The Music Piracy Riddle
Hardware, Software Providers Among Piracy's Legal Winners

By CONOR DOUGHERTY
Staff Reporter

While record companies stand to lose sales to online pirates, others have plenty to gain by helping those pirates out.

There are some obvious players, starting with the file-swapping sites themselves such as StreamCast Networks Inc., which distributes Morpheus and makes money both by selling advertising on the sites and selling pop up ads that appear on users' computers after the download has taken place.

"It's a trade-off. If you'd like to have Morpheus, then we've got to be able to have money to run the company," said Trey Bowles, vice president of strategic planning for StreamCast Networks.

There also are the Internet service providers, which are reaping the benefits from a gradual increase in broadband connections that many consumers install primarily to gain access to pirated content. And to make better use of a broadband connection, users visit computer retailers where they purchase bigger, faster computers as well as CD burners or Apple's iPod, so pirated music can be taken on the road.

"There are lots of periphery businesses doing well," said Lee Black, an analyst with Jupiter Research Inc.

Among the less obvious players benefiting are software vendors that provide programs for various stages of the file-swapping process.

One example is Cydoor Technologies, a New York-based start up that allows the pirate music Web sites to show ads on the downloaded programs. Both Morpheus and Kazaa use Cydoor products.

Annoyance factor

Another group is made up of "spoofing" services that work for record and software companies by flooding the swapping networks with fake files for download.

"As piracy has grown, the use of spoofing has grown as well," said Marc Morgenstern, chief executive of Overpeer Inc. in New York.

The Overpeer service is little more than an annoyance to the music pirates, but Morgenstern hopes it eventually becomes a big enough bother to prompt users to either move to another network out of frustration (or actually purchase a CD).

Overpeer's technology can respond en masse to online searches across peer-to-peer networks. Say a potential pirate types in "Britney Spears." Overpeer responds by providing the user with several files that match the search only they don't actually contain the song. "It may be silent, it may be a demo version, but it does not contain the file," Morgenstern said.

Another technique is to cut the user off mid-download, then let them reconnect, only to stop the transfer again thus wasting the user's time and annoying them considerably.

"We make it more difficult, more frustrating and a whole lot less fun to be on peer-to-peer networks," said Morgenstern, who won't name clients or titles, but said the service works for music, movies, software and video games.

Another direct beneficiary is BigChampagne LLC, a Beverly Hills-based company that sells data to media companies concerning what's most often swapped and what software is being used to do it. "Essentially, the model is to be the Nielsen ratings for online media," said Eric Garland, BigChampagne's chief executive.

Though media companies can use BigChampagne to learn what songs are being stolen most often, Garland said they use the service primarily for consumer research.

"Compact discs are no longer a reliable indicator of a successful venture in promoting music," he said. "You might have a successful song, but that doesn't mean anybody is buying your CD. You gauge the public's reaction by looking at consumers where they consume media."

Garland said his three-year old company, which has offices in Beverly Hills and downtown Los Angeles, has been profitable for a year and he expects to generate more than $10 million in revenue in 2003.

"In 1999, we were the town crier," he said. "Today we don't have to stamp our feet."

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