April 23, 2002 5:05 PM PDT

Kazaa steps out of the shadows

A new candidate to become center of the file-swapping universe has been unveiled: Vanuatu, a small group of Islands in the South Pacific.

That's where Sharman Networks, the parent company of the hugely popular Kazaa software, is registered to do business, according to Chief Executive Nikki Hemming. After months of speculation about the mysterious file-trading company, Hemming went public with this and other details of her business in a conference call late Tuesday.

Hemming and Sharman control software that has been downloaded more than 60 million times, with more than 1.5 million people using the software on any given day, the company says. Now, with ambitious commercial plans and a lobbying presence in Washington, D.C., Hemming is poised to make a bigger mark on the business of file swapping and digital entertainment than any figure since Napster's Shawn Fanning.

But to get there, the company will have to wend its way through legal threats from movie studios and record labels, as well as concerns of consumers angry about Kazaa's policy of bundling software that will use individuals' computers for other companies' purposes. On Tuesday, Hemming defended company policies that have drawn criticism from both sides.

"Our primary goal is to deliver quality software to users," she said. "I'm very comfortable that we've kept our word to users so far."

Months of silence
The 35-year-old Hemming, a former Virgin Interactive executive who lives in Sydney, Australia, is something of an anomaly in the nearly all-male file-swapping software world. She brings a decade of experience and contacts in the traditional entertainment world to her new company, as well as familiarity with running a fragmented international business.

Hemming was introduced to Kazaa and the world of file swapping by a former business associate, Brilliant Digital Entertainment CEO Kevin Bermeister. Brilliant had been working closely with the group of Netherlands-based programmers that had originally written Kazaa and its underlying peer-to-peer technology and was trying to sell the software.

When a Dutch court ruled in late 2001 that the programmers had to take Kazaa offline, most bidders disappeared. Hemming stayed put, said Niklas Zennstrom, one of Kazaa's original creators.

"We had some other offers and discussions during the year," Zennstrom wrote in an e-mail interview. "(After the court ruling) the other potential buyers had withdrawn, but Sharman was still interested, so we sold it to them."

As the new owners of a piece of software that had been downloaded over 30 million times by the beginning of March, Sharman was instantly a name to be reckoned with online. But Hemming declined to give interviews. Reporters and copyright authorities couldn't even find a record of the company registered in Australia, Hemming's home.

Hemming finally answered some-- if not all--of those questions on Tuesday. Sharman itself is registered for tax reasons in Vanuatu, an island nation that advertises itself on its Web site as "The South Pacific's premiere tax haven." Day-to-day operations are conducted in Sydney by an affiliated management company, she said.

According to the company's terms of service, it can be sued in Australia, which has copyright laws similar to those in the United States.

Sharman is funded by a group of private individual investors who wish to remain anonymous, Hemming said.

Rumors have floated for months, spurred by a note in the company's terms of service, that Kazaa would soon start charging for its service. Hemming said that she intended to keep the basic Kazaa service free, but would later introduce a premium service with new features. The company already has a deal with DoubleClick to serve ads through the Kazaa software, she noted.

Beset from both sides
Sharman is the largest peer-to-peer company that hasn't been sued by recording companies or movie studios. Kazaa BV, the Dutch company that sold Sharman its software, is still being sued. StreamCast Networks and Grokster, two companies that initially shared the Dutch file-swapping technology, also are being sued.

A Dutch appeals court ruled last month that the owners of the Kazaa software weren't liable for the actions of people using the software to trade copyrighted works illegally. That ruling doesn't hold immediate value as precedent in United States courts, however.

Australian copyright authorities have previously said they were investigating Sharman, but were not able to find records of the company's existence. Now they're mum on their plans, but say they're still looking.

"They are still a matter of interest to the anti-piracy unit," said Michael Speck, head of the Australian Record Industry Association's (ARIA) anti-piracy division, in an e-mail to News.com. "The unit down here has...zero tolerance (toward) piracy, and any piracy identified in this territory is dealt with according to the available resources."

The Recording Industry Association of America (RIAA) declined to comment directly on Sharman for this article.

Even while scrutiny from copyright holders has tightened, Hemming has tapped into some deep consumer fears about privacy and loss of control of their own computers. For the last two weeks, Sharman has been trying to assuage consumers' concerns about Brilliant Digital Entertainment's Altnet, which will use consumers' PCs in a new commercial peer-to-peer network. Altnet is installed with every copy of Kazaa.

Hemming said that Kazaa has changed its policies to ensure that no personally identifiable information is collected by any of the company's partners, and that all companies--including Brilliant and Altnet--communicate directly with consumers about what will happen to individuals' computers.

"Look, I've got the most powerful brand in the market right now," Hemming said. "I'm not about to put this brand into any risk whatsoever by making a hasty discussion on partnerships."

Some online file swappers are taking matters into their own hands. A hacked version of Kazaa stripped of Brilliant and other companies' advertising software has begun circulating online. Sharman has persuaded Download.com, a popular software aggregation site operated by News.com publisher CNET Networks, to remove that software program from its database, but it is still readily available elsewhere. She said the companies' attorneys are in the process of issuing cease-and-desist orders to the distributors and creators of that software.

Kazaa itself was removed from Download.com's directory after Altnet's software was revealed, but it had reappeared by Monday.

Hemming is moving ahead quickly despite the skirmishes on both flanks, however. Sharman's lobbyist in the United States has been speaking to musicians' groups and hardware companies about a new plan for paying content owners. The company also is hoping to win Internet service providers and telecommunications companies as allies, arguing that file swapping will help persuade people to sign up for broadband service.

"It's pretty clear that we have a way to play the part of being the driver in this market," Hemming told reporters Tuesday. "Why not be the visionary. Why not be the driver?"

 

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