Interview: Altnet, paid downloads the music industry doesn't want

Recently joined to the record industry's lawsuit against KaZaA, Altnet is the paid download service the major labels detest. Available through KaZaA and other peer-to-peer program searches, Altnet's paid downloads have gained exposure to a global audience its rivals would kill for. Using peer-to-peer technology, Altnet can also offer faster download capacity than centralised services by allowing customers to download from other client PCs that have purchased the item.

Despite its advantages though, Altnet is yet to sign a major record label. The music heavyweights claim the company is profiteering from the popularity of illegal activity on the peer-to-peer networks, which they say is costing them millions.

To find out where the controversy is heading, last week PC World spoke with Altnet chief executive Kevin Bermeister. In this interview, he tells PC World reviews editor Danny Allen and online news journalist Steven Deare his views on copyright infringement on peer-to-peer networks, the recent music industry raids on his offices, his blunt message for the music industry, and Altnet's future plans.

Note: PC World will have an interview with KaZaA owners, Sharman Networks, online next week.

The background The Altnet service Altnet vesus the music industry Altnet's future plans

The background

Give us an explanation about the companies you're involved with: Brilliant Digital [Entertainment], Altnet, also Joltid.

Brilliant Digital is a publicly listed company in the United States. I founded that company in 1996, and prior to that it was actually an offshoot of Sega. I was the CEO of Sega Ozisoft here in Australia prior to that, and became the CEO of Sega World [arcade centre in Sydney] and worked very closely with Japan. Essentially it was a spin-off organisation which went public in the United States in 1996 to develop 3D animation and the markets were very very difficult and essentially we moved in late 2000 and the middle of 2001 into 3D animation for advertising. Through that we began to bundle our technologies with several of the [search] companies but Morpheus was certainly the largest that we ended up striking a deal with, and rapidly thereafter ended up discovering that Morpheus was licensing technologies from KaZaA.

[KaZaA founders] Niklas Zennstrom and Janis Friis were based in Europe at that time. I contacted Niklas and we ended up cutting a deal and began to bundle our technologies with KaZaA. Altnet really came into existence much later on by virtue of the fact that I had identified that Niklas and Janis were very smart individuals who really understood the emerging peer-to-peer markets and what was really taking place in distributed computing, and had a very clear understanding of applications that could be deployed and used -- and peer-to-peer was one of them.

At that point in time Altnet, or Brilliant Digital at least, wanted to establish a relationship in the peer-to-peer space. We worked closely with Joltid, which was a company that Niklas had recently established to create new applications that would be closed file-sharing applications as opposed to open file-sharing applications, meaning that any files that were transferred on the closed protocol would be more secure than files transferred on the open protocol, like FastTrack. And Brilliant had some specific objectives in mind, that in content distribution we were intending to build a content distribution platform with the technologies provided by Joltid.

So we ended up entering into a joint venture with Joltid who were going to be the responsible party for the creation of the peer-to-peer protocols and the peer-to-peer technologies, and we also entered into a distribution deal with KaZaA who were going to distribute these technologies. We began to negotiate similar distribution deals with Morpheus and others at the time. We continue to develop the concept of Altnet, the business models for Altnet, the technologies, the specifications and designs and developments that were intended forward, and our business was already beginning to change because we were very excited about this whole new peer-to-peer world, peer-to-peer distribution and then KaZaA.

Niklas sold his business to Nikki Hemming and Sharman Networks in early 2002 and we began to work with Nikki to effect what Altnet had planned, to establish this broad-based content distribution network where the content was authorised by content-owners. So we couldn't populate anything on this closed peer-to-peer protocol unless the content owners agreed. And so we began to do a lot of early stage work to test how we could populate search results into the KaZaA user-interface, so that if you typed in a search term, how well that search term would appear inside KaZaA, whether or not users would determine actively what we had then launched as a gold icon versus a blue icon in KaZaA, and we discovered quite rapidly that people would download content. We started off in about middle of 2002 with a range of about 1000 files, a mix of 500 music files, a couple of hundred video games and software applications and a few hundred movies and other video files. For the most part we stayed from about mid-2002 to all the way to end of 2003 with those same 1000 files.

In that time-frame we made lots of modifications and changes to the underlying technologies of the closed protocol of the payment gateway that we had to develop in order to get people to download. Most of these files were free but some of them were paid, but we were essentially a Microsoft DRM licensee and we were doing some very large scale experimentation on DRM and the acceptance of DRM over a period of time. We were going to make the payment gateway more convenient... there were lots of shortfalls in the Microsoft DRM system that we really had to learn about and work around in order to accommodate what we believed users would ultimately look for in some kind of licensing model. For the most part, for example, you could buy a DRM, buy a song, and have the Microsoft DRM be licensed to the device but if you wanted to move it to another device you couldn't do that. If your device crashed, for example, you'd paid your 99 cents and you couldn't recover your file, how were you gonna get your licence back?

So there were a myriad of issues that we were experiencing with users who were using this DRM system. We modified the DRM system, tested it, produced new versions and had to deal with the way that our search interface integrates with... impression management, people who ended up successfully completing a file download, tolerance and file sizes and file shapes, to show that this was a functional platform.

It took us 18 months and in December last year and January of this year we launched what we call payment gateway eight, which is the entire new DRM system which we believe is fully-functional and completely transparent DRM system and payment gateway system and file transfer protocol. And we're now for the first time ever beginning to load up the number of files that we have in system. Our intention is to upload 100,000 files between now and October. This is without the major record companies coming along and doing a deal with us. We're just increasing the rate at which new deals come onboard, lots of independent catalogues, lots of independent companies are signing deals with us now just to increase the capacity of the files we have on offer.

The Altnet service Back to top

What Australian labels have you worked with?

Well we've worked primarily on Australian content through Sharman, because Brilliant doesn't have a business development presence here but KaZaA does, so they've introduced us to a number of independent Australian artists.

Altnet is a platform provider and it allows artists and content owners to enter their content in the Altnet database and then Altnet works with traffic providers like KaZaA, eDonkey, Overnet, Grokster and Excite. Essentially that drives traffic to Altnet's content through search and as the users convert to pay what really happens is that the benefits of the cash being received for each piece of content sold is essentially passed back to the content owner, and after a split with the traffic provider Altnet takes a piece of the action for the deal.

Are the downloads centralised through Altnet?

No. Let's take an example of a file that's never been put on Altnet before. What happens is we have a search index that's transported with every KaZaA application, or whatever it is, [for example] Grokster. So the search index is bundled with those applications. It automatically updates every few days so that your client will also have the Altnet search index on the KaZaA client, locally residing. So when you do a search, your keyword that you use will look to the local Altnet client and TopSearch to determine whether or not there's a matching keyword and if it finds a match, it will advise the KaZaA user interface that it has a match and the KaZaA user interface will then display the Altnet icon result.

At that point in time the user then clicks on the file to download the file. Assuming the file has never been downloaded by any user ever, it's going to fall back to your central Altnet server then it's gonna populate in your shared folder and then the next time you come along and click on that file, it'll look for shared folders and if it can't find it it'll then fall back to a central server.

In the rare circumstance that everybody didn't have it in their shared folder?

It'll always find the file.

Is that from Altnet themselves?

Either from Altnet or from an Altnet designated server. For example the content owner may be the provider.

What procedures do you have in place to make sure someone doesn't onsell the song they don't own the licence to? For example, that they get a Madonna track for free, pirate it, then try and sell it?

It can't happen for Altnet. Altnet only distributes a DRM product. That DRM file can be duplicated as many times as it needs to be duplicated, but every single device is a unique device and if you don't own a licence on your device your device is going to come back online and look for a licence.

So the DRM you use is-

[interrupts] We use Microsoft, we use TriMeda, we use a number of DRM providers. On top of that we have a licensing entitlements system which is an Altnet proprietary IP which essentially enables you as a user, even though you have licensed the content to your unique device, the content owner may determine, at their discretion, that by buying this 99-cent licence you have the right to play it on up to three devices. So you can have it on one device, and then you may download it on your other device, and you put your username and password in and it'll come back to our central licence manager and say you have three licences available, you're using one and therefore you're OK to have it available here.

Altnet vesus the music industry Back to top

I'm interested to know how the joint venture with Sharman Networks came about, who was the instigator, yourself or Nikki [Hemming]?

No, I kind of got Nikki into this mess [laughs]. I mean I was very excited about the future of this business. I thought it was a wonderful business and the reality is it's extraordinarily competitive with terrestrial distribution strategies of major music and motion picture studios, and they are aggressively defending their turf.

Can you tell us about your involvement with the court case, here and abroad?

Brilliant Digital and Altnet are not a party to litigation in the United States. I've been living in the US for five years. I immigrated back [to Sydney] around August last year and have been living here for about six months now. So we haven't been a party to litigation in the United States but we've been seriously attacked through a process of subpoenas and depositions and a variety of other actions in the United States, which is taking up inordinate amounts of our time. We've been attacked in the press, inevitably we're involved somehow.

But our principal claim in the United States is that the music industry has colluded, and been anti-competitive, and breached many anti-trust legislation issues in the United States, and those are the complaints we generally have. In Australia, the legal system is far more discretionary than it is in the US so typically judges can make calls, and we've discovered lots of technical issues that've been used to attack us here in Australia which would not normally be available in the US to a plaintiff. So the Anton Piller order [the court issued for the raids], not available in the US, you just wouldn't be able to issue an Anton Piller order against a non-party, and Altnet is and has been a non-party to litigation here in Australia. We were a respondent on the Anton Piller order that was issued against Sharman and LEF (Sharman's parent company), and the judge failed in his ruling to recognise that we were actually not even a party to the litigation, and that's one of the claims we're making in the appeal. Unfortunately we found ourselves in a very difficult position because whilst we weren't a respondent on the Anton Piller order, we had no technical right of appeal under Australian legislation.

So we'll fight that litigation, we'll continue to fight that litigation... we've been outlawyered here in Australia and people like [Music Industry Piracy Investigations boss] Michael Speck are, you know, very smart and very good ... players. You know he is an undercover cop who's been on the drugs squad and various other [groups], making charges for criminal offences and I think he's very good at what he does. But in time we will get through the justice system and the right bench of judges will sit in that position and make a determination.

What did those raids on your premises here in Australia involve?

Well I was off to a meeting when my wife called me to say five attorneys, or five people in suits standing at the front door, were delivering a box of stuff. There was [sic] three attorneys and one forensic guy and one investigator and it was just a very intimidating experience. I refused to let them into my house, and at the same time that I was being raided the offices of Brilliant Digital were being raided so I arranged for attorneys to be present and we refused to give them entry ... and eventually we decided that they needed to call a judge because we weren't parties to the litigation and really didn't think that we should be raided, at all.

So we went to the judge and the judge unfortunately reversed the ruling but narrowed it down to the time-frame and specific types of data they were able to get and the way in which they were able to get that data and we complied. The data now lives in my attorneys' offices and not in their attorneys' offices and it's all the subject of an appeal.

What's your advice for the music industry in solving this dispute?

The same advice that I've been giving for almost two years now and the very reason that I started Altnet. You can't fight technology, OK? There is just no way to fight the progression of technology. If you believe that you can slow the progression down through the process of litigation to defend your own business assets and your terrestrial distribution, your old models, then you may be able to make life very uncomfortable for a lot of people but in the end you'll fail miserably. The only way to truly embrace the change that's occurring is to understand it, learn about it, and significantly advantage from it in much the same way as you advantage from long-playing albums, singles, CDs, videos, DVDs and all the other technologies that've come since the establishment of the music business.

And unfortunately there are many many marketing reps, A&R [artist and repertoire] people, business executives, CEOs in the music industry that I've seen in the last two years; they get it. A lot of people get it. A lot of people are excited about it, a lot of people are willing to move forward with deals, but the word from the top of Hollywood is there's a big red light which passes through all of the litigators, all of the litigation parties involved, all of the internal litigation experts at the major corporate levels in Universal, BMG, Sony, Warner, etcetera etcetera and the reality is because they are effectively trying to stop and slow down progression of technologies like peer-to-peer and the adoption of technologies like peer-to-peer...

Aren't those same companies also working with DivX to license their technology to introduce their own download options?

DivX deals with Apple, they deal with all sorts of parties. I mean they bought Overpeer. They're doing deals with spoofing organisations, they're doing deals with all sorts of organisations. They are doing everything in their power to stop this thing going. Everything they can do.

This is a concept of super-distribution. It's about getting any content anywhere and any time, and they just know that their businesses are in trouble.

In saying that though, obviously through the KaZaA application, there's copyright infringed on a fairly wide scale every day.

Well in Canada it's no longer copyright infringement, is it?

No, but is your company, or would you be in favour of Sharman Networks working with law enforcement agencies, MIPI, etc., to identify copyright infringement on that KaZaA/Altnet service?

Well I can't answer for KaZaA or Sharman. They have to answer for themselves in terms of what they want to do and how they want to do it. I've worked very very hard for two years, OK, very very hard. I've spoken to the most senior executives in Hollywood and the music industry. I've spoken to the largest shareholders in Hollywood and the music industry. I've put out every single possible branch there is to put out. I mean we've extended it over and over again. We've put out letters. I was the first guy, when I met Janis and Niklas, to go and meet the RIAA [Recording Industry Association of America]. They flew in from Washington, I set that meeting up. I put them in front of Gordie Crawford, who's the biggest shareholder in Hollywood, all the major studios. I extended every opportunity to get some kind of a deal done.

I don't think anybody intends to work with MIPI, ARIA or the RIAA until such stage that their members begin to work with us. There are ways to resolve this on a commercial basis, it doesn't need the litigation that's currently going on, it never did and it didn't need it in the first instance. The litigation is there to control us. And while it exists there is no way I am going to make a decision to support them, as long as they're suing me.

But it would save you the legal hassle and be a very socially responsible act-

[interrupts] If they are prepared to drop their litigation and enter into a business deal with me, I'm sure that I'll be able to use my influences to work with people like KaZaA and Grokster and eDonkey and others to create a more commercially sustainable business model. That's all I can offer.

That said, what is the incentive for them to do business with you? Their music is already there on those services, what's the incentive to license content to Altnet when it's already there for free?

Every time somebody licenses a music file from an application like KaZaA in that GUI, that's a music file that was not taken for free. Recently there was a Harvard study that just came out that, through unbiased research, nobody paid these guys at Harvard to go and make this research happen, but intuitively it's the thing that we've always believed is that in actual fact, whilst according to the law in certain countries, although copyright infringement may be taking place, what is the economic damage to the industry? And Harvard proved that the economic damage was zero. In actual fact, they believe that there was economic support for file sharing. Meaning that CD sales were beginning to rise, because artists were getting better, songs were getting better, people were buying albums and that's evident in Australian figures that the Sydney Morning Herald published, [that on] 2002 figures, album sales were up, in record numbers.

I'm not justifying the behaviour of individuals around the world in any way whatsoever. Certainly in Canada today, it's justified [by law], but in other countries around the world, you may be breaking the law. There's lots of content on there that artists put out, MP3 files all day long, for free, and gladly have their content distributed and listened to. So there's a myriad of content types, a myriad of geographical/territorial issues and a much more complex bowl of legal spaghetti that is extremely confusing as to who is responsible for working all of this out. When reality, and the only offer that Altnet's ever been able to make, is one that presents users the opportunity of buying music, in those interfaces where they're sharing music, to benefit from the technologies they're using to share music, and to actually improve the offer that's being made to those users so that they will be more and more incentivised to buy music.

We put together Altnet peer points manager which is a function of KaZaA. KaZaA distribute it still to this very day; it's a loyalty program. The more Altnet files you share the more points you earn, the more Altnet files you upload to other users, the more points you earn. If the music industry had taken one tenth of the amount of money that they've spent on litigation and devoted it to the loyalty points program that would end up in the hands of end users, there would be a massive shift, a behavioural shift, by users that are targeted by this loyalty program, to share the files that the music industry want users to share. We built this right up front, we deployed this in expectation that the labels would plan it and come onboard, we presented it. Many many executives said they would support it, and when they turned around to their litigation experts internally to move forward with deals with us, contracts with Altnet, those contracts came to a grinding halt. They were killed, there was absolutely no progress at all in the major industry studios because of litigation.

Recently the record industry started suing individual users. Do you see that as a more appropriate course of action than suing companies like yourself?

I think that that is a more appropriate course of action. I think in the end the users are the ones that make the choices and make the decisions about which content they use. Do I agree with it? Technically yes I agree with it. There's no way I can say that I don't agree, if the law's the law, you can apply the law in a certain way, but don't blame Smith and Wesson for making a gun. They have a right to make a gun.

So the point is individual users have got to be more conscious of these issues and they are more conscious of these issues, of course legislation will change as it did in Canada and that will cause a change. Is downloading illegal is uploading illegal, what is it? What can you do?

In the end I think this is a shifting landscape. I think that the approach of the entire industry is one designed to protect their existing interests.

Altnet's future plans Back to top

You're an ex-game man, having been at Sega. I know a big thing with Altnet is the delivery of games. How has the reaction of the gaming industry been compared to the reaction of the music industry?

Better. There's no doubt that we're seeing, I mean we have games from Eidos and from Atari and from major game companies and we're in discussions with Activision and others, so we've done deals with the major gaming companies as opposed to the music industry where we haven't done deals with the major companies.

[What about] charge cards?

We're working on various deals in the US right now. For example the biggest single focus that we have is pre-paid telephone cards. What we're intending to do is link up with various pre-paid telephone providers who will enable their cards to be used for the purchase of online content. So when you come on and you get a song and the window pops up and you put your card number in and your PIN number from your card and then basically you'll link back to from Altnet's gateway to the card provider cleared the fact that you have available credit on that card then authorise the transaction.

How about [telecommunications deals] in Australia?

Haven't started those discussions yet.

Given that you're going to have pre-existing relationships with the telecommunication guys, can you see yourself moving into direct-to-phone download services?

Very much so. That's my favourite subject. We've actually tested it and built the technologies for it. We've built in phone technologies as well. So essentially what happens is you can bill across from your download to your phone, or direct the download itself to the phone. That for me is the best, most convenient business model for anybody to realise.

Note: This transcript has been edited for brevity and clarity.

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