P2P Sharing: The KaZaA story at Port 80: Boardwalk

The legal case against KaZaA in Australia has reached a lower-court verdict that has both sides claiming partial victory. Google News coverage

Justice Wilcox is a brave judge
by Kim Weatherall
Weatherall's Law, September 5, 2005

In effect, Wilcox wanted to split the baby. He didn't want to absolve Kazaa in this case. He wanted to put a stop to some of the infringement. But he also wanted to make it clear that P2P file-sharing could go on. So he tried to tread a middle path.

Professor Felix Oberholzer-Gee and co-author Koleman Strumpf floored the disbelieving music industry with their findings that illegal music downloads don’t hurt CD sales. Oberholzer discusses what the industry should do next.

Lawyers were asked on Tuesday to reveal the identity of the owner of Sharman Networks, parent company of file-sharing service Kazaa, as the company faced copyright infringement allegations in Sydney, Australia.

Lawyers for Universal Music Australia called on Sharman in Australian federal court to reveal the anonymous figure controlling the corporation in its request for evidential discovery. Justice Murray Wilcox agreed, saying this was "not an unusual request."

The public face of Sharman to date has been CEO Nikki Hemming.

"Miss Hemming seems to be a key player...on whose behalf is she playing?" Wilcox asked. "Who is controlling these activities?"

It could all be over soon for Kazaa, the file sharing network that is the current scourge of the recording industry. Investigators raided the Sydney office of Kazaa yesterday (Friday Feb 6) collecting evidence about copyright infringement that will be presented in a Sydney court on Tuesday. ...

The raid not only took in Sharman's head office but also employees of the company, partners of the business, Universities and ISPs. According to Speck, they entered "the offices of the Kazaa operation, so Sharman at Cremorne, the home of Nikki Hemming, the Chief Executive of the Sharman organization, the home of Philip Moore, the IT Director, Brilliant Digital Entertainment, the joint venture partners and the home of Kevin Bermeister, the Chief Executive of Brilliant".

The three Universities were "Queensland, The University of NSW and Monash".

The makers of Kazaa, the peer-to-peer file sharing software, challenged the validity of a court order used by the Australian recording industry to raid its offices last week.

The company, Sharman Networks, threw down the legal challenge Tuesday in Australia's Federal Court in Sydney. Sharman was raided by Music Industry Piracy Investigations, a private investigations unit established by the Australian Recording Industry Association to crack down on copyright infringement, including illegal Internet file sharing.

What's Next? Movies

Releases like Shrek 2 have been pirated on the internet
One in four people on the internet have illegally downloaded a film and the problem is set to get worse, said the US movie industry's trade body.

A study released by the Motion Picture Association of America (MPAA) found that film piracy was worse in South Korea, where broadband is commonplace.

The film studios say piracy on the net has cost them billions of dollars.

Last year Hollywood's major studios made a record $10.85bn (£5.8bn) at the international box office.

Faster downloads

For the study, the MPAA questioned 3,600 internet users who regularly went to the cinema from across the world. It found that a quarter admitted to having downloaded a film from the internet.

"About one in four Internet users have downloaded a movie," begins a recent, much-publicized report on online file-trading. Thing is, the statement is not even almost true.

Last week, the Online Testing Exchange (OTX) and MPAA (Motion Picture Association of America) shocked the world with their "one in four" claim. The two organizations surveyed more than 3,600 users in 8 countries and discovered an astonishingly high rate of movie downloads. Their report released last week captured headlines such as "Movie piracy on Internet call an epidemic" and "Alarm at Internet movie piracy" and "Movie downloading costs MPAA billions."

However, it's not actually one in four Internet users that have downloaded a movie, rather one in four broadband Internet users. That last broadband tidbit is in the report's fine print. And there are even more interesting findings that didn't make their way into the fine print at all.

KaZaa's org chart

Banned IP Ranges - the IP numbers that KaZaA Lite won't let connect with your computer.

Kazaa, the largest file-trading network running, has a new business plan that includes a subscription service, audio and video media advertising -- oh, and an offshore tax haven.

Sharman Networks, the company that purchased Kazaa in January, announced a deal Tuesday with Internet advertising company Double Click, as well as the creation of a new, secure delivery system that will make the company profitable, said Nikki Hemming, Sharman's CEO.

Kazaa, an application that is downloaded onto a hard drive, comes embedded with software from Brilliant Digital Entertainment that allows companies to deliver advertisements. Double Click will then be responsible for selling Kazaa's advertising space, with the two companies splitting profits.

Kazaa users, angered by the network's inclusion of secretly embedded spyware, can now connect to the peer-to-peer network using a hacked version of the application called Kazaa Lite.

Kazaa Lite is a software client that provides access to the same FastTrack network as the peer-to-peer program, Kazaa Media Desktop, but does not require users to install any third-party software or view any banner ads.

Niklas Zennstrom (right) and Janus Friis (far right), are Swedish and Dutch software programmers who supervised the writing of

the software called FastTrack with the help of Estonian lead programmers Ahti Heinla, Priit Kasesalu and Jaan Tallinn (left), who run Bluemoon Interactive. FastTrack resides on each user's computer and goes out on the Net to find other users to link up to. Zennstrom and Friis used FastTrack to start a company, KaZaA BV, in 1990.

When Swedish software developer Niklas Zennstrom cast about for help in writing the Kazaa file-sharing software, colleagues raised eyebrows when he chose three unheralded youths from little-known Estonia.

Niklas Zennström, the internet entrepreneur behind both Kazaa and Skype, spoke to BBC Click Online about how his two inventions came about, and how broadband and wireless devices are shaping his vision for the future.

There are few people in the world who can claim to have invented something that captured the imagination of hundreds of millions of people.

But Niklas Zennström has done it twice.

In February 2002, Zennstrom and Friis dumped KaZaA for roughly $500,000 to a British-born woman in Australia named Nikki Hemming, who quickly rounded up a couple of investors and formed Sharman Networks. Zennstrom and Friis are still on the hook legally because they kept the underlying software, called FastTrack, that powers Kazaa and Grokster.

FastTrack Creators Niklas Zennstrom and Jacob Friis who also 'operate' the FastTrack protocol have become 'untraceable' in Europe. They recently were added to those been sued in the case. However, US Courts have been unable to locate them in Europe.

The RIAA have launched a case in Estonia related to the underlining FastTrack technology. Apparently the code was last seen in Estonia. Those been questioned in Estonia claim that they no longer have the code. The Estonian is refusing to say who now has the code.

Roderick G. Dorman is representing Sharman Networks in the case. Their main line of argument is that a US Court has no right to tell an Australian company how to do it's business.

The case against KaZaA in the Netherlands which KaZaA won in a lower court has now reached the Dutch supreme court. The Dutch copyright authorities have the case on appeal.

Sharman, which has no employees, is officially based in Vanuatu, a Pacific island tax haven headed by Father John Bani (below). Its chief export is kava, an herb that allegedly helps relieve stress. Music execs would have a hard time filing suit in Vanuatu.

The uses of a tax haven are really only limited by the fertile imaginations of taxpayers (and non-taxpayers), their accountants, lawyers and other professional advisors.

How best to use any tax haven depends on what type of income a taxpayer has, where it is earned, where it is taxed and, in many jurisdictions, exchange controls. There is no short answer and no easy solution; if there was nobody would pay any tax.

Contrary to popular opinion, tax havens are not only places used to avoid income tax. While this may be their main use they are also very important in the fields of estate and gift duty planning, minimising stamps duties, and the circumvention of exchange controls; uses which are commonly overlooked.

Another often used aspect of the Vanuatu Finance centre is the strict code of secrecy. While this code of secrecy is relied upon, and rightly so in tax planning, it can also be very useful in any number of circumstances where the confidentiality of ownership, or control, want to be preserved.

Since then, Zennstrom and Friis have created a company, Blastoise dba Joltid. Blastoise/Joltid has licensed the FastTrack software that powers KaZaA to Kevin Bermeister's Los Angeles-based Brilliant Digital Entertainment (BDE:AMEX). They have formed Altnet, a joint venture to enable profit with peers.

Brilliant Digital's 2002 Annual Report, or 10K, filed with the Securities and Exchange Commission.

"In February 2002, we formed Brilliant P2P, Inc., later renamed Altnet, Inc., to create a private, peer-to-peer network utilizing existing, proven technology to leverage the processing, storage and distribution power of a peer-to-peer network comprised of tens of millions of users," the company reports.

Altnet intends to license commercially available digital rights management technology to protect against infringement of the proprietary rights of the owners of the content distributed over the Altnet network. Altnet licensed the peer-to-peer technology necessary to operate the network from Blastoise, Ltd. doing business as Joltid. Blastoise is owned and operated by the developers of the FastTrack P2P technology, the underlying technology which operates the KaZaA and Grokster P2P networks. Pursuant to our agreement, Blastoise acquired 49% of the outstanding common stock of Altnet.

Filing suit against Kazaa, therefore, has forced the entertainment industry to negotiate the legal rules of no fewer than five countries on three continents.

This case "is one in a series of skirmishes that will determine whether the information network the public enjoys five to 10 years from now is open or closed and to what extent different countries will have a role in controlling it," said Jonathan Zittrain, co-director of the Berkman Center for Internet & Society at Harvard University.

Who owns the domain kazaa.com? LEF Interactive, the management company based in Sydney, Australia, that Nikki Hemmings and the other people who run Sharman actually get paid by.

Kevin Bermeister's Brilliant Digital Entertainment has become a household name in Internet circles almost overnight.

But the company's chief executive didn't plan on it happening so quickly. Brilliant, a small, California-based software company, has sold 3D advertising and modeling software for several years. But Monday, the company revealed that it had entered a more ambitious business, called Altnet, aimed at distributing content online using peer-to-peer technology.

The move proved instantly controversial--not so much because of the idea itself, but because of the way Brilliant set about carrying out its plan: Bermeister struck a deal to bundle bits of software along with the Kazaa file-swapping software, which is downloaded millions of times every week.

As that software finishes downloading, it gains the capacity to link ordinary computers into a massive new file-swapping network controlled by Brilliant. The company plans to use it for distributing secure content such as movies, music or advertising, or to perform complicated "distributed computing" functions.

The servers are in Denmark. The software is in Estonia. The domain is registered Down Under, the corporation on a tiny island in the South Pacific. The users - 60 million of them - are everywhere around the world. The next Napster? Think bigger. And pity the poor copyright cops trying to pull the plug. ...

On a January morning three months after the suit was filed, Amsterdam-based Kazaa.com went dark and Zennström vanished. Days later, the company was reborn with a structure as decentralized as Kazaa's peer-to-peer service itself. Zennström, a Swedish citizen, transferred control of the software's code to Blastoise, a strangely crafted company with operations off the coast of Britain - on a remote island renowned as a tax haven - and in Estonia, a notorious safe harbor for intellectual property pirates. And that was just the start.

Ownership of the Kazaa interface went to Sharman Networks, a business formed days earlier in the South Pacific island nation of Vanuatu, another tax haven. Sharman, which runs its servers in Denmark, obtained a license for Zennström's technology, FastTrack. The Kazaa.com domain, on the other hand, was registered to an Australian firm called LEF Interactive - for the French revolutionary slogan, liberté, égalité, fraternité.

Confused? So were the copyright cops. "It's hard to know which one to sue," complains Michael Speck, an investigator with the Australian Record Industry Association. Hollywood lawyers figured the best way to bring Kazaa to justice was to squeeze Sharman. Trouble was, Sharman, which operates out of Sydney, had no employees. All its workers, including CEO Nikki Hemming, are contracted through LEF. The names of Sharman's investors and board members are locked away in Vanuatu, a republic that bills itself as an asylum whose "strict code of secrecy" is "useful in any number of circumstances where the confidentiality of ownership, or control, want to be preserved."

Why all the subterfuge? It's an international business model for the post-Napster era. A close look at Kazaa reveals a corporate nesting doll that frustrated Hollywood attorneys for more than a year. From Estonia to Australia, they pleaded with courts to force Kazaa's operators out from the shadows. Meanwhile, every week that Sharman was able to hold the law at bay, countless copies of Kazaa software were being downloaded. In the last six months alone, PC users have downloaded more than 90 million copies. Kazaa has 60 million users around the world and 22 million in the US - an irresistible audience to marketers. Last year, Sharman raked in millions from US advertisers like Netflix and DirecTV, without spending a penny on content. The chase could have gone on forever.

This story isn't done yet. Note the phrase above, "Blastoise, a strangely crafted company with operations off the coast of Britain - on a remote island renowned as a tax haven". It's called Sealand.

What's next?

Kazaa co-founders Janus Friis and Niklas Zennstrom have a new target: the telephone industry.

They've launched Skype, which they claim is the first Internet phone service to use peer-to-peer software. In just its first week of availability, 60,000 people downloaded the free Skype software. ...

Just as they shook up the music industry by creating Kazaa, the pair now wants to rattle the cages of traditional telephone companies. ...

Q: Why are the creators of Kazaa going into VoIP?

A: After Niklas Zennstrom and I did Kazaa, we looked at other areas where we could use our experience and where P2P technology could have a major disruptive impact. The telephony market is characterized both by what we think is rip-off pricing and a reliance on heavily centralized infrastructure. We just couldn't resist the opportunity to help shake this up a bit.

How long did it take to come up with the Skype software?

Skype has been in active development for about six months. It took less time to develop Kazaa--about four months--but we think we've come up with a better piece of software this time. ...

We hope Skype will be as popular as Kazaa and will have a similar disruptive impact--albeit on a different industry. Very few people can find anything bad about unmetered telephony--except the established telephone companies. ...

Eventually, someone will pull the plug on the traditional circuit-switched telephony network, but this may take some time. Why should the P2P generation (teenagers growing up with Kazaa, Skype and others), get a normal phone line when they move out? They'll just get broadband and Skype.

It would seem that Mr. Zennstrom would be wary of taking on Big Music. The industry sued him last year, brandishing threats of criminal prosecution and millions of dollars in fines. He sold the Kazaa software and Web site in 2002 as his company's legal bills exceeded $100,000 a month.

Despite Kazaa's popularity, Mr. Zennstrom never struck it rich. He barely recouped the money -- some $220,000 -- he put up to finance the company, and he still rides a bicycle to work. But he is bracing for another fight. "Basically what the [music industry] should do is outlaw the Internet," he says, over lunch in a Stockholm café. "That's what they want to do." ...

He and a partner, Janus Friis, decided to create Kazaa in April 2000, after seeing how traditional Internet file distribution -- using centralized computer servers -- strained networks. To write the software, Mr. Zennstrom hired a trio of whiz kids in Estonia who answered an online ad.


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modified: August 25, 2004 by Douglas Anderson http://RicciStreet.net/port80/boardwalk/pop/kazaa.htm

Popular Music:
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KaZaa's org chart

What's next?

Popular Music: P2P Sharing The KaZaA Story

Where audiences meet musicians

What's Next? Movies

KaZaa's org chart

What's next?

Popular Music:
P2P Sharing
The KaZaA Story