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The Megaupload Bust’s Cloud-Computing Fallout

The crackdown took a major piracy site off the Web, but it also sent jitters through the file-hosting community


When file hosting website was shut down by the U.S. Justice Department, on January 19, it didn’t take long for the repercussions of the international action to be felt across the Internet. And while digital pirates—people who trade illegally ripped copies of movies, music, and computer software—were the intended target, the fallout has become much more widespread in the days since the website was shuttered and its founder arrested.

According to federal prosecutors, by allowing users to swap pirated files, Megaupload has cost copyright holders hundreds of millions of dollars in lost revenue. The site not only encouraged people to upload digital copies of everything from movies to e-books, it rewarded users who uploaded the most in-demand material, and allowed anyone else to download it—often thousands of times.

What’s been lost in the rhetoric around piracy is the fact that Megaupload had customers who were using the website legitimately, as an online storage locker for their own files. In other words, they were using Megaupload as a cloud service, backing up files online in case of damage to their physical copies, or to be able to access them remotely. Many businesses also use these “digital lockers” to collaboratively exchange documents and other files between parties who are separated by long distances. Those Megaupload customers have lost access to their files and the likelihood of getting them back is low.

An industry reacts

As images of executives being arrested and seized property flooded the media, other online file hosting services began quietly taking defensive measures to prevent file sharing. None have gone on record as saying the Megaupload case is directly responsible, but the timing of the moves makes it rather obvious.

Filesonic removed the ability for users to download any files except those that they themselves uploaded to the website and eliminated reward programs for making popular content available. Files suspected of infringing on copyright have been removed and users suspended. A multitude of other sites have followed suit, including Uploadstation, Filepost, Fileserve and Videozer, while some offshore-hosted sites such as remain online but have blocked US visitors. At the extreme level, customers of file hosting service Uploadbox are now greeted by message on that company’s website that read: “File hosting service is no longer available. All files will be deleted on January 30th.

Making things tough on illegal file sharers is one thing, but the Megaupload incident has also led to concerns that more business-focused file hosting sites might also be subject to closer scrutiny. Amazon (NASDAQ:AMZN), Box and Dropbox are among the players in this space, and Apple (NASDAQ:AAPL) has recently made a big push with iCloud.

While it’s unlikely that these services would be shut down, the episode has taken some of the shine off of cloud computing just as IT departments have begun to embrace the concept. The fear among legitimate file sharing websites and cloud computing advocates is that businesses might hesitate to use the services over the possibility they might lose access to their data should the unthinkable happen and a file hosting site they rely on is tarnished with the piracy brush. For many cloud clients, the prospect of reduced service, government action, or, as happened with Uploadbox, a decision to shut down and delete what’s left is enough to give them pause.

Pirates will quickly find another way to trade files (they always do), but the damage done to public and corporate trust in file hosting websites and cloud computing in general will likely take longer to repair.

Article printed from InvestorPlace Media,

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