Megaupload and the Broken Cloud Business Model

That’s what one sees when you visit the MegaUpload site today. Its a small jpeg file which has driven fear into tons of VC funds, investors, entrepreneurs and 12 yr old file sharing kids alike.

The arrest of Kim Dotcom (Yup, that’s his real name legally changed from Kim Schmitz) and the shutdown of the MegaUpload site may just be a watershed moment in the ‘Fight against Piracy’ or whatever they want to call it. This fight has Big business and Big government on one side and scores of scrappy sites, entrepreneurs, artists, hackers and a multitude of downloaders on the other. If you have ever downloaded a song, file, picture etc which doesn’t belong to you and which you haven’t paid for, then you are in the latter camp. While this fight may be about Copyrights and other legal stuff, what it is actually about is control and hence, money. Lots of it. But that is for some other time.

Online piracy by the two companies, recently shutdown- MegaUpload Ltd and Vestor Ltd – generated more than $ 175 million in criminal proceeds and caused damage of half a billion dollars to copyright owners (allegedly)

 

The forms of internet sharing which are under scanners now

1. p2p Sharing – Programs like BitTorrents, KaZaA, Shareaza, Ares, eMule, MP3 Rocket Beta Frostwire are those which depend on no central servers to save those files. Transfers happen only through various personal computers but helped and tracked along by P2P programs. These are fairly difficult to make a case against since they don’t physically store the files.

2. Digital Lockers – Like MegaUpload and others (Yousendit, Amazon Services, Apple  iTunes, Dropbox, Box.net), these services physically store your files and let you share them by sending links for other to download. As per US laws, these may be liable for prosecution.

It’s scary when one reads the names above because not only are they big players working in perilous waters but simply because the US today has the highest number of servers which make up the cloud (the 1/2 more important part of cloud computing) and hence any law enacted and executed by the US will have devastating consequences on how we have come to share our data.

But what really worries me is that the action on MegaUpload happened in New Zealand and its servers were located in Hong kong. So the US used its political and economic muscle to get other countries to act on laws that it has created for the US.

This sort of muscle is used for International Fugitives, Dictators, Drug Trade, Human Trafficking and the likes…but for taking down a file sharing service??? That’s like swatting a fly using a heat seeking missile. Unless… It involved big money and influence. Which it does in the form of the music, entertainment, software and movie industry. Unfortunately for them, they haven’t learnt that their distribution system and business model are broken. They just don’t get it. Not all of them anyway.

While the above has many ramifications, what I want to talk about are those issues which are related to Cloud Computing for Businesses and Startups.

The effects of this move, if sustained and unchecked may be.

1. US Economy Cloud computing has ensured millions of servers are hosted on US soil. Until now, the startups running those servers/services thought they were safe ‘In the land of the Free’. That just might change. If MegaUpload could be shutdown based on an accusation and not a guilty sentence, any company/startup against which ‘resonable doubt’ can be shown, may be under threat of closure. This may just lead to lots of capital and jobs flowing out to other ‘cloud computing’ friendly regions. For a country aiming at creating higher value jobs, this could be disastrous.

2. The Difficult move to the cloud. CIOs and CTOs across the world have always had issues regarding the safety of their data on the cloud. Imagine them asking themselves what they would do if they woke up one morning only to find that their data has been seized by the Govt of USA simply because the cloud service provider might have been (knowingly/unknowingly) letting people share illegal stuff. Startups may find it increasingly difficult and tough to answer these questions raised by CIOs/CTOs.

3. Startups. Might need to think about moving outside the US or at least hosting their servers in countries like China, Russia, Mauritius, Cayman Islands, Maldives etc. Countries where neither over-burdening  laws  nor US political muscle can influence business without due process and investigation. Existing Cloud based service startups, I am sure, must already be thinking of innovative and circumventing ways to offer great services without breaking the law. 

4. Investments in the cloud computing. The Cloud has until now been the hottest sector for VC investments along with e-commerce and mobile tech. That might just change in the short term.

5. Net Activism. History has shown that whenever there has been a sudden clampdown on what is viewed as culturally and socially relevant freedom, activism has sprung up to resist change. Yin and Yang. Anonymous, the activist cyber-hacking group, has already had its say in this matter by shutting down sites of Department of Justice, FBI, Motion Picture Association of America (MPAA) and Recording Industry Association of American (RIAA), among others.

6. Smart Phones. Unlike computers, smartphones have been designed and introduced to the general population as low memory gadgets, which help you always stay connected. This also means that with the increase in consumption of material on phones as opposed to computers, users will have to rely on fast networks, streaming and cloud based storage. With these laws, the last 2 parts could just radically change, leading to a not-so-cloud-connected world. 

7. Your Stuff. Emails, Photos, Documents, Numbers, Movies and Songs – All legal, could get confiscated if your cloud service provider might just be servicing people who are sharing files illegally. 

Imagine waking up one morning and not being able to open Gmail, access your calendar or download your college report. 

Scary? 

Well that is exactly what has happened to the millions of people who kept their PERSONAL data uploaded on MegaUpload. 

Enjoy this promotional video by MegaUpload while you munch on that.

Managing the Law

Seen the Sylvester Stallone movie ‘Judge Dredd’?

It was one of those silly, comic-bookish super-hero movies about a bad-ass, no nonsense, gun slinging judge, set in the future, who goes around knocking off the bad guys.

The reason why we loved it was because it appealed to our ‘Black and White’ vision of the world. You know, the ‘Good Vs Bad’, the ‘Ugly Vs Pretty’ and the ‘Powerful Vs Meek’ mentality that has been drilled into 0ur heads. Though a very Catholic way of looking at the world, it has its place in every Religion and Ethinicity. And it helps keep order in this world.

And what else did we love about Judge Dredd, other than when he screams ‘I am the law!!!’ (Distended jaw and fearsome spit)?

We loved the fact that he was right, moral (though gunning down people or their cars can hardly be called that, but let’s move along), direct, honest and still won. Hands Down.

And we loved it as kids, many still do, it serves as a model (though flawed) of the kind of person we wish we could become. Unfortunately in the Real World, we must manage the law.

Before you go ahead and denounce me as the devil himself, I want to tell you something… Take a Hike.

This post if about Laws and not Morals. Don’t mix the two.

Laws are made by men and mostly powerful men who have always had self interest in mind.

Morals have a divine purpose. They must be followed.

God never invented the Tax Laws or ordained that bars must shut down by 11.30 on New Years (What-a-joke)

And men never made laws directing us to help old ladies cross the street.

This post if about Startups and the fact that they manage laws in India.

Examples?

Most Startups and Small businesses have started out with lots of ‘illegal’ history.

No. Not drugs and Human trafficking.

I mean many of the successful ones I know, have worked without paying VAT for atleast the first year.

Restaurant Owners have paid huge sums for licenses (12 in some places) to start off. Most never recover that money.

Black money, which comes at an affordable 1.5% interest rate per month, has been used as the seed capital for many small companies.

Millions of families subsist by running kirana stores selling stationary, groceries, clothes without a bill and only on cash. Hence pay no VAT (12.5% direct profit). Here I don’t mean the well-off Lalas. If you can afford to maintain a huge belly, you can afford to pay taxes.

Many small time street vendors (More entrepreneurial that many well funded startups) have to pay off cops just to earn a daily living.

College based startups don’t have any licenses, but still make it work. I haven’t seen college faculty insisting that startups get registered before they can sell their first product.

My Point?

India has loads of laws to follow. In most cases we become aware of them only when in deep shit. Many have been used to fork out money from law abiding citizens.

On close inspection of laws one will realise that this nation will see no real innovation or startup/small business activity if we zealously start following all laws. Following our laws will lead to most startups shutting shop before they can break even.

The laws are crazy. They are obstacles to entrepreneurial activities at best. At worst they are backed by fat babus in safari suits waiting to legislate us out of existence, if we don’t pay up.

They themselves are backed by the Economics of Corruption. More on that in a future post.

Once you get into the world of registrations, taxation, accountants, bankers, police, municipality, agreements, contracts, state laws and by-laws, you will really wish you had either married a Lawyer, been born in a family of Lawyers or had atleast dated one.

You get jacked and most can see a dream slipping past with the rapidity of a well oiled loo flush.

It’s primarily because of the above reasons that IT/ITes/BPO really mushroomed in our economy. In the 1990s the babus didn’t know what to tax and which licenses to make money out of.

So my point is. If it isn’t going against your basic morals and human decency, learn to manage the law.

And if you can’t handle it. Don’t give in.

Get a well paying job with good increments.

Cause you will still have to pay the extra ‘tip’ for your gas cylinder.