With settlement, Kazaa casts off its pirate garb

Once a bane of the recording industry for its popularity as a place to get music without paying for it, Kazaa now will begin using filtering technology to prevent its users from distributing files that infringe on copyrights. Its parent company, Sharman Networks, will pay more than $100 million to global record labels EMI Group, Sony BMG Music Entertainment, Universal Music and Warner Music.

The out-of-court settlement puts an end to the legal proceedings brought by the record companies against Kazaa in Australia and the U.S., according to a deal announced Thursday by the Recording Industry Association of America and the International Federation for the Phonographic Industry.

"This is a victory for anyone in a creative industry that has had their works stolen and distributed through an illegitimate P2P network," said David Munns, vice chairman at EMI.

It also spares Kazaa the fate that befell another well-known peer-to-peer site, at least in the short term. Just over a year ago, the U.S. Supreme Court ruled that file-sharing companies could be held responsible for illicit content that passed through their sites, subverting a 2003 verdict by a lower court that decentralized downloading networks were legal. It was a decision that doomed Grokster and set a tough precedent for future face-offs between peer-to-peer networks and the recording industry.

Then, in September 2005, Australia's Federal Court ruled that Sharman was guilty of facilitating widespread copyright infringement by distributing software that allowed for the illegal spread of media files. Sharman tried to appease the situation in December by cutting off Australian access to Kazaa, but its executives were subsequently threatened with jail time when record industry representatives initiated a motion for contempt of court proceedings.

Unlike Grokster, Kazaa does not plan to close. Instead, it will switch to a service for paid legal content while maintaining its distributed peer-to-peer infrastructure.

"It's going to offer licensed files over the Kazaa Media Desktop," said Phil Armstrong, a U.S. spokesman for Sharman. No decision has been made yet on whether the new Kazaa will choose a subscription-based business model like Napster or charge for individual downloads as Apple Computer's iTunes Music Store does. Armstrong estimates that this decision will be made within the next few weeks.

The settlement is actually something of an anticlimax. For years, the recording industry has been doggedly working to stamp out music piracy, going after everyone from peer-to-peer sites to dozens of universities and thousands of individual downloaders, and has won repeatedly in the courtroom. At the same time, paid services like iTunes have surged in popularity and are helping to define a new generation of accessing music over the Internet.

In the burgeoning field of online video, meanwhile, peer-to-peer stalwarts such as BitTorrent are also feeling the heat and switching to paid services.

Whether Kazaa can make a go of it as a paid service remains up in the air. Certainly, such a transition hasn't been a guarantee of success. Napster, for instance, is a far cry from its glory days as the destination for unpaid music downloads. Peer-to-peer networks like Mashboxx, designed from the outset to be law-abiding, have yet to make much headway.

"The evidence today suggests that P2P services were successful because they were free. We're still waiting for an example of a P2P service that can succeed by selling legitimate downloads," said Roger McNamee, co-founder and general partner of several venture capital firms including Integral Capital Partners and Elevation Partners, which targets media and entertainment investments. U2's Bono is also a partner in Elevation.

Rivals in the Net music business also took a wait-and-see attitude.

"This settlement clearly allows them into the game, but it's a pretty competitive landscape now," said Tim Westergren, founder of Pandora, a 7-month-old online radio and music discovery engine that doesn't charge its members.

"It's hard to draw any real conclusions about a brand's strength as a paid service, if its reputation has been built on giving things away for free," he added.

And Kazaa itself isn't the force it once was. In May, only 6 percent of all peer-to-peer network downloads took place through that service, according to the NPD Group. Once the most popular peer-to-peer service on the Internet, it has since shrunk considerably in the face of legal troubles and spyware allegations.

David Card, vice president and senior analyst at Jupiter Research, is skeptical about Kazaa's chances. "It's going to be extremely difficult to convert a file-sharing network into a legitimate business," he said.

Besides going up against a glut of services offering legal music downloads, from iTunes to MTV's recently launched Urge, and illegal file-swapping sites based overseas, it faces this sobering reality, Card said: Its remaining base of users isn't a loyal one.

"This is not about file-sharing and peer-to-peer; it's about free music," he said. "And free music is still offshore."

CNET News.com's Stefanie Olsen contributed to this report.