While users housing content on the troubled Megaupload site were given a two-week reprieve, one of its co-founders is having less luck. Kim Dotcom has lost his appeal for bail, with prosecutors fearing that he would flee from New Zealand and return to his native Germany, possibly making him safe from extradition. According to the BBC, the prosecution alleged that Dotcom -- formerly Kim Schmitz -- had multiple passports and bank accounts, and "a history of fleeing criminal charges." His next court appearance his scheduled for February 22nd.

Megaupload co-founder's bail appeal rejected originally appeared on Engadget on Fri, 03 Feb 2012 09:21:00 EDT. Please see our terms for use of feeds.

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Today, Megaupload founder Kim Dotcom appeared at New Zealand’s High Court to continue his fight against extradition to the United States on copyright infringement, racketeering and money laundering charges.

Dotcom has been held in custody since dozens of police raided his Coatesville mansion last month following a lengthy FBI investigation.

During the day-long hearing before Justice Asher, Dotcom’s lawyer, Paul Davison QC, appealed a decision by Judge McNaughton in the Auckland District Court last week which denied the 38-year-old German national bail.

Judge McNaughton had concluded that with all his resources, Dotcom posed a “significant” flight risk.

The defense said that Dotcom has several health-related conditions – one of which is thought to be diabetes – which cannot be properly dealt in prison, adding that the Megaupload founder wanted to be able to spend time with his wife who is currently carrying twins.

Just because Dotcom had access to a helicopter and private jet, Davison added, it did not follow that he would seek to use them to flee the country.

When it was Dotcom’s turn to take the stand he told the Court that during his high-profile arrest last month, police had assaulted him after finding him in a secure panic-room known as the “Red Room”.

“I was punched in the face, I was kicked down on the floor,” Dotcom said. “One guy was standing on my hand so my nail was ruptured and my hand was bleeding, it was quite aggressive.”

Dotcom also told of how that during his time in prison he had received “funny visits”, phone calls and contacts from people he had never heard of including a succession of women wanting to be his friend.

One unsolicited telephone call claimed he was a prosecutor who in return for receiving some money would help Dotcom get bail

“I immediately said ‘absolutely not’ and I gave the number to the officer,” Dotcom said.

Another, the court was told, was said to be an expert document forger.

“If people were to approach me and to offer such a service, I would tell them to go to hell,” Dotcom said. “I have no desire to run away.”

But lawyer for the United States government, Anne Toohey, said that the chances of the New Zealand resident fleeing were too high, a point on which the court eventually agreed.

Describing Dotcom as “an extreme flight risk”, Justice Asher again denied bail. Dotcom is set to appear in court again on February 22nd for an extradition hearing.

Source: Megaupload Founder Accuses Police of Assault, Denied Bail Again

“Hong Kong, what an awesome place to do business and to host my new phantom persona,” Megaupload founder Kim Dotcom wrote here on TorrentFreak last December.

“I should write a book about doing business in Hong Kong, that’s how good it is. People there leave you alone and they are happy for your success,” he added.

But leaving him alone wasn’t on the agenda of the Hong Kong authorities. In a triumphant January statement they revealed how they had worked with the U.S. Department of Justice and the FBI to “smash a transnational cyberlocker syndicate” – aka Megaupload.

The commitment from Hong Kong Customs was significant. Not only did they invest a year’s worth of investigative manpower, but also supplied 100 officers from their various copyright enforcement divisions to carry out raids on the company.

According to an FT report, authorities there are set to go even further. Later this year, Hong Kong Customs will set up an “electronic crime investigation” center after being called on by media companies to pay closer attention to other cyberlocker-type services operating locally.

Mega Headquarters in Kong Kong

The announcement is likely to further unsettle several other file-hosting services that have a presence in the territory such as Filesonic.com, Uploading.com, Uploaded.to, zshare.net, Filepost.com and Hulkshare.com.

Just a couple of days after the Megaupload raids, Filesonic – one of the top 10 file-sharing sites on the Internet – reacted by disabling all 3rd party sharing.

Like Megaupload before it, Filesonic blocks all local IP addresses, presumably in an attempt to avoid local difficulties. But although there is no suggestion that Filesonic has done anything wrong, this type of blockade alone will not ensure it has a quiet life.

Hong Kong authorities described the motivation behind Megaupload’s IP block as “a bid to hinder investigation by law enforcement agencies.” Filesonic told FT that they have “a zero tolerance” approach to piracy.

Uploaded.to, another site with Hong Kong links, reacted to the Megaupload raids by blocking all visitors from the United States. Others have disabled their affiliate programs or taken other measures.

“Targeting the organized and transnational nature of IP infringing activities in the wake of technology development, the Hong Kong Customs will continue to monitor the situation and co-operate with the IPR industry and overseas law enforcement agencies so as to suppress infringing activities effectively,” HK Customs said in a statement.

Whether Customs will follow-up with further action remains to be seen, but in the meantime an Eastern chill is certainly blowing through cyberlocker land.

Source: Megaupload: Hong Kong Mulls Copyright Crackdown

Megaupload's digital doors may have been closed due to the presence of pirated materials, but there's still the matter of all that legal content residing on its servers. Naturally, folks want their files back, but now that the government's gotten what it needs, the hosting companies no longer need to keep the data around because Megaupload's no longer paying them to do so. Carpathia Hosting and Cogent Communications, however, have decided to preserve the data for another two weeks while a deal is brokered with the DOJ for its release. In the meantime, the Electronic Frontier Foundation (EFF) has teamed up with Carpathia to create a website that puts folks in touch with EFF attorneys so users can try to retrieve their data. No word as to what legal wrangling the EFF can do to make it happen, but those affected can get the wheels of justice started at the source below.

Megaupload users' data to be kept another two weeks, EFF to help folks retrieve it originally appeared on Engadget on Tue, 31 Jan 2012 21:19:00 EDT. Please see our terms for use of feeds.

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As previously reported, the Megaupload shutdown sent shockwaves right around the world and prompted a huge rethink by many cyberlocker file-hosting services.

The Megaupload indictment focused on several issues including alleged payments of cash rewards to known uploaders of infringing material. This prompted some rival services to cancel their affiliate/reward programs altogether and even end 3rd party downloads (Note: Fileserve have since re-enabled sharing).

Last week, TorrentFreak noted that traffic to many rival sites had increased following Megaupload’s demise – including sites like RapidShare that have no rewards program.

Today, however, German anti-piracy outfit GVU said that sites that have removed their rewards programs are now on a downward trend, while those that have maintained them are doing better than ever before.

GVU, which carried out the investigation preceding the record-setting raids on Kino.to last year, note that some linking sites are now removing links to sites that have no rewards programs and replacing them with those that do. The existence of rewards, the group suggests, means that more content is posted, ensuring traffic – and revenue – for both the linking sites and cyberlockers.

While it is fair to say that in some instances the existence of rewards can encourage infringement, GVU are now using this background to call for a review of cyberlocker and hosting provider liability, and are calling for a “reverse burden of proof” to be applied.

“In Germany, Service Providers are (at first) not liable for copyright infringements in content which is uploaded by third persons,” Otto Freiherr Grote of the Wilde Beuger & Solmecke law firm told TorrentFreak this morning.

“But the GVU now demands a reversal of this principle, at least for those filehosters which reward uploaders for uploading very popular files,” Grote adds.

GVU Director Dr. Matthias Leonardy says that while there is authorized content being stored and delivered by hosting services, much of the mass volume consists of unauthorized movies, TV shows and games, and it is this content that draws the bulk of the traffic and generates the revenue.

“Therefore, a file hosting provider must be aware that it promotes this through commission payments to those uploading pirated copies,” Leonardy notes.

On this basis, what Leonardy wants is a review of liability for those file-hosting services offering rewards programs.

It should not be the responsibility of rightsholders and authorities to show that such programs are being abused by infringers [such as is being claimed in the Megaupload indictment], Leornardy says, but the opposite – cyberlockers should be forced to prove that their businesses aren’t based on piracy in order to avoid liability. How this can be achieved remains to be seen.

The German legal system is no stranger to these apparent reverse burdens of proof when it comes to file-sharing cases. Domestic Internet users are responsible for infringements that happened via their accounts, whether they carried them out or not.

Source: Cyberlocker Burden of Proof Should Be Reversed, Anti-Piracy Group Says

In the wake of the MegaUpload shutdown many of the site’s users have complained about the personal files that were lost as collateral damage.

From work-related data to personal photos, the raid disabled access to hundreds of thousands, perhaps millions, of files that are clearly not infringing. A recent announcement by the US Attorney now suggests that these files may soon be lost forever.

“We received a letter very late Friday from the US Attorney that declared there could be an imminent destruction of Megaupload consumer data files on this coming Thursday,” MegaUpload lawyer Ira Rothken told TorrentFreak.

Rothken explains that MegaUpload is determined to protect the interests of its users, but that its hands are tied without help from the authorities. The looming data loss is linked to unpaid bills at Cogent Communications and Carpathia Hosting where MegaUpload leased some of its servers.

“We of course would like to think the United States and Megaupload would both be united in trying to avoid such a consumer protection calamity whereby innocent consumers could permanently lose access to everything from word processing files to family photos and many other things that could never practically be considered infringing,” the lawyer told TorrentFreak.

“Megaupload’s assets were frozen by the United States. Mega needs funds unfrozen to pay for bandwidth, hosting, and systems administration in order to allow consumers to get access to their data stored in the Mega cloud and to back up the same for safekeeping.”

MegaUpload has contacted the US Attorney’s office with a request to unfreeze assets including money and domains so users can get access to their personal data. If this doesn’t happen, the consequences for many MegaUpload users and the future of other cloud hosting services will be disastrous.

“If the United States fails at helping protect and restore Megaupload consumer data in an expedient fashion, it will have a chilling effect on cloud computing in the United States and worldwide. It is one thing to bring a claim for copyright infringement it is another thing to take down an entire cloud storage service in Megaupload that has substantial non infringing uses as a matter of law,” Rothken told us.

Meanwhile, MegaUpload users are also taking action themselves. Last week Pirate parties worldwide began making a list of all the people affected by the raids, and they are planning to file a complaint against authorities in the US. The EFF has also taken an interest in the issue, and is sharing data with the international Pirate parties.

For now, however, the more urgent matter is to ensure that the data doesn’t get destroyed.

Update: The data is safe for two more weeks, at least.

Update: Carpathia Hosting sent us the following statement.

“In reference to the letter filed by the U.S. Department of Justice with the Eastern District of Virginia on Jan. 27, 2012, Carpathia Hosting does not have, and has never had, access to the content on MegaUpload servers and has no mechanism for returning any content residing on such servers to MegaUpload’s customers. The reference to the Feb. 2, 2012 date in the Department of Justice letter for the deletion of content is not based on any information provided by Carpathia to the U.S. Government. We would recommend that anyone who believes that they have content on MegaUpload servers contact MegaUpload. Please do not contact Carpathia Hosting.”

Source: MegaUpload User Data Soon to be Destroyed

Despite its “rogue site” status and various other warnings, when MegaUpload went down last week it still came as a shock.

But what came next was unprecedented, a dramatic reaction in cyberlocker land that took out vast libraries of digital content and capacity. The perception of the established ground rules had been changed, without the passing of a single new law.

FBI, arrests by huge numbers of police, enormous cash and asset seizures overseas, reward program scrutiny, knowledge of payouts to persistent uploaders of infringing content. Extradition. These are things that changed the game.

“If the US government can come for Kim Dotcom it can happen to almost anyone,” a file-hosting operator told TorrentFreak on condition of anonymity. “I’m trying to think of everything I did possibly wrong in the last 3 years and worrying about that and the next 3 years also, if we even have that long.”

For many hosting sites it was time to react – quickly.

Earlier this week we documented the drastic actions taken by services such as Filesonic and Fileserve who shut down all 3rd party sharing and, like many others, closed down their affiliate payout programs. Later we showed how file-hosting competitors such as 4shared, Rapidshare and Hotfile had grown as users hunted for spare capacity.

In the space of a week and the MegaUpload shutdown aside, huge libraries of both legitimate and pirated material were wiped out as filehost after filehost deleted an impossible-to-calculate number of files and closed down thousands of suspected infringing accounts.

And this is where it gets quite interesting.

For more than half a decade Hollywood and the recording industry have spent millions of dollars not so much on actually eliminating illegal content, but getting rid of links to content such as those found on BitTorrent.

But this week, without a single cease and desist being sent, cyberlockers across the globe not only self-deleted vast quantities of files, but in doing so made millions of links across thousands of ‘linking sites’ completely useless too.

For the operators of these linking sites and their uploaders, this week has been very hard work indeed. For some sites it was all too much and the shutters have simply come down.

The problem, it seems, is money. While there is money to be made in torrent sites, the content sharers there are largely altruistic. The cyberlocker scene is more complex and incestuous, with revenue being generated in a handful of basic ways on both legal and illegal content.

Through reward programs, uploaders get paid on the number of times people subsequently download content. Equally, ‘release’ sites can upload the content themselves and get paid like a regular uploader when people download. Reward programs are important for cyberlockers too since they attract customers away from competitors and also give them an incentive to supply content.

Release sites and warez forums send users to cyberlockers to get content and when they get there they are faced with a choice. Download a little, relatively slowly but for free, or pay for a premium account and get lots as quickly as possible. In many cases choosing the first option means that cyberlockers also make more money from advertising.

When various sites shut their rewards programs this week, those uploading purely for the money were hit hard. In fact, many who had cash mounting up in their accounts lost it all – some cyberlockers simply kept the accrued money. While the ‘victims’ were livid, those who hate financially motivated ‘sharing’ commented that justice had been served.

But while it’s clear that some uploaders, often young and in less well-off countries, are ‘sharing’ small time for a few bucks, for some the reward payouts are more important. For many release sites, those rewards pay the server bills.

“We needed the payout and when [filehost name redacted on request] shut down sharing we were all but finished,” one admin of a release site told TorrentFreak. “90% of our content was hosted there. Then they deleted all our files and closed the account. They won’t even speak with us about it. A whole year’s work gone. We shut at the end of the month.”

But like worker ants whose nest has just been smashed apart by angry humans, others are utterly unfazed and just want to know which hosts are still paying out. Despite the climate of fear, quite a few hosts say they are and it’s evident from the links being posted on release blogs that the upload-for-cash crew have noticed them quickly.

Things, however, are still in a state of flux. Some of the filehosts still paying out appear to be offering tiered reward systems with just about every country in the world getting a reasonable deal but with the United States right at the very bottom.

Another interesting rumor, which at the time of writing we have been unable to confirm, is that one of the filehosts who banned 3rd party downloads earlier this week is now re-enabling them. This is something to look out for. Without 3rd party links being operational users are extremely unlikely to sign up for a premium account and this is where the cyberlockers can make good money.

So finally, one has to ask whether the MegaUpload shutdown has damaged the Internet piracy infrastructure. Providing an answer is not easy.

The amount of material coming online has not really reduced – content feeding from ‘The Scene’ is business as usual. Torrent sites are watching on closely, but the public ones tend not to host content, their users do. Cyberlockers are in a mess, but already recovering. Release sites are continuing, albeit with a reduced number of multiple links to the same content.

Perhaps the best test is whether it’s now very hard or impossible to find and download popular content. Not even close.

Source: Mega Aftermath: Upheaval In Pirate Warez Land

Yesterday morning, Kim Dotcom had his application for bail denied at the North Shore District Court in New Zealand.

Judge David McNaughton said that the scale of the charges against the MegaUpload founder combined with his significant resources meant that there was a significant risk he could flee, possibly to his birthplace, Germany.

In a later hearing at the same location, lawyer Guy Foley argued that Dotcom’s alleged co-conspirators – Bram van der Kolk, 29, Finn Batato, 38, and Mathias Ortmann, 40 – are of good character and deserved bail.

This morning Judge McNaughton handed down his decision. He granted bail to both Dutch national Bram van der Kolk and Finn Batato from Germany, but denied bail to Ortmann due to financial concerns.

According to Stuff, the FBI’s records show that Ortmann made around $14.5 million from the company between 2005 and 2010, and an additional $3 million in 2011. His accounts, however, show $20.2 million, some $3.5 million more. Ortmann’s lawyer has until tomorrow to come up with an explanation.

Yesterday, Guy Foley described programmer and networking expert Bram van der Kolk as a family man and today his wife Asia expressed relief that he would be coming home.

“I’m just glad my husband is going to be able to play with our baby again,” she said.

Although the Judge granted the pair bail, he ordered them detained for a further week so that their homes could be assessed for surveillance equipment suitability. It’s becoming ever more clear that being monitored is nothing new for these MegaUpload employees.

The US Department of Justice’s indictment showed that the operators of MegaUpload had been subjected to monitoring over the past several years, but a piece of evidence presented in court yesterday revealed not only how far back, but just how deep that surveillance went.

Documents produced by the FBI reportedly show the details of a 2007 Skype conversation between Bram van der Kolk and Mathias Ortmann where they mulled a situation where Kim Dotcom might run off with “the money”.

Although no context was provided by the FBI, Van der Kolk allegedly described the situation with Dotcom more than 4 years ago as “a bit risky” but with Ortmann offering assurances that since Dotcom was “operationally dependent” on the pair he could not “sneak away with the money.”

“What if the shit really hits the fan? Would he take the last little bit of money and take off? He’s good at that,” Van der Kolk replied.

“True,” said Ortmann, “But with his spending nowadays he will attempt to get the shit off the fan, and that’s what he needs us for.”

Dotcom will remain in custody until at least 22nd February.

Source: Two MegaUpload Ops Bailed, But Government Wants Surveillance

Following the dramatic events of the previous 24 hours, last Friday the founder of MegaUpload, Kim Dotcom, was denied bail in an extradition hearing in New Zealand.

Dotcom, who along with several of his employees was raided by armed police in helicopters the day before, is wanted in the United States on racketeering, copyright infringement and money laundering charges.

The hearing was adjourned until Monday this week with Judge David McNaughton delivering his decision this morning at the North Shore District Court.

Noting the scale of the charges against Dotcom and his considerable resources, Judge McNaughton said he that he had no doubt that fleeing New Zealand could be real possibility for the MegaUpload founder.

Judge McNaughton said that if Dotcom could somehow make his way to his birthplace of Germany, extradition would prove impossible since the country has no such agreement with the United States.

Essentially agreeing with prosecutor Anne Toohey, who had described Dotcom as a “significant” flight risk, Judge McNaughton denied the 38-year-old bail and remanded him in custody until 22nd February.

Dotcom’s lawyer, Paul Davison, QC, said that decision would be immediately appealed to the High Court.

“We were hopeful that the judge would accept our intentions and our arguments and see that there was no risk whatsoever of Kim Dotcom seeking to leave New Zealand.

“All of his assets have been frozen, all of his resources have been taken,” he said as he left court today.

“He’s living here with his wife and family, he has no intention whatsoever of endeavoring to leave New Zealand.”

Also appearing in Court today were Dotcom’s alleged co-conspirators Bram van der Kolk, 29, Finn Batato, 38, and Mathias Ortmann, 40.

In a hearing following Mr Dotcom’s, the lawyer representing the three men, Guy Foley, said his clients did not enjoy the same resources as the MegaUpload founder. Foley said that in the absence of a guilty verdict there should be a presumption of innocence.

He described Batato, as a “fair player” who denies involvement in the alleged conspiracy. Prosecutor Anne Toohey described Batato as a series flight risk who, in common with Dotcom, could seek to flee to Germany.

In defense of der Kolk, Foley described him as a family man who had a wife and child in New Zealand. He added that it was troubling that in evidence submitted to the court the FBI had supplied a photograph of someone else.

Ortmann, said Foley, is “decent, modest, honest and reliable” man who would not flee. Prosecutor Toohey said as a German national, fleeing there was a real possibility.

The decision on whether to grant bail to der Kolk, Batato and Ortmann will be delivered tomorrow.

Source: MegaUpload Founder Again Denied Bail, High Court Appeal Launched

Strictly speaking, the top five pirated films of the year were Fast Five, The Hangover II, Thor, Source Code, and I am Number Four. It’s not a ‘best of’ list, exactly, but that’s a different story.

Even most opponents of SOPA/PIPA maintain a common front on this issue: the foreign thief must be stopped. Chris Dodd is right about this: the only public debate is about how.

For the past few years, Kim Dotcom (nee Schmitz) has been the MPAA’s go-to example of the foreign thief. Dotcom is a flamboyant hacker/entrepreneur with a fraud conviction, a penchant for fake names, and a fortune built, like many new media fortunes, in the grey areas of IP law. Megaupload was one of the first cloud storage or ‘cyberlocker’ services, and is routinely ranked in the global top 50 in traffic. There is little doubt that it hosted a lot of infringing media. There is doubt about the extent to which Megaupload encouraged this, and how that affects their liability for infringement.

The Megaupload case has important legal implications. Mike Masnick has a very good rundown, but let’s focus on two. The case will certainly challenge the scope of the “safe harbor” from liability afforded online storage providers—a very important issue in an era of cheap, ubiquitous cloud services. It will also be a front in the government’s (and, more particularly, MPAA’s) push to shift from an ex post model of enforcement, involving notification and takedown requests when infringing content is identified, to an ex ante model based on the surveillance and filtering of user activity.

If this sounds familiar, it’s because it is also fundamentally at stake in SOPA, and raises all the same censorship and free speech issues. Holding Megaupload liable for failing to monitor and filter user activity for infringement, for example, would compel monitoring across a wide range of web services, from search to social media. And that would mark a very fundamental shift in the freedoms associated with the Internet. SOPA and the Megaupload case are part of this long game.

The Megaupload indictment is also a public effort to cast a villain in the file sharing story: to prove that someone, other than consumers, benefits from piracy. Kim Dotcom’s arrest—with all of his luxury cars on prominent display—is about making the case not only for abstract losses to industry but also theft from industry. We’ve repeatedly taken issue with the industry calculation of losses, most of which are fictional. But let’s ask the narrower question. Who is the foreign thief, and how much is he stealing?

As usual when talking about piracy, there are lots of claims but very few hard numbers. The revenue estimates that do circulate in file sharing cases are notable, however, for their miniscule size compared to the 10s or, occasionally, 100s of billions in losses claimed by industry groups. Here are a few examples…

• The Swedish trial of The Pirate Bay trial in 2009 became an occasion for all sorts of competing estimates of revenues. Record industry group IFPI estimated the site’s revenues at $3 million per year. The MPAA described $5 million in revenues. But prosecutors endorsed a much lower number: $170,000 from advertising (against what the defense characterized as $112,000/year in server/bandwidth costs and $100,000 per year in revenue). This is for a site that appears consistently among the top 100 visited sites in the world.
• NinjaVideo, a Brooklyn-based movie indexing site whose owners were arrested in 2011, was alleged by prosecutors to have made $500,000 in 2½ years. After the site began to make money, the four administrators split the revenue, netting around $33,000/year each after expenses. Hana Beshara, the site’s primary owner, was sentenced to 22 months in prison under the US No Electronic Theft (NET) Act.
• Brian McCarthy, the owner of Channelsurfing.net, a Texas-based sports streaming site, was alleged by prosecutors to have made $90,000 over five years. He also faces jail time and fines under the NET Act.
• Immigrations and Customs Enforcement (ICE) made some partial revenue estimates for targets of its 2010 domain name seizure program, Operation In Our Sites, based on information from advertising network Valueclick. According to ICE investigators, Torrentfinder, a BitTorrent site, made about $15,000 in ad revenue from Valueclick over a year in 2008-2009. Onsmash, a music link site, made around $2,500 in 2009-2010.

The ICE numbers aren’t complete accounts, but they met the traditional definition of “commercial” copyright infringement that justified the criminal charge (US District Court Case # 10-2822). What they don’t do is describe a very lucrative or, in any other respects, criminal business.

This is a point we’ve made repeatedly regarding the incentives for criminal involvement in piracy. We see little evidence that there’s much money to be made from it—especially as the costs of setting up and running such sites decline. It’s very likely that the larger sites generate significant revenues from advertising—indeed even in the torrent admin community (see below) it’s assumed that the handful of top sites generate six and even seven-figure revenues annually. But at any given time there are only a few such sites. And even accepting the IFPI estimates, it’s chickenfeed. The top 5 pirated films, for comparison made $2 billion last year. The (non-overlapping) top 5 grossing movies made nearly $5 billion. Piracy generates an overwhelmingly consumer, not criminal, surplus.

It’s easy to see how Kim Dotcom got rich by being an early entrant in the cloud storage market, in the only part of the business that required a lot of large file transfers. (Much the same is true of broadband adoption, for which piracy has always been the early killer app—especially outside the US where legal web services are still underdeveloped.)

As a subscription business selling a scarce commodity, Megaupload’s revenues were many times larger than the largest torrent or link sites. In 2010, execs at Paramount Pictures estimated (in testimony to Congress) its profits at between $41 million and $300 million per year, with the range reflecting different assumptions about its subscription rate. The Justice Department’s recent indictment put the number below the low end of the range—committing to only $175 million in total revenues since 2005–under $30 million/year–and reflecting a roughly 7-1 split between subscriptions and advertising. There are no estimates of how much of this came from legal sources.

In contrast, it’s hard to see how this model remains lucrative. Storage costs are falling rapidly, and there are no barriers to entry or significant network effects. For a comparable market, look to the highly competitive web hosting business rather than search engines or operating systems, which have more characteristics of natural monopolies. Many companies–including Megaupload–already give large amounts of storage away. Many compete for “premium” users, either with inducements or bundling with other services.

The sum of Megaupload’s activities may well satisfy a court that it encouraged large-scale copyright infringement, and therefore should be held liable. But Megaupload’s survival is not the main concern: it’s what happens when all storage is mirrored in the cloud. It’s whether we’ll monitor and police the core features of the web: storage, linking, and search.

The Torrent Admins Survey

Now that the nerds have (provisionally) won the argument that DNS blocking could break the Internet, attention will turn to “follow the money” enforcement strategies—especially those targeting advertising and payment systems. We might ask, in this context, what “follow the money” looks like in a sector where there are few barriers to entry and costs are falling toward zero?

To find out more, we prepared a short survey of torrent site administrators, which was circulated through torrent admin lists and IRC channels by some trusted intermediaries. We received 11 responses to our survey—most of them anonymous; most of them ‘vouched for’ by our partners; and most of them anonymized through various services. We neither asked for nor received identifying information. This is, in other words, a small sample with some big caveats (such as selection bias). Nonetheless, the responses tell an interesting story.

Responses came from a pretty wide spectrum of sites, including:

• 2 that receive over 10 million visits per month
• 2 that receive 2-10 million visits per month
• 2 that receive 500,000 – 2 million visits per month
• 2 that receive 25,000-100,000 visits per month
• 2 that receive less than 25,000 visits per month.
• 1 that did not specify traffic

To provide some reference points, the two current largest torrent sites—the Pirate Bay and Torrentz—receive roughly 88 million visits/month and 46 million visits/month respectively (according to Google Adwords. There are claims that this significantly undershoots traffic on those sites.) Although cyberlocker sites like Megaupload and Mediafire now outdraw torrent sites by a wide margin, the latter remain a good indicator of the cost structure—and costs of entry—of large scale file sharing. BitTorrent is now a thoroughly commoditized technology, running on low cost hardware with freely available software. Cyberlockers are slightly further behind.

How much does running a torrent site cost? The largest site in our survey, with over 10 million visits per month, was also the most expensive. It reported server and bandwidth costs of $25,000-$30,000 per year. Most of the sites operate on less than $10,000 per year. A couple of the smaller ones were under $3,000.

How much money do these sites make, and how? Of the eleven responses, only the largest site used advertising. It reported a roughly break-even operation, with costs covered in most months by advertising. The other ten do not use advertising. These are typically the smaller, private trackers that require invitations to join—a category that nonetheless reaches into the millions of visits per month.

Eight indicated that they meet the majority of their expenses through member donations. Only one indicated that it fully met expenses this way. Only one earned additional income through affiliate links. The balance typically comes out of the pockets of the site administrators.

Although we received less information on staffing, several indicated that they operated entirely with volunteer labor—in a couple cases involving communities of a dozen or more administrators. This is the norm among smaller, private sites.

The picture that emerges from the survey is one of financially fragile but low cost operations, dependent on volunteer labor, subsidized by users and founders, and characterized by a strong sense of mission to make work more widely available within fan communities. Few such sites make or seek to make money. Many are specialized communities exchanging media of particular types, genres, or languages. A site like NinjaVideo began this way, but grew into a larger, revenue-making operation.

Rights holder pressure on payment systems is not new, but it has been ad hoc. Credit card companies were enlisted in the mid 2000s, when the record industry group IFPI waged war against the (nominally legal) Russian pay-download site AllofMP3. Industry threats against safe harbor provisions for payment providers played an important role in this process. No payment provider wants to tangle with industry lawyers on behalf of an accused infringing site, even if there is no legal basis for cutting off service. Few accused sites are able to lawyer up to respond. Strict legality doesn’t make much difference in such contexts. One site administrator showed us a letter from a payment provider terminating service based on a DMCA complaint—a law that makes no such provisions.

SOPA and PIPA legalize these strategies and make them much easier to use. Under SOPA, rights holders gain a strong right of “private action” that allows them to issue cut off letters directly to advertising services and payment systems. The latter must cut off service or face secondary liability for infringement. Under SOPA, moreover, neither the payment system nor the rights holder is liable for damages from any mistaken or overly broad actions. The “safe harbor,” under these circumstances, is repurposed to empower the complainant rather than the user.

Independent of the potential for collateral damage, SOPA and PIPA are best understood as collections of harassment measures for pirate sites, rather than any sort of “solution” to piracy. A loss of advertising revenue would harm some file sharing sites—especially the larger, more public sites that have grown into advertising-dependent commercial operations. The loss of primary payment systems such as PayPal would complicate life for the smaller torrent sites, but wouldn’t cut off revenues: there are many ways to manage the modest donation systems that keep these sites in business.

Some parts of the file sharing ecology, consequently would be vulnerable to payment system attacks. But the overall impact is likely to be low. Much of the file sharing ecology already operates at very low cost, on minimal revenue. Much of the labor is volunteer—with advertising and the “professionalization” of staff a matter of choice rather than necessity. And infrastructure costs are falling.

We talk about the efficacy of enforcement at some length in our Media Piracy report. Many readers have concluded that enforcement doesn’t work. But that isn’t what we say. We say, rather, that we’ve found no evidence that it has worked. The main factors shaping piracy are price, income, and the declining cost of technology–and that will remain the case. But it seems entirely possible that some impact can be bought at a high enough price. The numerous critiques of SOPA and PIPA provide a good idea of that price—a broken, arbitrary, copyright surveillance regime and an Internet culture reorganized around the established content providers.

The Commercial Scale Standard

In most national copyright laws, criminal law applies only to copyright infringement on a “commercial” scale. Traditionally, commercial scale referred not to the number of copies made, but to financial benefit derived from it. (Infringement that doesn’t meet the criminal standard can still be addressed through civil law, as tens of thousands of file sharers in the US and Europe have learned.) In the past 15 years, digital technologies made a mess of this distinction. When copying was capital intensive and required a factory, scale and profit went together. But in an era of ever cheaper copies and storage, the two are delinked. What to do, then, with the commercial standard?

The US response in the 1997 NET Act was to expand the definition of commercial infringement to include the unauthorized digital receipt of anything of value, subject to an exemption up to $1000. Without the for-profit requirement, the door opened—in theory—to criminal prosecution of a much wider array of participants in file sharing. The exchange of a bunch of albums or a few copies of software can easily qualify. In practice, the NET Act has been applied not to consumer-level sharing, but to intermediaries—initially members of mostly non-commercial “warez” groups engaged in cracking software, and more recently to marginally commercial intermediaries like Hana Beshara and Brian McCarthy. (The expanded criminal model is also being exported abroad without the de minimis exceptions, through trade agreements and new enforcement treaties like ACTA).

In our view, this is a bad way to resolve the confusion around the commercial standard. It dramatically expands criminal liability without any corresponding intention of enforcing it. Law enforcement, under such circumstances, becomes arbitrary and easily captured by private parties. Industry lobbying secures funding for enforcement agencies and enforcement agencies return the favor, turning to stakeholders for staffing, planning, and cost sharing. Personnel flows between the two, anchored in the understanding that government service is rewarded later in the private sector.

The US Attorney leading the Megaupload case, for example, is Neil MacBride, former head of enforcement for the Business Software Alliance. The Obama transition brought at least five RIAA lawyers to the Department of Justice. The Megaupload indictment, both in its tone and its kitchen sink approach to infringement, could have been written by the MPAA. The distinction has become a formality.

So what to do? As long as we have a culture organized around copyright, there should be ways to define and police violations of it. But our current definitions needs a rethink. There is ample reason to see unauthorized copying and file-sharing as inevitable in the digital era and more–as inextricable from the core features of general computing and the Internet. The law should recognize this because doing so protects the wider set of freedoms to express and innovate that build on those features. Both individuals and companies should be accorded wide latitude in their use. That said, there is no reason to defend piracy as a profit-making activity.

So one place to start might be to ditch the NET Act and SOPA and restore a narrower commercial scale standard for criminal infringement, along with a less draconian set of penalties for the times when it is invoked. Such a standard would make profit the trigger, and make that the basis for any follow-the-money actions against payment systems or advertisers. This bar could be set high enough to exempt the marginal member-subsidized torrent sites, since these are little more than group implementations of search, store, and link–the building blocks of the web. They cost little today and less tomorrow.

But the bar could also be low enough to encompass sites that start to generate a lot of money. Drawing such distinctions could help restore a useful middle ground—retaining a threshold for enforcement while rejecting both the universal liability envisioned in the Net Act and the universal surveillance implied in SOPA. It would better align the law with the actual capabilities of law enforcement to enforce, and thereby make enforcement less arbitrary. And it would help articulate a much wider zone of personal freedom to copy, based on a recognition of the wider importance of unhindered, unmonitored use the core capacities of the web.

A reinvigorated commercial standard won’t end piracy. Nothing short of a copyright surveillance state would, to any significant degree. But the commercial standard would help drive file sharing into the non-commercial economy, leaving more room for creative, legal, low-cost commercial alternatives. That’s not a sufficient definition of copyright reform, but it may be a necessary step if we’re to bring law into line with the basic economics of our digital culture. The law can’t eliminate piracy, but it can help make it irrelevant.

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Addendum: Regarding the monetary harm of Megaupload’s activities, the Justice Department characterized it, without explanation, as “well in excess of $500,000,000” since 2006. And although that number is probably meant to impress, it’s somewhat baffling. Even without a per annum breakdown, it comes nowhere near the annual piracy losses claimed by the major industry groups—whether the BSA’s $58 billion loss claims for software losses in 2010 or the “conservative” $26 billion estimate for movie, music, and software piracy from 2007, which lazy journalists still allow to circulate. This for the site that MPAA called “By all estimates… the largest and most active criminally operated website targeting creative content in the world.”

Since we’re using made up numbers here, let’s make up some more–and for the sake of argument, some extremely favorable ones for the Justice Department’s effort to paint Megaupload as the big bad. Posit that all $500 million in losses came in 2011. Posit the $26 billion loss number. Megaupload’s contribution to the pirate economy tops out at 2%.

Source: Meganomics: The Future of “Follow-the-Money” Copyright Enforcement