Dan Whalen is a JD candidate at Osgoode Hall Law School.
Online file-sharing company Xunlei Limited recently announced that it has indefinitely postponed its initial public offering and NASDAQ listing due to unfavourable market conditions. Although some would claim the setback as a small victory against a leading copyright pirate, inspection of the company’s continued legal successes and financial support from the West lead this observer to wonder if the battle is already lost.
In neutral terms, Xunlei provides digital media content downloading and online video streaming services. Upon downloading the company’s free proprietary software, users can search for and download any of the 3.7 billion digital media files via Xunlei’s network of over one million third-party servers and another 3,600 Xunlei servers. It has become the most popular service of its kind in China, holding 78.7% market share in February 2011. Globally, the service boasts 291 million users. On an average day in 2010, Xunlei facilitated 138 million downloads.
Like the many similar online services, however, most of Xunlei’s downloadable content is pirated. The company is frequently accused of as much on the Internet and nearly as often in court. Xunlei faced 234 lawsuits for copyright infringement in 2009 and 2010 combined and reported 32 outstanding suits earlier this year. In the Risk Factor section of its preliminary prospectus, the company candidly discusses its copyright infringement liability exposure, including litigation warnings from the Motion Picture Association of America and complaints from the Recording Industry Association of America.
Amazingly, 87% of lawsuits to date have been resolved in favour of Xunlei. According to China’s Supreme People’s Court, Internet-based copyright infringement lawsuits must be heard at the location of the infringement or of the defendant. Conveniently, Chinese law is not clear as to whether software or websites are responsible for policing pirated content that is downloaded via peer-to-peer technology. Such laws are much clearer in many Western jurisdictions, such as the US, where similar pirate ventures like Napster and Grokster were long ago shut down.
As a brief aside, it is interesting to note that even the 13% of lawsuits to date that Xunlei has lost have had little impact on the company’s operations. The court-mandated payouts for damages to date sum to US$200,000 – a pittance when compared to the company’s revenues, which were US$40-million in 2010 and US$14.3-million in Q1 2011 alone.
It must be conceded that Xunlei has made some improvements in preparation for its initial public offering. In December, 2010, the company sold off its rights and assets in Gougou, a search engine for downloadable media files. Yet not only does Gougou remain Xunlei’s featured search tool, but users remain free to download pirated material from other third-party sites. Xunlei has also assigned a team to remove any infringing content upon receiving notice from rights-holders. However, this team comprises a scant 15 individuals spread across a workload of 3.7 billion files. Upon reflection, these improvements thus seem more like drops in the proverbial bucket.
So, all things considered, where does an enterprise like Xunlei get the moxie to take its business public? It seems that the company has been emboldened not only by its success in the courtroom but by the continued support of powerful benefactors. Beyond its ample revenues drawn from advertising and subscription services, Xunlei has also received significant private investment. In 2007, Google invested US$5-million in the company and currently holds 2.8% ownership interest. In April 2011, beleaguered press baron Rupert Murdoch and wife Wendi followed suit, making a US$29.4-million investment.
Google’s investment is perhaps the most shocking revelation. In other areas of its business, the Internet titan has demonstrated a fierce sensitivity to intellectual property rights. It has even taken on Internet piracy itself, having applied to its Google Instant feature “a narrow set of removal policies for… terms that are frequently used to find content that infringes copyrights.” This is no idle policy; Google has disabled auto-completions for websites such as BitTorrent, RapidShare and MegaUpload – services often associated with pirated content – but left their competitor Xunlei untouched. Google denies any ulterior motive.
While the postponement of Xunlei’s listing on NASDAQ has prevented the US entities from funding Internet piracy for at least a little while longer, one cannot help but feel discouraged by the pre-existing and continued support from powerful Western institutions. This observer wonders if the battle was over before it even started.