unlikely that eDonkey or others could create a similar service without spending millions of dollars.

Along with these business decisions is the starker reality of settling with the RIAA. When iMesh made its peace treaty with the music industry in mid-2004, well before the Supreme Court's ruling, it agreed to pay labels $4 million.

Industry insiders say the settlement for any big file-swapping company that expects to continue swapping is also likely to range into the millions of dollars.

A spokesman for the recording industry said that the group was encouraged by the progress of discussions, but declined to discuss a timetable.

"These conversions are simple notionally, but there is a lot of devil in the detail," said RIAA spokesman Jonathan Lamy.

Peer-to-peer watchers are quick to note that even the most prominent companies, such as eDonkey and Lime Wire do not have a lock on their own file-swapping networks, however. For example, many people who connect to eDonkey's network actually use a different, compatible piece of software called eMule, which also allows people to swap files, but is not produced by Yagan's company.

That means that even if the RIAA does strike deals with eDonkey and other file-swapping software companies, their networks may stay active as a result of other organizations or individuals creating compatible software that uses the same networking technology.

It remains difficult to say how file-swapping, industry-backed or not, will fit into the future of online media.

The technology itself has been warmly embraced by both record companies and movie studios, assuming the file-sharing outfits can prove that copyrights are being protected. Sony Music was instrumental in helping create the soon-to-launch Mashboxx, and Warner Bros. Home Entertainment announced Monday that it will begin selling films through a P2P system in Germany this March.

So far, iMesh is the only file-sharing company to try to go legit. Its music subscription service launched in October, but allowed existing users to continue downloading as much music as they wanted for several months without asking for payment. Summer said that a "small" percentage of those users have now been asked to begin payment, but declined to say what proportion of those users have converted to the fee-based subscription service.

Estimates of usage vary, but Big Champagne, a company that measures file-swapping traffic for record labels and other clients, estimates that the eDonkey network attracted an average of 3.5 million simultanous users a day around the world by the end of December. Attracting even a small percentage of that user base, which could range into the tens of millions worldwide, would be profitable for the record industry, Yagan says.

That's the card he hopes will carry MetaMachine and eDonkey through the critical next weeks and months.

"If you compare us shutting down versus us converting, there's a heck of lot more value in us converting versus scattering those users," he said. "I think we all want to go to the same place."

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