There Be Pirates In These Clouds!

So what are the takeaways from the MegaUpload indictment? And what are the implications for other cyberlocker services and cloud storage providers?

First, this should be clear and convincing evidence that piracy is big business. The indictment states that the alleged conspirators earned more than $175 million in illegal profits through their services and caused over $500 million in economic harm to copyright owners. Moreover, these are profits that instead of going to legitimate businesses or taxpayers in the United States were instead spent by an ex-con in New Zealand on his self-described playboy lifestyle of “fast cars, hot girls, superyachts and amazing parties.” While we will never know the exact economic impact of piracy on the United States, this case demonstrates exactly how the content industry cannot simply create better business models to solve the piracy problem. A legitimate startup cannot compete fairly with another site that does not pay copyright owners for their content.

Second, this puts the business model of cyberlockers on the proverbial hot seat. Cyberlockers are file-sharing services that allow users to easily store and share files online. For example, users may use cyberlockers to back up the contents of their hard drive or to send large files to friends or colleagues that would otherwise be cumbersome to send by email. Cyberlockers come with various features: some limit files to a few hundred megabytes, some have almost no limit; some are ad-supported, some are paid subscriptions, etc.

Cyberlockers have been under scrutiny for some time now as reports have found that as of 2011 cyberlockers account for 5.1 percent of global Internet traffic. And they have been getting a bad rap over the past few years because legitimate uses have become secondary to illegitimate uses. Much of it is due to the willingness of a few bad actors to facilitate piracy and, as a result, this has overshadowed the legitimate use of these services. For example, in December 2011, the USTR identified Megaupload and the UK-based Putlocker in its “Out of Cycle Review of Notorious Markets” report that identifies the worst of the worst markets, including on the Internet, for piracy and counterfeiting. The USTR noted that both of these sites used reward systems which are popular with illegal file uploaders.

Third, users naturally wonder what the impact of the Megaupload case will be on legitimate third-party file hosting sites like DropBox. Should they continue to store their files with online third-parties?  What will happen to their files?  Some Internet users are arguing that the Department of Justice should not have shut down an alleged infringing site since this hurt both illegal file sharers and legal file sharers.

For the most part, these legitimate sites (and their users) have nothing to worry about. Importantly, the DOJ indictment was not just of Megaupload.com’s hosting site, but of a broader “Mega Conspiracy” designed to intentionally infringe on copyrighted works through 1) its business model of paying users who upload popular copyrighted content and drive users to the website; 2) discouraging legitimate use of the service by deleting files that are not regularly downloaded; 3) actively supporting third-party linking sites that publicize infringing content. Sites simply hosting content and responding appropriately to DMCA take-down notices would not be in violation of the law.