By Joseph Menn and Sarah McBride
SAN FRANCISCO (Reuters) - The crackdown on file-sharing site Megaupload is expected to do little to reduce overall piracy of music, software and Hollywood movies, while potentially stifling emerging means of distributing content online.
In the wake of last week's surprising indictment of the digital storage company and seven executives, other companies have begun changing their policies even as Megaupload officers maintained their innocence in a first court appearance in New Zealand.
Filesonic.com stopped allowing people to download files that they had not uploaded themselves, while Uploaded.to blocked access from Internet locations in the United States.
However, just 3 percent of U.S. Internet users relied on digital lockers like Megaupload in the third quarter, according to NPD market research, compared with 9 percent who used peer-to-peer networks, which allow sharing of files among consumers' computers with little or no central organization.
Peer-to-peer systems, including BitTorrent and PirateBay, might gain more activity after the Megaupload charges, analysts said, while users may be afraid to upload content to lockers for fear they will lose access in a similar shutdown.
"I don't think you'll see more file sharers per se, but the amount downloaded over the torrents might rise," said NPD's Russ Crupnick.
But the Recording Industry Association of America and the Motion Picture Association of America said at least some users would balk at the higher complexity of peer-to-peer sites.
Lockers are "more user friendly. I doubt there will be a wholesale shift" to torrents, said MPAA Senior Vice President Kevin Suh.
PirateBay appeared to ignore the demise of Megaupload in its communications with users on Monday. In its blog, writers posted about how PirateBay saw the future of copying - evolving beyond digital format to physical objects it dubbed "physibles" - and
about what artists it might promote in coming months.
In a press release issued last week about proposed anti-piracy legislation in the U.S., PirateBay compared its role to the founding fathers of the U.S. and took the position that it fights for freedom of speech and the equality of all people.
SKIP HOLLYWOOD MIDDLEMEN
Though Megaupload has been around since 2005, lockers have only gone mainstream in the past year. Amazon.com Inc, Apple Inc and Google Inc all adopted some version of the technology that permits digital content to be uploaded for the purpose of backing up user data or making content available to multiple devices or outsiders.
For some content producers, the new avenues are a way to skip the middlemen in Hollywood and reach their fans directly.
Last month, the comedian Louis C.K., complaining of a lack of royalties from conventional DVD sales, offered downloads of a one-man show for $5 from his own website and sold more than $1 million worth.
Megaupload supporters in the past have included major recording artists, such as Macy Gray and Sean "Diddy" Combs, who lent their voices to a popular video touting Megaupload by name.
Rapper Busta Rhymes signaled his support on Twitter even after the arrests last week, tweeting that Megaupload "could create the most powerful way 4 artist 2 get 90% off of every dollar despite the music being downloaded 4 free."
Until the middle of last year, Megaupload offered "rewards" for those who uploaded the most popular content. The indictment said this induced piracy, because the most popular content was likely to infringe copyrights.
But Jennifer Granick, a longtime Internet attorney who is now general counsel for a site devoted to hip-hop, said the idea that only infringing material would be popular was "ridiculous".
"This is a way for artists of all kinds to get out of these record-label deals that can be really limited. These can be a really important way to try to make money and get their stuff out there."
Julie Samuels, an attorney for the civil liberties nonprofit Electronic Frontier Foundation, said it was unusual for the Justice Department to bring a criminal case for an alleged conspiracy over copyright violations, which are usually handled in civil court.
The EFF filed an amicus brief defending another locker service, MP3Tunes, against a record label that sued over a related issue, the "de-duplicating" that saves resources by preserving only one copy of a file that is uploaded by many.
The court ruled that MP3Tunes was in the clear as long as it abided by Digital Millennium Copyright Act requirements for responding to takedown requests, blocking repeat infringers and the like.
Samuels said she was not surprised that other file-storage services were dropping reward programs and in some cases limiting downloads to users' own files.
But she said that was bad for innovation and bad for users.
"The worst part here is that if the lockers are legally unstable then users will be hesitant," she said. "What's really been troubling is that the third parties who are using Megaupload for legitimate reasons no longer have access to their own content. In this case it's the government, but often it's traditional industries that are squelching innovation in what may be an expansion of ways for artists to get paid."
(Reporting by Joseph Menn and Sara McBride in San Francisco, Jeremy Pelofsky in Washington and Jim Finkle in Boston; Editing by Tiffany Wu, Bernard Orr)