Company believes data encryption drawcard can create legal shield against any copyright infringement by users

Internet entrepreneur Kim Dotcom's latest venture has started with a bang - but will Mega burn bright or burn out?

The online data-storage and file-sharing service launched on Sunday to much fanfare - Dotcom's stoush with the US Government and the high-profile shutdown of his previous venture over accusations of copyright violations ensured the event received worldwide attention.

Within an hour of its launch, Mega had claimed to have 100,000 registered users, which Dotcom suggested could make it the fastest growing startup in the history of the internet.

Come Sunday evening, this had grown to 500,000 and Mega's chief operating officer Brian Clarkson said it had been signing up around 250,000 people a day when he checked on Wednesday.


By this time Clarkson said Mega was handling more traffic than Dropbox, another storage and sharing service which the company views as one of its biggest competitors.

"We're a significant threat," Clarkson said.

But it's one thing to get users to sign up to a free internet service and quite another to get them to pay for it.

Like most of its competitors, Mega allows users to store a certain amount of data for free and then charges if someone hits their limit and wants to access more space.

While not giving away any numbers, Clarkson said the company was "very pleased" about how many users had opted to become paid Mega subscribers.

These users had paid up despite the fact they had not reached the storage limit offered to members for free, he said.

"There's absolutely no reason for people to pay - nobody has exceeded their 50 gigabyte [storage] limit ... it indicates people's willingness to pay for this sort of service even [if] there's no requirement for them to do so at this point in time," he said.

Business commentator Lance Wiggs said Mega had proven there was appetite for their product.

"There's clearly demand for it. The question is, are they [users] going to pay?" he asked.

Given so many people were willing to pay for premium services on Dotcom's now-shutdown file-hosting business or for storage on Dropbox, Wiggs believed people would pay for Mega.

Mega also offered users more storage space in its paid plans than either Dropbox or another storage service, Google Drive, he said.

As well as this - and what Mega thinks is central to its business case - is the level of privacy and security the website provides its users.

All data held with Mega is encrypted and the user who uploads a file controls who else gets access to it.

The company itself cannot even tell what a user is storing or sharing over the service. While the company views encryption as a huge drawcard, Christchurch-based entrepreneur Ben Kepes did not see it as special and said this feature existed more to protect Mega than benefit users.

"If consumers want a cloud, file-sharing service, which is free to start off with, they can go and use Dropbox or a plethora of other products. There's no difference," he said.

"The encryption thing is their [Mega's] way of trying to get around the fact that they're being watched very closely by the feds [US federal agents] obviously."

The encryption and the fact its team can claim to have no knowledge of what is being shared means Mega believes they are legally shielded from responsibility for any swapping and copying of copyrighted material by users.

The Economist said this could be called the "see no evil, hear no evil, speak no evil defence".

"If Mr Dotcom doesn't know what you're sharing, he can't be brought before court for copyright infringement ... it's a risky bet, and one that is unlikely to stand up to judicial scrutiny," the London-based newspaper said.

A Sydney-based lawyer who specialises in intellectual property, Charles Alexander, said he could understand the argument being made. "Whether it would be successful or not is another matter," he said.

Dotcom told the Herald last Sunday that every aspect of the site has been studied by lawyers and he did not believe Mega could be shut down like his former business, Megaupload. But if the Mega team is wrong, its explosive growth could be stopped in its tracks - along with its ability to make money.

Given Hollywood's past animosity towards Dotcom, movie studios and their lawyers are unlikely to lay down without a fight.

Lawyer and policy lead at internetNZ, Susan Chalmers, said both sides were going to think their interpretation of the law was correct.

If a case between a big copyright owner - like a movie studio - and Mega were to happen, Chalmers said lawyers would likely argue around two U.S Supreme Court decisions - the Sony "Betamax" decision from 1984 and the MGM v Grokster in decision from 2005.

"The Betamax ruling basically says that the distributor of a copying technology isn't on the hook for the copyright infringement of users of the technology so long as the technology itself can be used for non-infringing purposes (in that case taping a show to watch at a different time) In the other case, between a file-sharing site (Grokster) and the film studios, the Supreme Court created a new form of liability called "inducement". Basically, if someone distributes technology and promotes it to infringe copyright, then they are on the hook for the infringement of their users," Chalmers said.

"So Mega's attorneys would point to the Betamax decision and say of course the Mega site can be used for non-infringing purposes - you can store any type of file, not just copyrighted material. And according to Grokster, the Mega site isn't being promoted as an infringing file-sharing site - it's 'the privacy company'," she said.

Although designers of file-sharing sites had been developing programs that work around the law since Napster was shut down service, Chalmers said the Supreme Court had also showed it could "innovate".

"When a file-sharing site is shut down, the next generation looks at the way the law shut it down, and designs around it. And, in the Grokster case, the Supreme Court showed that it was ready to innovate itself in the law, creating a brand new theory of liability for Grokster because nothing else fit," she said.

The Motion Picture Association of America already issued a statement this week saying they were sceptical about his new project.

"We'll reserve final judgment until we have a chance to take a closer look, but given Kim Dotcom's history of damaging the consumer experience by pushing stolen, illegitimate content into the marketplace, count us as sceptical," it said.

Others have also expressed some doubts about Mega.

When looking at Mega's business model, technology commentator Nat Torkington said he had a "sneaking suspicion" the company's competitors would not be Dropbox or Google Drive, but filelocker sites.

"[They're] sites that are used extensively to swap pirated material. It's a return to Megaupload, but with an offering that is far more resistant to takedowns," Torkington said.

Clarkson said Mega had no interest in competing with these sort of sites and the company was not operating "in that space".

One of Mega's chief competitors in file storage and sharing.

• Has over 100 million users.

• Founded in 2008.

• Offers less free storage space than Mega but is seen as being easier to use.

- additional reporting AP