Goodbye Napster, hello Morpheus

It's now glaringly apparent that the music and movie companies cannot fight the onslaught of digitization forever. Every time the record industry tries to stamp out one file-sharing network, another rises to take its place.

COMMENTARY--It's happening again. No sooner did the music industry effectively kill Napster than a dozen imitators started vying for its vacated throne. And now they're not swapping just music, but movies, software, and any other content that can be condensed down to 1s and 0s.

Primary among the upstarts is Morpheus, peer-to-peer file-sharing software distributed free by StreamCast Networks of Franklin, Tenn. Napster had about 70 million people download its file-sharing software, but in less than a year, 60 million have already downloaded Morpheus. At the beginning of March, StreamCast had to put out a new version of Morpheus -- in part because the old version no longer worked (more on that later) -- and in the following two weeks, more than 25 million users downloaded the new version. Those numbers speak volumes. "Millions of consumers are forming peer-to-peer networks," says StreamCast CEO Steve Griffin. "They are not going to stop."

Indeed, Morpheus has become extremely popular despite being difficult to find (sort of like the Laurence Fishburne character of the same name in The Matrix). If you try, for instance, to type "www.morpheus.com" into your browser, you'll automatically get redirected to a competing music site called www.morphius.com. To download the real Morpheus, you need to go to StreamCast's website at www.musiccity.com. Confused? So is the rest of the world, which is perhaps why "morpheus" is one of the most searched-for terms on the Internet. The best excuse Griffin can come up with for this brand bungling is "We have been growing so rapidly we've neglected to identify who we are." He began rectifying that situation on March 14 by launching an official StreamCast corporate website, repositioning MusicCity as a promotional vehicle for independent bands and labels, and introducing a way to add copyright protection features to the software. It's also worth noting that the company has changed its name several times, and its financial prospects are highly uncertain, despite the success of its product.

To be fair, you can't really blame StreamCast for trying to keep a low profile. Last October was the first time the number of Morpheus downloads surpassed the number of Napster downloads, according to Jupiter Media Metrix. Not coincidentally, that was also the same month that 28 movie and music companies -- including Disney, MGM, Sony Music, and Warner Brothers Records -- filed a copyright infringement lawsuit against StreamCast and two other peer-to-peer services, Grokster and Kazaa. The same fate that befell Napster after it was sued by the recording industry may await these successors.

If that happens, though, it's safe to say that yet another company -- or companies -- will rise up to take their place. The litigation that StreamCast and its co-defendants triggered among the major content companies is all too predictable, but all those lawsuits merely fan the flames of the peer-to-peer movement. As P2P hacker Brandon Wiley explained last week during the South by Southwest festival in Austin, Texas, "When Napster was around, nobody was bothering to write file-sharing applications. But once it was shut down, every freshman in college was writing one." By constantly suing, the big entertainment companies simply inspire more copycats to come up with ever more clever ways to swap music and movies online.

StreamCast's day in court is set for October, and the company will attempt a "Betamax defense," which harks back to the 1984 Supreme Court ruling that protected Sony's right to sell VCRs. Even though VCRs could be used to tape copyrighted material, they also served a perfectly legal non-infringing purpose -- taping TV shows and watching rental movies. That's why the court ruled that they couldn't be outlawed. Griffin says Morpheus is a similar type of technology, and that since many types of music, movie, and software files do not infringe on any copyrights, people should be allowed to use Morpheus to swap those files freely. As for the mass of copyrighted content that Morpheus also allows people to swap, well, Griffin says there's no way for him to monitor or stop that sort of illegal use. Unlike Napster, which maintained a central directory to connect file swappers, StreamCast maintains no such central control point. The Morpheus software lets computers talk directly to one another. "We are a piece of software that lets anyone connect and form a network," Griffin says. "We have no control over users."

Ironically, it was a dispute with Kazaa, rather than with the entertainment industry, that forced StreamCast to change its underlying technology earlier this month. Previously, StreamCast licensed Kazaa's proprietary P2P technology until a long-simmering disagreement (about license payments) became so heated that Kazaa blocked all Morpheus users from using its network. So on March 1, StreamCast released a new version of Morpheus based on the totally different open-source Gnutella technology instead. That day the number of people sharing files on the Gnutella network spiked, going from 100,000 to 500,000.

The number may sound somewhat low, but remember, in a P2P network, the most important metric is the number of simultaneous users logged on at any given time. As Wiley says, "If you aren't online, it's like you don't exist." So that first day, people who downloaded the new software could basically browse through the MP3, digital movie, and software collections of 500,000 other people. That means if you wanted to find Dire Straits's "Money for Nothing" or the 1968 Woody the Woodpecker cartoon "Woody the Free-Loader," chances are you'd get lucky.

StreamCast's problems aren't over yet though. Gnutella may run into problems scaling to millions of simultaneous users, and Kazaa is now trying to woo many of the old Morpheus customers as well. But whatever the outcome, the dedication Morpheus users displayed by switching to the Gnutella version of the software proves once again that consumers will overcome almost any obstacle to share music and other content over the Internet.

It's now glaringly apparent that the music and movie companies cannot fight the onslaught of digitization forever. Their litigation may just be a stalling tactic until they can get some momentum behind their own online schemes, such as MusicNet (backed by Business 2.0 parent AOL Time Warner, Bertelsmann, and EMI) or Pressplay (a Sony Music-Universal Music joint venture). So far that stalling strategy hasn't worked. Internet data measurement firm ComScore Networks reports that in the month of February, StreamCast's MusicCity attracted 37 million worldwide visitors, Kazaa garnered 25 million, and Audiogalaxy 20 million, while Pressplay brought in only 788,000 and MusicNet got a piddling 154,000. In part that's because music through the P2P services is free, while you have to pay at least $10 a month for the label-backed services. But there's another reason too: With a P2P network, you stand a greater chance of finding the music you want.

In fact, the sheer popularity of P2P services makes them a great way for the major labels to promote their artists. But for that to work, the labels need to cede some distribution control to customers, who want to have all their music in one place, and can now do that through P2P networks. Rather than continuing to sue P2P upstarts, the major media companies would be wise to strike deals with them. Because, when you think about it, nobody really wants to be the next Napster. They'd rather figure out how to become the next Blockbuster.

As an editor at large for Business 2.0, Erick Schonfeld contributes to the editorial development of the magazine, writes feature stories, and pens a weekly online column (Future Boy). Schonfeld is also a contributing editor for Fortune, where he has written about technology and investing for the past seven years.