Kazaa Settles Up

And another one bites the dust.

Kazaa, once one of the titans of the illegal peer-to-peer (P2P) file-swapping business, reached an out-of-court settlement Thursday with the music industry.

Under the terms of the settlement, the Australian-based Kazaa agreed to pay a reported $100 million to the trade organizations representing the international music industry.

Kazaa, owned by Sharman Networks, also agreed to use filtering technology on its networks to prohibit future illegal file swapping.

“This is welcome news for the music community and the legal online music marketplace,” Mitch Bainwol, chairman and CEO of the Recording Industry Association of America (RIAA), said in a statement.

“Steadily but surely, we are passing another important marker on the remarkable journey that is the continuing transformation and development of the digital marketplace.”

Kazaa has long been an elusive legal target for the recording industry. Some stats on file-swapping and music downloads explain why.

According to research firm NPD, Kazaa accounted for 7 percent of peer-to-peer (P2P) households as of May 2006. Of all the songs downloaded via P2P sites in the U.S., Kazaa accounted for 6 percent of them. NPD also said 11 percent of Internet-enabled households in the U.S. (7.4 million households) downloaded at least one music file to a PC from a peer-to-peer service in May 2006, up by 2 percentage points from the same time last year.

After courts in the Netherlands ruled against it in 2001, Sharman moved its operations to Australia and the Pacific Island tax haven of Vanuatu.

Sharman has been in almost constant litigation since then, as have American-based P2P companies.

The American music industry litigation culminated in a landmark Supreme Court decision in June last year when the high court decided P2P operator Grokster was operating an illegal business model.

“A little more than a year ago, the U.S. Supreme Court struck a wise balance between protecting innovation and the rights of creators,” Bainwol said.

“Services based on theft are going legit or going under, and a legal marketplace is showing real promise.”

That’s encouraging news for the industry’s ability to invest in new music.” Both Kazaa and Grokster grew out of the failure of the first Napster, which U.S. courts held liable for copyright infringement.

Unlike Napster, next-generation P2P software does not store files on central servers, a key legal point in the Napster case.

Niklas Zennstrom developed Kazaa then sold his interest to Sharman Networks and moved on to develop the P2P Internet telephone service Skype.

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