MegaUpload and the end of a pirate cottage industry

The take-down of MegaUpload continues to make waves, with a number of similar file-sharing sites either shutting down or significantly altering their offerings. But the demise of services like UploadBox and doesn’t mean cloud file sharing is over; others are more than happy to fill these gaps.

Instead, it looks as if there will be a fundamental shift in how cloud file sharing providers do business. On the losing end will be a small, but thriving, pirate cottage industry.

MegaUpload stumbled over rewards

The indictment of MegaUpload alleged a number of illegal acts, including money laundering and active copyright infringement by the company’s executives, which tried to compete with YouTube (s GOOG) by copying as many videos from the Google-owned site as possible. But one of the key accusations of the indictment involves MegaUpload’s affiliate program:

“For much of its operation, the Mega Conspiracy has offered an “Uploader Rewards” Program, which promised premium subscribers transfers of cash and other financial incentives to upload popular works, including copyrighted works, to computer servers under the Mega Conspiracy’s direct control and for the Conspiracy’s ultimate financial benefit…. In total, the Mega Conspiracy directly paid uploaders millions of dollars through online payments.”

MegaUpload’s affiliate program rewarded uploaders with free premium services and even cash if their files directed a lot of downloaders to the site. To be clear, most people didn’t get rich with the rewards: 10,000 downloads of your files simply got you a free one-month premium membership. However, users who brought the site 10 million downloads received $10,000 via Paypal.

The MegaUpload rewards program: $10,000 for 10MM downloads.

These kinds of rewards programs have long been a thorn in the eye of rights holders, who argue that the emphasis on high download numbers automatically pushes people to infringe and offer popular MP3s or movies for download. The MegaUpload indictment also suggests company executives had knowledge of their affiliates’ infringement, quoting from internal emails in which they discuss that some of the users offer MP3s, ripped DVDs and Vietnamese movies. One of the uploaders referenced in the indictment received more than $55,000 from MegaUpload.

How much hosts pay for traffic

MegaUpload introduced its rewards program in 2005, and the move was quickly copied by many other file hosters. The logic behind these affiliate deals was that the sites could easily monetize traffic. File hosters restricted download speeds and capabilities for non-paying users to the point where many simply gave in and purchased premium memberships. The indictment against MegaUpload alleges the site made more than $110 million via Paypal (s EBAY) alone, and users unwilling to pay were further monetized through ads.

Not an easy way to get rich: One user's stats of affiliate earnings through a cloud hosting service.

Affiliate deals made sense for one-click-hosters, but they also led to an interesting cottage industry that was largely focusing on redistributing pirated works. Uploaders distribute their files to multiple hosts, then link to them on third-party sites that openly promise access to infringing content. They discuss the details of their trade on web forums specializing on affiliate relationships, and openly compare how much each and every host pays them for their traffic.

Browsing these forums offers a fascinating insight into an under-reported part of the file-sharing scene. Some of these uploaders only make pennies on the dollar, despite investing lots of time into posting files and promoting them in various places. Said one:

“I upload porn and I am only able to make about ($1) per day and I have my own blog, am posting in about 20 mega threads on 15 different forums and am posting around 15 different scenes a day.”

Others make even less, with one writing he hopes “to someday earn 1$/day or more.” But there is also the other end of the spectrum, with some uploaders making $1000 or more per month, and a few even clocking three-digit earnings per day.

From Hotline to MegaUpload

These kinds of pirate cottage industries aren’t entirely new. Even before the days of Napster, there was Hotline, a client-server protocol that allowed anyone to set up small file-swapping services on their own computer. Hotline admins regularly password-protected their servers, asking users to click on certain banner ads to receive a password. After Hotline’s demise, much of that activity shifted to BitTorrent and Edonkey2000, with some users running ad-heavy forums and others even password-protecting downloads in order to get people to click on their links

The emergence of cloud file hosters multiplied revenue opportunities, but the writing was quickly on the wall: The bigger file hosters have been shifting away from these kinds of rewards programs for a while. RapidShare stopped rewarding people for traffic two years ago, and a company spokesperson told me this week, “Such a system would be very effective advertising, but we concluded that it could increase abuse.”

MegaUpload apparently ended its own rewards program last summer, according to the indictment, but the criminal proceedings at the company were already underway at that point. Smaller competitors were eager to step in and pay users for uploading files, but the dramatic shut-down of MegaUpload has all but put an end to this practice.

Image courtesy (CC-BY-SA) of Flickr user spcbrass.