September 20, 2005
File-Sharing Services Seek Pact With Record Studios
By SAUL HANSELL
At least five online file-sharing companies have started trying to reach an accord with the music industry to convert the free trading of copyrighted music on their networks to paid services, according to several recording industry and file-sharing executives.
The most advanced discussions are between the recording industry and Grokster, a small California company that has been sued by the entertainment industry, recording industry executives said.
Grokster has agreed in principle to be acquired by Mashboxx, a new company backed by Sony that is trying to start a legal file-sharing service, a person involved in the negotiations said. Mashboxx has made overtures to some file-sharing companies including eDonkey, Morpheus and LimeWire, but negotiations are not active, the person said.
The tentative agreement between Grokster and Mashboxx was first reported by The Wall Street Journal. MashBoxx would make a nominal payment for Grokster, but would share future revenue, the person involved in the negotiations said.
"We are looking at a number of acquisitions," said Wayne Rosso, the founder of MashBoxx, "but they have to make sense."
Michael Page, a lawyer for Grokster, did not return calls seeking comment.
Separately, iMesh, a file-sharing service that last year reached an accord with the music industry to convert to a legal paid service, has made overtures to acquire a number of the other file-sharing services, on the condition that they settle their claims with the recording industry, said Robert E. Summer, the executive chairman of iMesh.
"We have initiated discussion with a number of well-known players," Mr. Summer said. He said it was difficult to say which, if any, of those discussions would lead to acquisitions, in part because of the complexity of potential deals with the recording industry.
Mr. Summer declined to say how much money iMesh was offering the other services, but said "I don't think anyone will get rich off these deals." Rather, he thinks that such arrangements offer the owners of those services the ability to avoid litigation.
Such acquisitions, he said, "are good for iMesh and good for the industry." Mr. Summer is the former president of Sony Music International and former president of RCA records. He was hired by the founders of iMesh, which has moved to New York from Israel, to oversee relations with the record industry.
IMesh has agreements with all the major record labels and plans to introduce its service to consumers "imminently," Mr. Summer said.
Mashboxx announced a deal with Sony in June that would allow Mashboxx to sell Sony's music on its network. The company is in talks with other record labels, Mr. Rosso said. He hopes to introduce a public test of the service in December. He served as president of Grokster from 2001 until 2003 and remains close to Daniel Rung, the California entrepreneur who founded and owns Grokster.
The recording industry was handed more legal leverage in June when the Supreme Court ruled, in MGM v. Grokster, that the owners of file-sharing services can be held liable for contributing to the infringement of copyrights under certain circumstances. The case, which has both Grokster and Streamcast Networks, the owner of Morpheus, as defendants, was sent back to a lower court for further action. Last week, the Recording Industry Association of America sent letters to several file-sharing services, including LimeWire, eDonkey, and BearShare. The letters demanded that the companies stop allowing users to trade copyrighted files and invited them to discuss potential settlements in advance of litigation. A majority of the recipients of those letters have initiated at least preliminary settlement discussions, according to a recording industry executive.
Jenni R. Engebretsen, a spokeswoman for the recording association, confirmed that those letters were sent but declined to discuss any negotiations that have resulted.
Record industry and file-sharing executives say that the recording industry is looking for settlements that resemble its deal with iMesh, which paid $4 million in damages and promised to convert to a paid service that blocked the trading of copyrighted files without the permission of the copyright owner. None of the executives would discuss the amounts that the industry has been asking in the most recent settlement discussions.
"Ever since the Grokster decision, we have been thinking about what our next iteration should be and obviously the letter last week made that process more urgent," said Sam Yagan, the president of MetaMachine, which distributes eDonkey. He said he had talked to both iMesh and MashBoxx but had not decided whether to sell the company, to offer his own legal service, or to continue to fight the record industry.
Mark Gorton, the chief executive of LimeWire, said his company had not decided how to respond to the recording industry's letter. He declined to discuss any prospective acquisition offers. Michael Weiss, the chief executive of StreamCast, declined to comment on potential deals with iMesh or Mashboxx. BearShare executives did not return calls for comment.
While iMesh has taken nearly a year to develop its paid service - allowing free trading of files in the interim - the industry is likely to demand that other services stop free file-trading relatively quickly. That will require complex software development and business negotiations.
File-sharing services allow users to download files from each other's computers. Both iMesh and Mashboxx intend to use technology that examines files being downloaded and compares them with a master list of copyrighted files provided by record companies. If a user tries to download a copyrighted file, the download may simply be blocked or the user may be asked to pay a fee as with services like Apple's iTunes Music Store.
Both iMesh and Mashboxx have developed methods they hope will help lure users accustomed to free music into paying for songs. Mashboxx will allow users to download files free at low quality several times before being forced to pay for the song. Mr. Summer declined to detail iMesh's marketing plan, but music industry executives say it involves offering a long free trial of a subscription service, which allows users to listen to an unlimited number of songs for a fixed monthly fee.
