The Quest to Monetize File Sharing

1Executive Summary

Napster, Grokster, Kazaa, Morpheus, Torrentspy, Audiogalaxy: Hollywood and the music industry have forced countless file sharing services out of business in the last decade, and major record labels have sued tens of thousands of individual file sharers in the U.S. alone. But go to a site like The Pirate Bay and you’ll find millions of users busy swapping practically every movie, TV show or song imaginable, even as music sales free-fall and DVDs follow suit.

The legal war against file sharing has failed, and more and more, entertainment industry insiders are seeking alternatives to lawsuits and legal threats, realizing it’s time to finally work with, instead of against, P2P network operators and their users. The Recording Industry Association of America (RIAA) suspended its mass lawsuit campaign against users of file sharing networks at the end of 2008. Two years ago, Warner Music Group CEO Edgar Bronfman hired Jim Griffin — long known as one of the label’s toughest critics — to explore the idea of licensing P2P downloads through a flat fee that would let users legally download as many MP3s as desired.

The latter initiative, dubbed Choruss, continues to move forward, but it isn’t the only company trying to monetize the sharing of music and other types of content on P2P networks. Other efforts towards the same goal are underway — from some of the very people who have been at the center of the P2P controversy. Some of these initiatives are still in stealth mode, while others are emerging to establish entirely new ways to compensate rights holders.

Flat-fee Licensing

The Choruss approach to music sharing is as simple as it is disruptive: Instead of regulating file sharing, the music industry wants to monetize it through small monthly fees paid by users. The project is spearheaded by digital music distribution pioneer Jim Griffin, who was a sharp critic of the industry when it started to go after P2P networks. Griffin and the company approached universities early on to act as a test-bed for flat fee licensing. Though no school has publicly declared to be a Choruss partner, Griffin recently stated in an interview (subscription required) that half a dozen schools have signed on for field tests.

Details on these tests are still unclear, but one model would apparently be based on a dedicated file-sharing network that allowed students to swap an unlimited number of MP3s in exchange for a monthly fee paid directly by each student. The network would track transfers and distribute licensing fees to rights holders accordingly.

Griffin told me, when contacted for this article, that the project is ready to move forward. “We are now less interested in further testing and more interested in widespread deployment,” he wrote in an email, adding: “The model is proven and it is time to implement.” Griffin said Choruss aims for a broader campus launch as early as this fall.

Choruss has faced stiff criticism from bloggers and file sharers alike, some of which have compared the flat fee with a music tax, alleging that itwould essentially force users to pay for music that they may or may not consume. Griffin has disputed this notion from day one, arguing that services licensed through Choruss would have to be voluntary for end users, who should be able t make a decision on whether to opt in in very much the same way they might or might not subscribe to premium cable.

Choruss isn’t the only project based on flat-rate licensing. The Isle of Man proposed a similar licensing scheme in early 2009, and Noank Media has been building tools to legalize music and video sharing in P2P environments as well. However, none of these projects has gone beyond the planning stages as to date.

The biggest challenge for Choruss and other flat-rate licensing models will be acquiring rights to media. Even established online music services like iTunes haven’t been able to secure licenses for certain artists, like the Beatles. A flat fee, all-you-can-eat service based on something as controversial as file sharing could lead to even more rights holders holding out. There was also some concern that the service’s close alignment with Warner would alienate other rights holders, but Griffin said that hasn’t been the case — though “it did confuse some people,” he admitted.

Ad-supported P2P

LimeWire, one of the most established file sharing clients, proposed a different type of monetization scheme two years ago: The company would show contextual text ads, similar to the ones popularized by Google, next to search results within its file sharing client and split any revenue from those ads with rights holders. The system might, for example, display an ad for Gwen Stefani’s perfume next to search results for No Doubt tracks. Advertisers would pay only if a user clicked on the ad, and rights holders would receive around 40 percent of the revenue generated by that click.

Company representatives estimate that LimeWire’s 80 million users generate around 5 billion search requests per month. Search requests, they argue, could be monetized to benefit both rights holders and LimeWire. The company founded a subsidiary called Lime Engine, based in Sunnyvale, Calif., to develop its advertising network, and also hired a few key developers and executives from companies like Yahoo and Glam Media. LimeWire’s advertising operation has been run as a stealth mode startup, and the company has been very secretive about the progress of this program.

LimeWire is the first company to tackle advertising in a P2P context by using Adsense-like ads within a file sharing client. Others have claimed to deliver ads over P2P networks before, but most of those efforts were little more than thinly-disguised spam, and no other company has so far proposed to give rights holders a cut of its P2P ad revenue.

However, LimeWire faces some steep challenges too: It has to convince advertisers to market their goods next to potentially illegal downloads, and an ongoing lawsuit with the music industry doesn’t make this proposition any easier.

User Donations

Swedish BitTorrent site The Pirate Bay has been known for making fun of rights holders in response to take-down requests, so it might be surprising that one of the Bay’s founders recently launched a startup that explores yet another way for rights holders to monetize sharing of their works. Flattr, which launched in private beta earlier this year, offers users the ability to donate money to writers, musicians, filmmakers and other creatives.

Flattr isn’t per se designed for P2P — many of the works submitted in the first few weeks were actually blogs and other web sites. Rights holders list their works with Flattr and, in turn, receive a badge that looks very much like the button used by social news site Digg. They can then embed this badge onto their own sites and ask users to contribute with a click, just like they would vote on a post with a Digg button.

Registered users commit to pay anywhere from €2-20 ($2.70-$27) per month. This money gets distributed to rights holders based on the number of clicks on Flattr badges. If a user only clicks one, his €2 might go straight to that rights holder, minus a 10 percent fee. If he clicks on 50 buttons, each rights holder will only receive 2 percent of his monthly contribution.

So how could this work in a P2P context? Flattr would work really well with BitTorrent, because it requires users to browse web sites to find works that they want to download. BitTorrent is the tool of choice for movie and TV show piracy, but it’s also increasingly embraced by rights holders to legally distribute their works. Mininova.org, for instance, lists more than 11,000 legal torrents and filters out all unlicensed uploads. Each download page on Mininova could easily incorporate a Flattr badge, and the site could even encourage subscribing to Flattr by offering paying users higher download speeds.

Flattr’s big challenge will be to strike such cooperations that could convince users to actually open their wallets: There currently isn’t a clear benefit for those willing pay, other than feeling good about supporting artists.

Conclusion

Choruss, Lime Engine and Flattr aren’t the only companies and projects looking to monetize file sharing, but they’re some of the projects closest to deployment. The fact that more than one solution exists represents a huge opportunity in itself: Smaller and bigger rights holders alike can figure out which solutions work best for them, experiment with various approaches and possibly even combine multiple models to receive new revenue streams through a mix of donations, advertising and flat fee licensing. Choruss is for example solely focused on music for now, but Flattr could also be used by independent film producers or other online video entrepreneurs. Flattr on the other hand may not be ready for, or even appeal to, consumers of chart-topping pop music, but big music labels could easily benefit from embracing both Lime Engine and Choruss.

Entertainment industry executives just have to acknowledge that they have lost the war on file sharing, and start to build a peace-time business. The tools are there. Now, it’s time to use them.

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