Kazaa Settles with Music Trade Association for $10 Million

The legal battle may finally be over for P2P technology firm Sharman Networks, which operates the Kazaa file-sharing network and whose founders gave birth to the Skype messaging service. Late yesterday, the National Music Publishers' Association, which represents the holders of music IP rights in court, announced it had settled its dispute with Sharman.

The settlement was announced by the company in US District Court in Los Angeles yesterday; today The New York Times learned Sharman will pay the Association as much as $10 million.

After Sharman's stunning settlement with movie studios and individual music publishers for $115 million was announced last July, a settlement with other plaintiffs appeared imminent.

Sharman and Kazaa settled rather than face the possibility of very stiff penalties, in the wake of the US Supreme Court's landmark ruling in MGM v. Grokster. There, the high court ruled that providers of P2P network software could be held liable for the content exchanged over those networks.

As Justice David Souter wrote for the Court's opinion in June 2005, "We hold that one who distributes a device with the object of promoting its use to infringe copyright, as shown by clear expression or other affirmative steps taken to foster infringement, is liable for the resulting acts of infringement by third parties."

That sound you heard was a bell tolling for the P2P file-sharing industry in America, which was clearly heard by eDonkey. Rather than fight it out and suffer Grokster's fate, the company behind eDonkey, MetaMachine, shut down completely in September of last year.

Kazaa, however, wanted to go the route of Napster, which meant promoting its brand as a legitimate source of licensed content. In a recent statement, Sharman said that's the route it had intended to go from the beginning:

"It has been our long standing goal for Kazaa to play a significant role in the growing market for licensed online distribution and authorized exchange of copyrighted content using peer-to-peer technology," said Sharman CEO Nikki Hemming, "and this settlement [with content providers in July] ensures that we will be working together with the content providers to the benefit of consumers, businesses and artists."

But working with them to do what, exactly? There's two ways a legitimate P2P service can go. One way is by trying to integrate digital rights management technology into its service. P2P advocates had previously argued this was impossible anyway, but in recent days, they've revised and extended their remarks to at least pry open a sliver of hope. Not that DRM has necessarily been a lifesaver for Napster, which last month announced it was shopping itself out to be acquired. There are no rumors of possible suitors at present.

Another possible route for Kazaa was proposed by long-time P2P industry advocate Adam Eisgrau, during congressional testimony in July 2005 -- following the Grokster ruling -- in which he did not exactly find himself in warm and friendly company. Before the Senate Commerce Committee, Eisgrau proposed a system where P2P system proprietors license content from music IP rights holders, much the same way radio stations currently license the right to play songs from firms such as ASCAP today.

"What we are proposing," testified Eisgrau on behalf of his lobbying firm, P2P United, "is a system that artists and copyright owners would elect to participate in...That would mean that they're saying it's okay for their material to be accessed by individuals without their advance permission, as long as those individuals pay into a collective. That would mean that what was now unlawful downloading activity on the part of these individuals, would under such a system be lawful."

While P2P United has aided in the representation of firms such as Grokster, MetaMachines, and Morpheus owner StreamCast in the past, Sharman Networks has historically refused to participate in its initiatives. But the alternative concept -- an industry-supported standard for voluntary participation in a P2P DRM scheme -- has been in limbo since 2001, long before the latest round of players even came into existence.

So exactly how Sharman plans to pull off what it has pre-announced to be its next move is a technological mystery. If it pulls the plug from its existing system in hopes that its customers will stage a mass self-exodus to a new and "secure" platform, it may find a great many of those customers dropping off. On the other hand, Sharman hasn't left itself many other options.