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Shawn Fanning's New Tune: Snocap

By Heather Green During the later days of Napster, founder Shawn Fanning wrestled with numerous dilemmas as he tried to transform the pioneering free file-sharing service into a paid one. Chief among them was finding a way to accurately account for transactions to ensure that copyrights weren't infringed. Alas, music-industry lawsuits felled Napster before Fanning could solve the problem. But he believes he now has the answer in Snocap, his new startup.

Snocap, which aims to be up and running next year, is an ambitious project that could reshape the digital music landscape. Its goal is to help create a wide range of digital music services -- not just iTunes-style download outfits but also new file-sharing networks that are sanctioned by the labels. Snocap won't sell digital music, rather it'll act as an accountant for both labels and music services as files are downloaded, shared, or sold. It will be an automated central clearinghouse for music files online.

SIGNING UP. Snocap's aim is to increase the amount of legally available music and create a tracking system that will allow labels to ensure they get paid for downloaded or shared files. "There's an interest in creating the world we are describing, but no one can take the first step," says Fanning, co-founder and chief strategy officer of the San Francisco-based company. "This is a way to break that deadlock."

A label can decide to register any or all of its copyrighted material with Snocap. For every file that's registered, the service's database will contain each the file's unique acoustic fingerprint as well as other key information, such as the artist's name, who owns the rights in different regions, and the digital-licensing rules for the material. The music services will then use Snocap to check which files have been authorized for sale and under what conditions.

The startup is already gaining converts. Universal Music Group, the world's largest music label, has signed up to register its entire catalog, while EMI Music is in negotiations and expects to reach an agreement soon. Sony BMG Music Entertainment is said to be in talks with Snocap but declined to comment for this story. Mashboxx, a peer-to-peer startup expected to launch in January, will use the technology. "It's one giant experiment," says Mashboxx CEO Wayne Rosso. "We're all playing around with a lot of different ideas."

GO OR NO GO. Here's how Snocap's technology works: A file-sharing service that wants to participate in the Snocap scheme creates a software program that must be downloaded before an individual can be part of that file-sharing network. Typically, these programs will simply be variations of peer-to-peer technology already available, such as Gnutella or KaZaA.

When the user finds a file on another user's computer within that network, the newly downloaded software will check with Snocap's database to see if that file is registered. If it's not, it's up to the service to decide whether to send the file. But Snocap can notify the labels about which unauthorized files are being requested, so they can be registered. If the file is registered, it can be shared and paid for. Snocap will log the transaction, get paid by the service per transaction, and in turn pay the label the licensing fee it's owed for the transaction.

Snocap won't set the terms for the sale or the file-sharing rules. That's up to the content owners and music services. Depending on those agreements, a file might have to include copyright protection, or it could be shared multiple times before a payment is requested, or it could be available through a subscription service.

STILL DISHING SUITS. With Snocap, Fanning is trying to address the key issue nagging the paid digital-music services, which typically have about 1 million songs each available for sale: how to compete with free file-sharing services that make tens of millions of songs available. It took Apple iTunes (AAPL) 14 months to sell 100 million downloads at 99 cents apiece, yet some 100 million songs are downloaded for free from file-sharing services every three or four days, estimates BigChampagne, a company that tracks file-sharing networks for media companies.

Snocap can't do anything about file-sharing networks that don't use its technology. It will be the labels' job to try to convince them to set up authorized systems. And the labels will continue suing individuals who continue to use unauthorized file-sharing networks.

If Snocap can create a huge registry of licensed songs, services won't have to undertake the laborious work of licensing songs themselves from every label. And through its tracking system, Snocap can help a music label pinpoint unregistered files that lots of users are trying to share over Snocap-enabled networks. That could be a sign telling the label it would be better off registering that tune since users are interested in it.

A BIG LEAP. Still, Fanning's startup has plenty of obstacles to overcome. To transform the marketplace and truly be effective, Snocap will need to sign up most of the major labels, which will have to be willing to work with new kinds of startups that will create parallel file-sharing and music-distribution systems. Even with millions of files, the new authorized music services will have to figure out ways to stand out from the free P2P networks. Fanning believes some individuals will opt for well-run, authorized services. And he thinks the new services will come up with strategies such as innovative pricing, community offerings, or compelling advertising.

Participating in Snocap would be a big leap for the labels, which have fought bitterly against file-sharing. But having unleashed the experimentation that's possible with Snocap, they may need to become even more flexible during this next stage of the evolution of digital music. Green is BusinessWeek's Internet editor in New York

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