Megaupload Shut Down, Provides Basic Lessons on Bad Business

It’s been a crazy week with many crazy stories. Fears about the Stop Online Privacy Act created a massive online response, thrusting copyright reform into the national conversation. But while people were speculating on the future of intellectual property, the Department of Justice shut down Megaupload. Over the last five years, Megaupload had grown in popularity as an online “cyberlocker”. As broadband use explodes, the value of these companies is obvious. They are a user-friendly FTP where anyone can place files on a central server, to access them from a different locations or share them with others. When use a cyberlocker to store your baby photos or send a song you wrote to friends, there is no legal issue.

There might have been pictures of a two-year-old’s birthday party or basement demos somewhere on Megaupload, but review of the indictment made public this week shows the site knew their bread and butter was piracy. Although they had disclaimers on their site that users could be punished for uploading copyrighted content, the indictment claims that there was little, if any, enforcement. Instead, Megaupload acted to encourage infringement, primarily by creating an Uploader Rewards program that offered cash payments to the users who provided the most popular files. This, along with many more bad decisions detailed in the indictment, made the shutdown seem like an inevitable event.

There are many layers to this situation. It is a fascinating and frequently entertaining story, complete with outsized characters. One of the defendants Kim Dotcom (formerly Kim Schmitz) was living in China and New Zealand, and drove luxury cars with “GOD” license plates. Megaupload had an internal search engine to pluck whatever they liked from the servers, and one exec e-mailed another complaining his stolen copy of the Sopranos was in French. Employees described themselves as a modern day shipping service for pirates. In the wake of the shutdown, many have expressed concerns that this might signal an aggressive stance towards other sites that serve as cyberlockers. While it is unclear if that is the case, there are some lessons we can take to heart.

The federal government is very serious about delivering heavy blows to electronic money laundering, and are out to discourage anyone (including foreign companies) supporting it. Poker Stars, Full Tilt Poker, and Absolute Poker all tried to avoid the Department of Justice by operating offshore, but were sunk last year. The Treasury’s new Prepaid Access rules have enhanced company obligations to verify customer data, collect information, and comply with law enforcement. This is a sustained pattern that has continued with Megaupload, as the third count in the indictment is for money laundering. It appears it has again been proven that doing your due diligence on your customers and making sure that you do not let suspicious transactions go unnoticed will always be a good investment of money and time.

This case seems uniquely egregious, and it may be that worries about a wider crackdown are exaggerated. Most companies are not going to present such an obvious case for prosecution. Megaupload’s border hopping executives built a business model around attracting stolen content by offering cash incentives to users whose uploads produced traffic. They reveled in their criminality and invited the attention of law enforcement. There is a push to address copyright law and make broad, substantive changes, but most companies offering cyberlockers are not going to be waving a giant flag saying “SHUT US DOWN” like Megaupload did.

As we recently discussed on BitTorrent, the struggle of the government and the courts with file-sharing is part of a broad pattern. There is no widespread agreement on how to deal with these issues, as the hue and cry over SOPA proved. But it is hard not to be encouraged by the emergence of technology law in the national conversation. Last week, the two biggest stories were a piece of legislation that had yet to make it to a vote, and the shutdown of Megupload. If it gets people thinking critically on how to help the law catch up with modern technical realities, everybody benefits. Except Kim Dotcom. He is (probably) in big trouble.

Zack Bastian is an official contributor to Law of the Game. A third year student at George Washington University Law, Zack works at the Woodrow Wilson Center's Science and Technology Innovation Program and is a member of the American Intellectual Property Law Association. The opinions expressed in his columns are his own. Reach him at: zack[dawt]bastian[aat]gmail[dawt]com.

The Ongoing Legal Battle Over Bit Torrent Gets More Interesting

Since the beginning of its existence, BitTorrent has been a lightning rod for controversy. Comcast choosing to slow down or “throttle” the service’s traffic was one of the first shots fired in the ongoing battle over Net Neutrality.

This is not just a problem here in the States. Canadian provider Rogers ”throttles more than any other internet provider in North America”. This issue is not going away. It speaks to many fundamental questions on the future of the internet, and also the future of video games. BitTorrent has exciting, perfectly legal applications. You can use it to quickly and easily transfer a homemade game to a friend, or share your own machinima. The downside is that, thanks to its ample capacity and dispersed load, pirates have thrived, distributing illegal versions of games for free. That bites into already precarious profits and reduces the incentive developers have to make the new games we love.

This profound problem got a new wrinkle when TorrentFreak recently claimed they traced BitTorrent downloads to the Recording Industry Association of America and US Department of Homeland Security. Using YouHaveDownloaded.com, TorrentFreak alleges they found that six unique IPs within the RIAA and more than 900 at DHS downloaded illegal materials from BitTorrent. TorrentFreak is undeniably partisan. The blogger who provided these claims uses an alias (presumably due to fears of reprisal). But, it is not hard to believe that employees at large organizations get copyrighted materials for free. To be fair, we don’t know why these files were downloaded or what was done with them. It’s possible it was for personal use as most coverage of this has implied, while it’s also possible it was downloaded as part of an investigation, which may have even been at the request of the rights holder. All we know is the files were likely downloaded by someone at those IP addresses.

There is no consensus on how to deal with the issue. RIAA abandoned the idea of suing individual downloaders long ago. Not so in Europe, where CD Projekt served settlement offers on Germans accused of pirating a copy of The Witcher 2. Others have chosen to focus on communities like the Pirate Bay in order to make a bigger dent in the infringement. Pirate Bay has been cited by supporters of the Stop Online Privacy Act as proof of how necessary the legislation is. (Legislation which, incidentally, may also ”break the internet.”)

TorrentFreak’s claim they have found foxes in the henhouse is interesting, it does not answer any questions. Is it embarrassing for the RIAA? Yes. Regardless of what the real reason may be here, the publicity’s implications have been negative in a pretty much universal manner. But, it does not solve the unresolved problem of how to confront the clash between copyright owners and the easy sharing the internet allows. Law of the Game will keep you updated of new developments as they become available.

Zack Bastian is an official contributor to Law of the Game. A third year student at George Washington University Law, Zack works at the Woodrow Wilson Center's Science and Technology Innovation Program and is a member of the American Intellectual Property Law Association. The opinions expressed in his columns are his own. Reach him at: zack[dawt]bastian[aat]gmail[dawt]com.

LGJ: IP Police, Arrest this man, He talks in torrents

This week's LGJ goes into the reported 'Pirate Finder General' in the UK and what could follow in the US.

Read on!

LGJ: Piracy and the economy

In the last LGJ, a discussion of Piracy as it relates to the economy.

Read on!

LGJ: Pirates are grumpy, underutilized customers?

As the first LGJ that's been 'on site' from a conference, this week's column makes some commentary on a statement Jason Holtman, Director of Business Development / Legal Affairs for Valve, made at the Game::Business::Law Conference:

Most pirates are grumpy, underutilized customers.

Read on!

The PRO-IP Act and Movies and Music

This week's Law of the Game on Joystiq (link) covers the new PRO-IP Act as it applies to video games. As a sidenote to that column, I wanted to discuss my thoughts on the PRO-IP Act as it applies to movies and music, where I also think the Act is as much a detriment to producers as it is to consumers. I would again like to reiterate that the Act has not been signed into law as yet, but has been passed by both the House and Senate at this time. The final text of the Act is here.

In short, the PRO-IP Act does the following three things:

1. It increases the penalties for infringement by expanding what is considered a ‘work;’
2. It broadens the ability of the government to permanently seize goods; and
3. It creates an Intellectual Property Enforcement Coordinator, a new cabinet position whose sole job is to increase intellectual property enforcement.

This bill was passed based on the theory that intellectual property is under a drastic attack in the US by, seemingly, everyone. There is an element of truth to this, as CD sales have certainly been down, and it's clear the music industry is trying to find a new model, though I'm not sure it's truly broken, or at least waiting for digital sales to catch up. On the other end, the movie industry is certainly losing something to campus piracy, but there is still growth, even if it's short of the gaming industry as of late. In fact, the gaming industry, which is experiencing the most growth, also takes a much different stance on piracy, rarely going after the customers rather than professional pirates. It should also be noted that the biggest dent in piracy could likely be made if enforcement on piracy of physical copies were greater in certain countries outside the United States that I won't name, as tourists have been bringing back stacks of VHS tapes, audio cassettes, VCDs, DVDs, and CDs bought for next to nothing from street vendors for decades. You can even find these pretty easily in many major cities in the US.

Movies

The MPAA is newer to the anti-online piracy front than the RIAA, but online piracy is a convenient scapegoat for box office sales not living up to all expectations. Campus piracy was one of the convenient ones that was eventually brought back to reality from the absurd estimates of 40% of revenue loss (linked above). While there is still sales growth, I expect many executives are concerned about the sudden rise of game sales. I have often wondered if that is, in part, driven by the economics of entrainment hours per dollar spent, as so many games offer a much greater amount of entertainment per dollar spent than a movie ticket.

The movie really has three potential downsides to the PRO-IP Act. The first and most obvious being the negative publicity that the RIAA has enjoyed, which could lead to a further alienation of Hollywood and the general public. The second is what I discuss for game developers in the Joystiq piece, specifically the issues that arise under the new definition of a 'work' and how the overlap may play out and 'force their hand' on suits they don't wish to file. Finally, there's an issue that all media shares with respect to enforcement: many of the people who are sued don't have anywhere near the resources to pay these fines. The end result is you've successfully entered a judgment someone can't pay, had property seized that is at most tangential to the actual piracy, and received a large amount of negative press in the process. Not to mention, you've likely lost a customer, as I can imagine people who are sued by the MPAA aren't likely to head down to the movie theater on a regular basis anymore.

Music

From what I understand from many reports, the music industry, more specifically the RIAA, was one of the key backers of this legislation, but in my opinion, it seems they are the least likely to see any benefit from it. In fact, the enforcement strategy utilized by the RIAA to date has probably done more to alienate their own customers than it has to reduce piracy.

What sets the music industry apart from movies and games is there's no way to experience a song at little to no cost without risk. I think most people would love the opportunity to listen to a song or album one time before deciding whether to purchase it or not. There's no way to rent an album, and those 20 second samples on iTunes or Amazon don't do the full piece justice. Some might say that's changing, as more subscription services become available, but there isn't yet one that offers a complete catalog across all labels. Then there's the simple fact that there are other, potentially larger sources of income for musicians than record sales. The video game industry has no equivalent to a concert; disk sales are more or less all there is to it other than cross-licensing. Movies have more in common, between the box office, DVD, showings on TV, etc., but music is even far more ubiquitous than movies are, as they're in the background of pretty much every other medium, as well as most all venues and events.

And that's why the RIAA's strategy of going after the average Joe who downloads an album once in a while to try to find something new to listen to doesn't make sense. That average Joe probably has spent quite a bit on music over the course of his life, be it buying CDs or merchandise or concert tickets. And I'm sure there are many artists who would rather have people download their album in order to determine if they want to be a fan of the work rather than have no exposure as a result of their label or the RIAA suing their customer.

Ultimately, the way this hurts the music industry isn't in practical enforcement. They backed this bill because it helps their enforcement. It's an issue of image, and as the bad publicity keeps falling on the RIAA, more and more consumers are taking their entertainment dollars elsewhere. It's insulting to the consumer that the RIAA would even suggest that ripping a CD you purchased so you can put it on your iPod is illegal, even though they haven't tried to enforce that idea at this time. Ultimately, this only hurts the artists, which only serves to hurt the development of music in the US, especially for artists who can't or don't get radio time or for listeners who don't listen to what's played on the radio.

Solution?

I've long held the theory that attacking the supply is far more effective than attacking the demand in piracy situations, especially given that the demand are also often the customers you rely on to keep your business going. I'm not saying ignore every consumer. If a consumer is also sharing thousands of files that have been downloaded millions of times, then they're a distributor as much as anything else. But it seems obvious that the thresholds for enforcement need to be well above downloading one work once. The court has imposed reasonableness standards on many other areas of the law, and perhaps a reasonableness standard needs to be used here.

The goal of intellectual property rights was the balance the interests of producers and consumers so that the arts would grow and artists could prosper, and in many ways many people have lost sight of that goal. As we move further into the future, we all need to be prepared to change with the times, and acts like the PRO-IP Act attempt to bind us to business models and methodologies that don't make sense in the digital reality. By the same token, those decrying all intellectual property rights need to understand that without them, much of the media you enjoy today simply would not exist because those who produce it would have no means by which to profit from it. In a perfect world, we would have no need for intellectual property rights because there would be no piracy but there would also be unlimited exposure to new media. In our imperfect world, we need to keep sight of the balance between what both consumers and producers need to coexist in the most reasonable way. It's unfortunate that the PRO-IP Act takes a step backward rather than a step forward in achieving that balance.

Law of the Game on Joystiq: Activision's Stealth Enforcement

This week's Law of the Game on Joystiq takes a look at the quiet enforcement strategy Activision has been using, and what may be going on.

Read on!

Law of the Game on Joystiq: Of Pirates and Prostitutes

With a title like that, this week's Law of the Game on Joystiq has to be interesting, right?

Read about piracy and GTAIV here.