The brains behind Kazaa

After a long self-imposed quiet period, Sharman Networks CEO Nikki Hemming breaks her silence about her company's controversial file-swapping technology and the future of digital music.

John Borland Staff Writer, CNET News.com
John Borland
covers the intersection of digital entertainment and broadband.
John Borland
7 min read
Nikki Hemming has emerged as one of the most mysterious Internet executives in the world.

Hemming, 35, is CEO of Sharman Networks. In late January, her little-known company bought the Kazaa Media Desktop (KMD), a popular post-Napster file-swapping program that is used by tens of millions of people worldwide. Even by the ordinarily eventful standards of the peer-to-peer world, the months since have been punctuated by controversy.

In March, Kazaa's biggest competitor went suddenly, surprisingly dark. Some fingers pointed at Hemming's Sharman, although her company wound up having nothing to do with the incident.

Earlier this month, Kazaa came in for criticism following news that Sharman had bundled software from Brilliant Digital Entertainment. The contretemps erupted because the software would ultimately let consumers' computers be used as part of a new commercial peer-to-peer content distribution network called Altnet.

Through all of this, Hemming declined interviews, communicating with the public only through press releases. Now she is finally lifting the veil on her company. A former Virgin Interactive executive, Hemming is convinced she can help move file-swapping out of a commercial--and legal gray--area and create a business model that will satisfy entertainment companies and consumers alike.

Not that she thinks it's going to be easy. Nobody has yet sued, but Hemming knows that's a possibility. In the meantime, she's promoting a plan in the United States dubbed the Intellectual Property User Fee (IPUF), suggesting that a small fee could be added to ISP (Internet service provider) subscriptions to pay artists and content companies, for example.

Also, Hemming is sticking with her company's controversial alliance with Brilliant and Altnet. That network, which will support distribution of copy-protected entertainment content, will be one way that content companies and the peer-to-peer world can find common ground, she argues.

Hemming is also dropping hints that Sharman is close to signing distribution deals with European telecom companies, in what would be one of the biggest ratifications of the importance of file-swapping since Bertelsmann's financial interest in Napster.

CNET News.com spoke with Hemming in one of the first one-on-one interviews since the purchase of Kazaa.

Q: What made you decide to buy Kazaa? What are your plans for Sharman?
A: I have a ten-year background in consumer electronics. I worked for a number of companies like Viacom and Virgin Interactive. I established their organization for them in Sydney for the Southeast Asian region. I've been around the technology of entertainment for quite a bit of time. Basically, the opportunity was initially put to me by (Brilliant Digital Entertainment CEO) Kevin Bermeister, who I'd known for quite awhile.

It was quite an untenable situation for the Kazaa BV people at the time, and my investors had been looking at opportunities in the Internet field.

So Sharman predated the Kazaa purchase?
Yeah. The company was actually started for the purpose of investment in Internet opportunities. This is the first one of a number of deals that we're looking for. I'm actually heading up this project.

Can you talk about who those other investors are?
These guys are not vanity investors. The way we have it set up is I bring the experience and the skills and put the team together to drive the business forward, and these guys put up the majority of the capital.

They're private individuals; they're not particularly interested in having their interests disclosed, and that's fine by me.

Were you able to shield yourself legally when you bought the original assets? You're not being sued at this point.
Bottom line is that there is no litigation against Sharman Networks anywhere in the world. And obviously we were extremely pleased in March when the Dutch courts ruled that the KMD (software), which we owned, and the way that software functioned, was not infringing on copyrights in any way.

Ultimately, everyone is going to get around the same table. But someone needs to actually put the table up first and take a seat.
Yes, there is a risky profile, and I think that is the reality check of a new paradigm. If you are operating on the frontier, and you're operating as a driver in changes in technology, consumer behavior, and in what the commercial model looks like, then there are always inherent risks. That's partly where the challenge comes from for me. You need to stay the course, need to remain cool-headed, and need to be driving towards the ultimate objective.

Sharman Networks still doesn't appear to be listed in Australia. Where are you actually headquartered?
You're absolutely right. Sharman Networks is actually registered in Vanuatu. It's an offshore international company. What that does, along with other prudent investors in the multimedia world, is it provides us with some tax efficiencies for the purposes of our investor team.

Just for reference, we elected with the user terms to regulate our affairs by Australian law. That was with a developed legal system. My attorneys advised me that the legal system around copyright is very similar to that of the U.S. and Europe.

Have you had any contacts with the Australian or U.S. copyright authorities?
We've actually had no contacts from them at all. What we have been doing--we appointed a (U.S.) lobbyist very quickly when we took over the assets. He's been speaking to a number of players in the value chain. So, he has been speaking to musicians' groups at this point. That has been specifically around the IPUF.

Basically, Sharman Networks is the first software publisher to step forward and start to play a part in driving a solution to monetizing P2P. We've been in discussions with ISPs, with hardware manufacturers, and groups representing musicians at this stage.

We're actually looking to put some solutions forward. Ultimately, everyone is going to get around the same table. But someone needs to actually put the table up first and take a seat. We're bold enough and confident enough to do that.

In your terms of service, you talk about potentially charging a subscription fee. What are your plans for that?
It's so interesting that everyone is focused on that area. In the previous terms of service for Kazaa BV, there was a clause in there with very similar wording.

The answer is that Kazaa is a free piece of software, and the commercial model works very well for us on that. We yield our income from advertising dollars, and that allows us to produce great new versions. The model works very well.

The point for me is that we take privacy very seriously.

A number of other players in this market have already released premium versions which do not have the adware included. I'd say, probably, in the next six months we would look to release a premium version of the product. But we'd do it in a different way. We'd put significant effort into the value-add, so it would not just be (Kazaa) minus the advertising aspect, it would be (Kazaa) plus plus plus.

What is your relationship to Brilliant Digital Entertainment and Kevin Bermeister? Does Bermeister have any day-to-day influence in what Sharman Networks and Kazaa do?
We do have a strong relationship with BDE. They're one of our favorite third parties. The relationship is structured over three important parts. First, they're a bundling partner with the B3D projector, which allows us to deliver the rich media content. It's the same basic model that is shared with, say, a bundling partner like Cydoor.

Then we have a piece with them where they have a contract for advertising sales in North America. It's not an exclusive contract, but in this phase of Sharman's development, it allows me to outsource an important part of the revenue drive. We'd intend later on to put an in-house team in. Then, more recently, is the Altnet project. While Altnet has not gone live, in about six weeks the first test of Altnet will be put out to the market for content placement.

What's your opinion of the fallout from Altnet? It's something that has struck a raw nerve among people online.
I think the issue behind the unnerved reaction is that it all centers around privacy. It all centers around a general nervousness in terms of what's the downside of what the Internet can do for you. I think that's a general sense that isn't just around P2P. The point for me is that we take privacy very seriously. That's one of the big issues that has kept me so busy recently.

Kazaa needs to continue what it's doing already, which is basically to back its word...Altnet needs to do their own work to communicate with consumers to communicate how it's going to operate and how they can also trust Altnet.

Do you or Sharman have an equity stake in Altnet, or is it solely contractual?
No, it's solely contractual.

What else do you think needs to be part of the Kazaa story?
I'd like some acknowledgement of the role that Kazaa and P2P will have in the propagation of broadband. We have a couple of very sizable deals in Europe with some telecommunication companies that will be in place very shortly.

What kind of deals?
These are deals on a bounty basis, so they will use us as a marketing channel to demonstrate the effectiveness of broadband. They will actually be using Kazaa to promote the growth of broadband in their territories. The point is that it's not just price alone that will drive the uptake of broadband. Pretty much every government in the world is fully enlisted in the importance of broadband as the future of communications.

It's something where some of the telecommunications organizations are really looking for a solution, and P2P steps in and really is a solution.