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How label-backed P2P was born

A look at how top record label and P2P execs worked for a cease-fire--and wound up with a new kind of digital music service.

Andrew Lack wasn't like the other record label honchos, file-swapping maverick Wayne Rosso thought as he left Lack's swank office in a midtown Manhattan skyscraper.

That Lack, the chief executive of Sony BMG Music Entertainment, was even talking to Rosso showed he was more open-minded than most industry executives. That he was talking up the benefits of working together--even schmoozing with the man who used to run controversial peer-to-peer service Grokster--was downright amazing. "'I'm going to make you a millionaire,'" Rosso remembers Lack telling him.

"So I told him, 'I'm all ears.'"

There was no more an unlikely pair in the music and technology business in early 2004. But behind the scenes, their growing camaraderie became one of the most important bridges between the warring recording industry and peer-to-peer companies.

Their relationship led to the creation of Mashboxx, a new kind of peer-to-peer company that's expected to go live in mid-September. Mashboxx is one of several avowedly law-abiding, peer-to-peer companies trying to thrive in the wake of June's

At the time of their meeting, Lack's label was suing Rosso's former employer, Grokster. And record industry executives commonly viewed file swappers as renegades who had helped destabilize their industry.

Rosso, 56, was certainly no peacemaker, either. At the time, he was running a Spanish peer-to-peer software company called Optisoft and was fond of comparing label executives to the iron-fisted dictator Josef Stalin.

Mashboxx and the other label-friendly companies--which include Napster creator Shawn Fanning among their executive ranks--hope to meld traditional file-swapping technology with copyright-friendly filters that will replace unauthorized downloads with copies of songs that must be purchased in order to be played.

None of their ambitious plans has been tested in the marketplace. And skeptics predict that file-swap aficionados will avoid filtered services like Mashboxx and stick with competitors. Law-abiding music downloaders, on the other hand, may simply stick to Apple Computer's iTunes.

Wayne Rosso
Credit: Mashboxx
Wayne Rosso
Mashboxx CEO

But that this new generation of cleaned-up peer-to-peer companies exists at all shows how, despite a still-toxic legal environment and uncertainty in the courts, record labels and tech start-ups are finding increasing room for experimentation and collaboration.

"We said for a long time, and no one believed us, that we were serious that peer to peer could play a role in the distribution of music," said Mitch Bainwol, chief executive officer of the Recording Industry Association of America. "Our beef was not with the technology but with the people who wanted to use our products as start-up capital."

The loudmouth and the TV guy
By the time Lack, 58, suggested his idea for a filtered network in early 2004, Rosso had been meeting with him on and off for almost a year--long before the Grokster case made it to the Supreme Court.

Rosso, a heavyset, bearded former music publicity agent, was the president of Grokster when they first met in early 2003, and was widely known as the man with the biggest mouth in the peer-to-peer software business. He started his career sweeping floors in the United Artists warehouse in 1970, ultimately working his way up over 25 years to represent acts ranging from the Beach Boys to Branford Marsalis.

In the mid-1990s, Rosso found his way into a series of Internet start-ups and eventually landed at Grokster in 2002. A natural headline-grabber, he delighted in thumbing his nose at the record industry, calling its top executives lunatics, even dubbing labels' lawsuits against individual file swappers the "death rattle" of a dying business.

Andrew Lack
Credit: Sony BMG
Andrew Lack
Sony BMG CEO

Lack was more insider than maverick, even if his experience was outside the music business. A former actor in television commercials, he moved behind the camera in the mid-1970s, landing a producer's role at "60 Minutes" and ultimately creating in 1985 "West 57th," a CBS news magazine show controversial for adding show-biz glitz to news. In 1993, he was tapped to lead NBC's news division and was instrumental in shaping the MSNBC and CNBC cable channels before leaving to head Sony Music in early 2003.

He hadn't personally lived the scorched-earth warfare between file swappers and record labels and could call his own shots. That made him a perfect person to pitch, Rosso thought.

When Rosso cold-called Lack in early 2003, the record executive surprisingly called back and suggested they meet. A month later, they sat in a conference room on the 32nd floor of Sony's office and, over twin Styrofoam bowls of popcorn, chatted.

"I told him, 'I shoot my mouth off in the press, but it's all marketing.' He did the same thing, taking a certain stance in public," Rosso said. He has been fiercely loyal to the executive since that meeting, often attacking critics of Lack with all the overwrought rhetoric he typically reserved for record industry leaders.

They agreed that they would look for ways to work together, but initially found little practical room. Rosso left Grokster for Optisoft soon after. But it wasn't until a separate group of technologists began bringing swap-stopping technology to the labels' attention that their relationship started to show sparks.

Building the swap walls, brick by brick
The first company to try building a peer-to-peer network that filtered out record company's copyright products was the original Napster, under the strict orders of the federal courts. It didn't work well, and the company ultimately shut down its service. Its name and assets were sold to software company Roxio, which now uses the Napster name for its online music service.

But Napster founder Fanning learned from the experience. The day after the company declared bankruptcy, he and several of the original Napster figures began brainstorming. The result was Snocap, a new company aimed at providing a full infrastructure to turn unauthorized downloads on peer-to-peer networks into sales.

"(Napster founder Shawn Fanning) is, I think, the ultimate conversion. He has seen the way forward, and in that sense we are all grateful to him."
--Thomas Hesse, president, Sony BMG's Global Digital Business

In early 2003, they began meeting with the same top record executives who, barely months before, celebrated putting Napster out of business.

"I remember how Shawn came in, how he had obviously been converted to the legitimate version of the world," said Thomas Hesse, Sony BMG's president of Global Digital Business, who at that time was chief strategic officer at BMG Music. "He is, I think, the ultimate conversion. He has seen the way forward, and in that sense we are all grateful to him."

But through 2003, there was little Snocap technology to see, only plans and a rudimentary demonstration. BMG and other major labels signed what amounted to an endorsement of Fanning's idea to help him find funding, saying they would be interested in exploring his work but making no commitment to using it.

Fanning wasn't the only one thinking along these lines.

Another company called Audible Magic was already marketing audio "fingerprinting" technology that could identify songs as they were sent through ISP networks or were burned to disc in a manufacturing plant. In late 2003, founder Vance Ikezoye gave RIAA executives a demonstration of how this could be plugged into a piece of file-swapping software, stopping downloads in their tracks.

RIAA executives quickly set up meetings for Ikezoye on Capitol Hill to show Congress that peer-to-peer software could be modified to protect their copyrights. Other record label executives, including Lack, got their own demonstrations, and by March 2004 he was impressed enough that he could tell Rosso that he'd seen filtering technology work as advertised.

Ikezoye's technology led to one immediate contract with iMesh, a company that would ultimately be Mashboxx's most immediate rival.

The RIAA had sued the Israel-based iMesh file-swapping company in September 2003, and executives at that company quickly decided that a settlement was better than fighting an expensive lawsuit.

By late the following spring, iMesh executives were meeting in Sony's headquarters with lawyers and businesspeople from all the major labels, as well as Audible Magic. iMesh President Talmon Marco remembers the meetings were supposed to be under a veil of absolute secrecy, even within the labels themselves--or so he thought until stepping out of the elevator in Sony's headquarters one day to see huge hand-drawn signs announcing "iMesh settlement talks," with an arrow pointing them in the right direction.

iMesh announced that it had settled with the RIAA in July 2004. It wasn't public knowledge for at least another eight months that Audible Magic was trying to turn iMesh's unregulated swapping network into the kind of filtered download service that Lack and Rosso were also discussing.

Preaching the gospel of filters
When Rosso left Lack's office after that 2004 meeting, he still had no plans to launch his own company. The better way, both agreed, would be to persuade existing peer-to-peer companies to adopt filters.

Trouble was, most of the well-known file-swapping companies were adamantly and publicly opposed to filters, questioning whether they were even possible to use. Rosso himself had publicly dismissed the idea in the past, and the P2P United lobbying group that he belonged to had contested Audible Magic's claims on Capitol Hill.

But Rosso, like Fanning a new convert, started lobbying on behalf of Lack's idea with his own Optisoft, a company set up to market file-swapping software created by a 24-year-old Spanish programmer named Pablo Soto.

He talked to Soto, and a month later returned to Lack's office to hold a conference call with the young programmer along with Sony Music's then-chief technology officer, Phil Wiser. Rosso and Wiser flew to Spain afterward to discuss a transition to a label-approved service, with filters.

They met in Wiser's hotel suite in Madrid. With his dreadlocked hair and casual clothes, Soto looked like a "Spanish communist hacker" working with the clean-cut Wiser, Rosso said.

Wiser and Soto spent a day sketching technical details for how to turn the Optisoft network, called Blubster, into a label-approved endeavor. At the end of the day, the three of them retired to a traditional Spanish restaurant, and Rosso and Wiser smoked Cuban cigars to celebrate what seemed to be a meeting of the minds. They code-named the project Tapas, in honor of their dinner, Wiser said.

"Only a psychopath is going to invest money in a company that's going to have to go to trial."
--Wayne Rosso, CEO, Mashboxx

But not long after, Soto changed his mind, and an exasperated Rosso quit the Spanish company.

For the next several months, Rosso helped set up meetings between Sony executives and other major file-swapping companies, including a four-month set of discussions with eDonkey President Sam Yagan. Some dismissed the idea out of hand; others, like Yagan, took it seriously but ultimately decided that filtered downloads would drive away their users.

With no takers for the filtering plan, and Lack growing increasingly frustrated at the lack of progress, Rosso made a decision: "I know you're not getting anywhere with these guys," he called to tell the Sony executive about a year ago. "I know you want to get a major name to convert.

"But with your permission, I'll do it myself."

Legal shifts, and development mode
Over the last year, Rosso's Mashboxx and rival iMesh have been feverishly working on technology while simultaneously trying to land licenses to distribute music from all the record labels.

Rosso initially planned to follow iMesh's lead and sign up with Audible Magic for the filtering technology, but a last-minute pitch from Fanning's Snocap persuaded him to adopt that technology instead. As of today, he remains Snocap's only announced customer.

Both services saw the Supreme Court's Grokster decision in late June this year providing a boost for their businesses. But Rosso remains bitter about the other peer-to-peer companies' rejections of Lack's overtures. He predicts they'll have trouble finding new funding or customers following the court's ruling.

"Only a psychopath is going to invest money in a company that's going to have to go to trial," he said.

But Sony BMG executives say they are willing to keep experimenting--including keeping the door open to other peer-to-peer companies.

"Andy (Lack) really wants Sony BMG to be out there and a leader in this (digital) space, free of any sort of prejudice and preconception," Hesse said. "It is incredibly important that we get it right."

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