Speaking at a Senate Judiciary Committee on Wednesday, Sam Yagan said that in order to avoid expensive litigation, file-sharing companies will have to change their models to become similar to iTunes or the new Napster or face expensive legal battles.

MetaMachine won't be an exception. "Because we cannot afford to fight a lawsuit--even one we think we would win--we have instead prepared to convert eDonkey's user base to an online content retailer operating in a 'closed' P-to-P environment," he said.

Yagan's comments have been posted on a Senate Web site. MetaMachine created the eDonkey P-to-P software client.

Legal Enganglements

Companies like MetaMachine, he explains, will have to comply with terms of deals made by entertainment rights aggregators and to do so they'll have to build centralized indexed searches, filters and closed networks in order to ensure that their users aren't conducting illegal file sharing. Such a setup is different then most P-to-P file-sharing companies today, which usually don't have centralized servers holding content.

This dramatic change is happening as a result of the Supreme Court's ruling in June on the MGM v. Grokster case. The court ruled that someone who offers a tool and promotes the use of the tool to infringe on copyright is liable for the user's infringement. Since that decision, the Recording Industry Association of America (RIAA) has sent cease-and-desist letters to leading P-to-P companies including MetaMachine, threatening litigation based on the RIAA's interpretation of the ruling.

Yagan concludes that because the court hasn't offered a standard to define how to measure whether a company is inducing users to infringe, any litigation will result in exhaustive trial proceedings during which organizations like the RIAA will dig up company e-mails, advertising, and any other evidence that might prove the file-sharing company intended to induce copyright infringement. Such a process would be just too expensive for most P-to-P companies, he said.

In August, CacheLogic, a company that provides traffic management services to telecommunication companies, released a survey that found that eDonkey has surpassed BitTorrent as the world's largest P-to-P file trading network.

Industry Shifts

In addition to eDonkey, it appears that other file-sharing companies may indeed be changing their models or shutting down, while the popularity of paid services is increasing. On Tuesday, BitTorrent announced it hired Doll Capital Management to help it raise $8.75 million in funding. The money will be used to support the global growth of BitTorrent's technology into a leading platform for the legal and secure distribution of content for commercial purposes, according to a statement from BitTorrent. While BitTorrent's leaders have historically said they aren't interested in supporting piracy, the funding may be used to make changes that can help solidify the company's role as a legal content distribution player.

Another file-sharing company, WinMX, appears to have recently shut down its operations as its Web page is no longer accessible. However, rumors online have WinMX leaders relocating outside of the U.S., thus fulfilling another of Yagan's expectations.

He suggests that a wide variety of technology companies will choose to locate outside of the U.S. to avoid such potential lawsuits. "It's hard to imagine future 'open decentralized' P-to-P companies opening shop as American corporations," he said. "Where are the Skypes of tomorrow being founded? Your best bet is to look offshore."