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January 26, 2012 / C. J. Sperling

Megaupload: Kim Dotcom, Copyright, Digital Distribution

The recently busted download site has been in the media worldwide.

Now Megaupload was not offering classical music, it had movies. But it’s about the same laws, the same oversimplistic “digital copying is the same as physical stealing” approach.

And there is even a lesson or two for the music industry in it.


“Copy kills music” is an influential music industry slogan.

First, as always in copyright discussions: keep in mind that it’s generally not about the money the artists make. It’s about the money the copyright holders make. Which mostly are not the artists.

Second, third, forth, and so on: the debate is very much not about helping music. It’s about defending the old business model that always was at least shady. Major corporations defending a quasi-monopoly they will never get back, putting their money in gigantic lobbying efforts to regain the gigantic gains from yore.

Just one example for the wilful blindness of some arguments: “Since people can copy CDs easily, we don’t sell them any more!” – No. It’s since people spend their money for mobile phones and texting, among others. You only can spend money once. (In Germany – I only have that numbers – total phono revenues went down ca. €1bn from 1997 to 2008, while total mobile revenues went up ca. €17bn. Any questions left?)

One more: Studies tell that people who download illegally actually spend more money on CDs than people who don’t. Like buying clothes: first try, then buy. But reacting on that would be logical thinking, and the result would not restore the major companies’ lost monopoly in distribution.

And so on, and so on.


“Kim Dotcom” (who also called himself “Kimble”, “Kim Tim Jim Vestor” or whatever, born as Kim Schmitz), arrested co-founder of Megaupload, is seen as a fighter for freedom and against an outdated copyright system by some people.

I personally don’t like his background. I don’t like it at all. And I hope there are not many freedom fighters in the world holding such a background.

In mid-1990s, Schmitz demonstrated blueboxing in German television, in order to become generally known as an able hacker (many believe he lacked the essential skills needed to be a real hacker). German Telekom, until then without knowledge of this technical possibility, became aware of the blueboxing method, and disabled it. One Schmitz was generally known, many real hackers lost cost-free internet access.

Afterwards, Schmitz started the bulletin board system “House of Coolness” where illegal software copies could be exchanged. Like now with Megaupload, uploaders were paid (with calling cards then, which were commonly used for internet access amongst hackers).

He found contact to suppliers of unpublished Nintendo games, became member of an Amiga games group, became trustworthy enough over the time to be allowed into many illegal mailboxes.

And he copied all data he found, and brought the captures to Germany’s most hated intellectual property lawyer, Günter Freiherr von Gravenreuth. Who sued the hackers on behalf of the copyright owners and allegedly paid Schmitz per bust.

Freedom fighter. My ass.

If you can read German, read von Gravenreuth’s story (including Schmitz’ part as told so far) here.

Felix von Leitner from Chaos Computer Club mockingly addressed the “warez doods” in his personal blog: “What do you think Kimble will do now with the weblogs of Megaupload? You hopefully never believed even for a second that he wouldn’t preserve any logs, in order to protect you? (…) Kimble was always sailing close to the wind, and he obviously planned to act as he did back then with his BBS in case he ran into problems.” (translated).


Back to Megaupload, which most people see as yet another piracy site.

There is an interesting other point of view, too (found here; again, it’s in German, but this one is well worth the read even if one has to endure an automatically translated version).

According to prosecutors, Megaupload illegally cheated copyright holders out of $500m, and earned $150m in subscriptions and $25 in advertising.

So, in other words: Megaupload found a working business model for distributing digital content on the net.

Obviously, the downloaded content would not easily have earned $500m, as claimed, with normal sales. Otherwise, users would have taken that way, without any risk of prosecution.

But Megaupload users did pay a considerable sum. If the damage claims were calculated the way I suspect they were (x downloads * y official price = z damage, in order to result in high claims), the Megaupload distribution model brought users to pay 35% of the official price.

That’s a lot.

And from copyright owners’ view, it’s definitely far better than illegal torrent sites and the like. Megaupload has shown that people are willing to pay for content.

Megaupload has also shown that profitable digital distribution is possible even when you don’t force users to pay. Give incentives to the users (in Megaupload’s case, higher download speed), and enough of them will pay voluntarily.

So, independently from the illegality of it all, one should really have a look on this business / distribution model.

Claiming that Megaupload only had success because it acted illegally may be technically true, but it would be unwise to dismiss the good ideas, too. Especially in an industry that has not yet found its way to handle digital content.


PS – Regarding laws: can someone from USA please explain what SOPA/PIPA is expected to help, and whom, and to which purpose, if there clearly was no legal obstacle to shut down Megaupload (based in Honk Kong) and get Schmitz arrested (in New Zealand)?


PPS – Regarding gains and losses in the entertainment industry: I’ll never again trust any financial number that comes from a major corporation.

“Harry Potter: Order of the Phoenix” is the unadjusted 15th highest-grossing film of all time, according to Wikipedia. But although the film grossed $939m worldwide, the net profit statement of Warner Bros. makes the film a $167 loss. Find the original statement here.


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