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Industries digest Grokster ruling

Companies mull how Supreme Court's decision will change the landscape for the file-swapping and entertainment industries.

Robert Summer, the former president of Sony Music International, was shocked as he read Monday morning's Supreme Court decision sharply questioning the legality of the Grokster file-sharing service.

It wasn't that he was surprised by the outcome. In fact, he had bet his future on a decision that would tip the legal scales toward the music industry. Summer, who is also former head of the Recording Industry Association of America, had agreed three months ago to become executive chairman of iMesh, a popular file-swapping company in the process of replacing its unregulated downloads with a service approved by the music labels.

Still, the unanimity of the court's decision was unexpected. From his office in iMesh's midtown Manhattan headquarters, he called a friend who was still a top executive at Sony Music to compare notes. Then he called other music industry types, shared a few congratulations and talked about where they would go from here.

News.context

What's new:
Supreme Court's decision has cast a dark cloud over the future of companies seeking to profit from swapping software.

Bottom line:
Executives are mulling how the ruling will change the landscape for file swapping and the music and movie industries.

More stories on file swapping

"The response across the board was one of elation," the 70-year-old Summer said in an interview Tuesday. "It's only as the hours and days pass that what sinks in is how much work there still is to be done."

The first task at hand is understanding how Monday's landmark ruling against Grokster and StreamCast Networks will change the landscape for file swapping and for the music and movie industries. While far from a death knell for unregulated peer-to-peer networks, the decision has certainly cast a dark cloud over the future of companies seeking to profit from swapping software.

For two years, peer-to-peer software companies operated with the relative security of two court rulings that had given them a clean bill of legal health despite repeated lawsuits from the record industry and movie studios.

But now, with a unanimous Supreme Court decision saying otherwise, big content companies are already turning their sights on peer-to-peer software companies that have managed to stay out of the courtroom, such as Lime Wire and eDonkey.

Robert Summer
Robert Summer,
executive chair,
iMesh

"The same principles that apply (in the Supreme Court decision) are going to apply to other companies that are engaging in the same business," Donald Verrelli, the attorney who argued on behalf of the record labels and Hollywood studios in front of the Supreme Court, said in a press conference Monday. "They do all the same things that Grokster and StreamCast do, in the same ways. I think we'll have a strong case against them as well."

For their part, file-swapping software executives aren't saying much. Executives from BearShare, Lime Wire and eDonkey--all leading peer-to-peer software companies--declined requests for comment or did not return calls. One Lime Wire executive was quoted in The New York Times as saying he is skeptical about his service's future.

Wayne Chang, the 21-year-old founder of i2Hub, said cautiously that he will continue operating his college-focused service, which facilitates textbook sales and offers a Friendster-like dating service, as well as file swaps. Although i2Hub users have been sued for swapping movies, he said his company doesn't actively encourage or "induce" illegal behavior and so shouldn't be in danger under the court's ruling.

"We don't condone or promote activities and actions that breach the rights of copyright owners," he said. "We're waiting to see how things unfold over the next few days and weeks."

From the emboldened record industry's perspective, these companies have only a few options: keep swapping and be sued; stop swapping and go out of business; or, as Summer's iMesh is in the process of doing, they can start charging for swaps with the industry's blessing.

The 6-year-old, 30-employee iMesh may indeed be a trailblazer for those peer-to-peer companies that want to stay in business in the United States.

One of most popular
Once one of the most popular post-Napster networks, iMesh was sued by the RIAA in late 2003. Attorneys for iMesh ultimately contacted Summer, who was then a consultant in New York, to see if he would help broker a settlement with the record industry trade group he headed in the early 1980s.

After several meetings, Summer said he was convinced that the Israeli company was sincerely committed to stopping copyright infringement and agreed to help. The resulting agreement between the RIAA and the company gave iMesh a grace period that has now stretched nearly a year to keep its service intact--copyright infringement and all--until it has finished a new paid-music alternative.

In short, the new iMesh will retain part of its old file-swapping identity, with some free songs available from people's hard drives, but with filters from a company called Audible Magic blocking most copyright works.

Songs will also be available to purchase individually, and the service will offer a monthly all-you-can-eat subscription plan courtesy of MusicNet, the same wholesaler that powers music services from Yahoo, America Online and others. No hard launch date has been set, but the company plans to add features throughout the year.

"It is a complex transition, far more complex than people would have imagined," Summer said. "There has been a great deal of development and that development continues to take place."

Bold peer-to-peer experiment
iMesh remains the only major former swapping network to adopt filtering in order to satisfy the big content companies (although the original Napster tried, disastrously, for several months).

However, several other networks are starting from scratch, hoping to build new swapping services around filtering technology that blocks unauthorized trades, while still allowing them to charge for legal downloads.

Wayne Rosso, the flamboyant former president of Grokster, said he is close to launching his new Mashboxx service after months of flying around the world meeting with record executives. The Supreme Court decision Monday only makes his business a better proposition, he boasted.

"I happen to be the only guy who's been the respondent and the beneficiary of a Supreme Court decision on the same day," Rosso joked. "It's a huge boost to us and our future."

Rosso's Mashboxx, which like iMesh will support only music files, is the first to use filtering technology from Snocap, the new company founded by Shawn Fanning, the creator of the original Napster service. Fanning and his team of engineers hope that Monday's ruling will drive other peer-to-peer companies to sign up for the filtering tools.

"I think the decision shows that P2Ps can't become legal businesses unless they settle with the industry and become authorized providers," said Ali Ayar, Snocap's chief operating officer.

For now, Snocap, like Audible Magic, offers peer-to-peer companies the ability to filter out only copyright music swaps, turning those into sales. But it has plans to add movie filtering to the mix by next year, using technology being developed by Royal Philips Electronics.

If all of those pieces come together, Summer said he believes iMesh and others will be able to keep people coming to peer-to-peer services even if they aren't free anymore. Community, the ability to discover new music, and the still-strong attraction of peering into other people's music collection will keep people coming back, he said.

"Those are the aspects that need to survive," Summer said. "I can't imagine tens of millions of people being attracted to a service simply because it was free."