Business Breakdown: Following SOPA Protests, Feds Shut Down Megaupload

Megaupload, the Hong Kong-based website that allowed users to store and share large files—including movies, music and television shows—was shut down by the Department of Justice yesterday for copyright violations. Four company executives—including the appropriately named founder Kim Dotcom (Schmitz, before he changed his name)—have been arrested, and $50 million in assets were seized; Megaupload is said to have accumulated earnings greater than $175 million since its establishment in 2005.

Why did they get shut down? Megaupload offered people the ability to easily swap music and movies; it also owned MegaVideo, a site where streaming movies and television shows could be found, often mere hours after they premiered. Needless to say, all the free stuff was a big attraction, copyright holders weren’t getting paid, and the traffic to the site—alleged by the DOJ to reach 50 million hits daily and make up 4 percent of all internet traffic—kept the company’s employees well remunerated. Among other things, the indicted individuals owned 14 Mercedes.

Did they really cost copyright holders $500 million? Probably not. The DOJ has not released the methodology behind the number, and figuring out the costs of intellectual property piracy is a tricky business. No one has a good idea of how much piracy in general—or specific organizations—actually cost content producers, or how much they benefit from the publicity.

You probably heard that rapper, producer and Alicia Keyes husband Swizz Beats is Megaupload’s CEO, though he wasn’t indicted. Yeah, it’s pretty funny. Almost as funny as the DOJ referring to the "Mega Conspiracy" throughout its rather breathless 72-page indictment.

Wait a minute, you can see copyrighted content and swap files in a lot of places on the internet. How come Megaupload got taken down? Online intellectual property law offers a “safe harbor” provision to websites that allow users to post their own content. It grants them immunity from prosecution if they take steps to remove copyright content, ban users who repeatedly violate rules, and work with rights holders to prevent abuse. Megaupload did some of these things—technically—but it didn’t do them very well:

In a 2008 chat, one employee noted that "we have a funny business... modern days [sic] pirates :)," to which the reply was, "we're not pirates, we're just providing shipping servies [sic] to pirates :)."

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That sort of conversation gives federal prosecutors a lot to work with. The conspiracy-minded also point to a spat between recording industry bigwigs thanks to a promotional video produced by the company featuring artists like Will.i.Am, Mary J. Blige, and Kanye West. While the site was trying to improve its relationship with content producers—part of the reason Beats was hired—the move only raised the ire of the recording industry, and might have raised the site’s profile on law enforcement’s radar.

Still, some observers think the prosecutors may have gone too far by resorting to criminal accusations—the site is already involved in civil litigation over copyright issues in the United States, and similar sites like RapidShare have won court battles over charges of copyright infringement.

What does this have to do with SOPA? The government’s actions came just a day after broad-based internet protests against proposed legislation that would make it far easier—in fact, way too easy—for copyright holders to shut down websites like Megaupload without due process. The fact that the feds have shut the site down suggests that they don’t really need new legal authority to do that, and that the legislation is designed to solve problems that don't exist.

Did the Internet freak out about the Megaupload situation? You betcha. Anonymous, our favorite shadowy hacktivist collective, launched a revenge attack, overloading the servers of websites for the DOJ, the Recording Industry of America Association, the Motion Picture Association of America, and Universal Music. Unfortunately, they chose to do it in a very unsavory way.

The criminal charges against Megaupload are the result of evolution in our society's approach to the the consumption and production of media in the internet age. We'll see many more conflicts like it as old models of content distribution struggle to survive in the face of forward-thinking new firms trying to develop the business models of the future, with the desires of consumers and the rights of artists caught in between. That's the breakdown.