A week ago the US government dropped the hammer on the nearly 4% of the world’s web traffic passing though the Megaupload “cyberlocker”, seizing its domain names, grabbing $50 million in assets, and getting New Zealand police to arrest four of the site’s key employees, including founder Kim Dotcom. In a 72-page indictment unsealed in a Virginia federal court, prosecutors charged that the site earned more than $175 million since its founding in 2005, most of it based on copyright infringement.
The indictment goes after six individuals, who between them owned 14 Mercedes-Benz automobiles with license plates such as “POLICE,” “MAFIA,” “V,” “STONED,” “CEO,” “HACKER,” GOOD,” “EVIL,” and—perhaps presciently—”GUILTY.” The group, lead by fonder Kim Dotcom, also had a 2010 Maserati, a 2008 Rolls-Royce, and a 1989 Lamborghini. They had not one but three Samsung 83″ TVs, and two Sharp 108″ TVs. Someone owned a “Predator statue.” Motor bikes, jet skis, artwork, and even 60 Dell servers could all be forfeit to the government if it can prove its case against the members of the “Mega Conspiracy.”
But why go after one of the most popular sites in the world, that for years have maintained protection under the DMCA Safe Harbor provisions: Megaupload had valid US Government registered DMCA agent, a copyright abuse widget, and even given rightsholders back-end access.
Reason #1: Megaupload knew what was happening on its servers and did nothing to stop it
The US government asserts that Megaupload merely wanted to project an aura of legitimacy, while its employees knew full well that the site’s main use was to distribute infringing content. Indeed, the government points to numerous internal e-mails and chat logs from employees showing that they were aware of copyrighted material on the site and even shared it with each other. Because of this knowledge and other infringing behavior, the government says that the site does not qualify for a “safe harbor” of the kind that protected YouTube from Viacom’s $1 billion lawsuit.
For instance, the “abuse tool” allegedly does not remove the actual file being complained about by a rightsholder. Instead, it only removes a specific Web address linked to that file—but there might be hundreds of such addresses for popular content.
In addition, the government contends that everything about the site has been doctored to make it look more legitimate than it is. The “Top 100” download list does not “actually portray the most popular downloads,” say prosecutors, and they claim that Megaupload purposely offers no site-wide search engine as a way of concealing what people are storing and sharing through the site.
Megaupload employees apparently knew how the site was being used. When making payments through its “uploader rewards” program, employees sometimes looked through the material in those accounts first. “10+ Full popular DVD rips (split files), a few small porn movies, some software with keygenerators (warez),” said one of these notes. (The DMCA does not provide a “safe harbor” to sites who have actual knowledge of infringing material and do nothing about it.)
In a 2008 chat, one employee noted that “we have a funny business… modern days [sic] pirates 
,” to which the reply was, “we’re not pirates, we’re just providing shipping servies [sic] to pirates .”
Reason #2 The Megaupload Artist Jingle Campaign
On November 10, 2011, a member of the so-called Mega Conspiracy made a transfer of $185,000 for an advertising campaign for Megaupload.com involving a musical recording and a video that infuriated the RIAA by including major artists who claimed to support Megaupload. After youtube.com received a takedown order from Universal Music Group claiming unlawful use of a performance by Interscope signed artist Will.i.Am, Megaupload later filed claims in US courts, trying to save the video and claiming willful and legal participation by all the stars involved.
Reason #3 MegaBox scared the RIAA
Just before Christmas, MegaUpload starting previewing a new service called Megabox ,with some big players (7digital, Gracenote, Rovi, and Amazon Mp3) listed as partners. In beta, MegaBox was a combination storage locker, download store, platform for do-it-yourself artists, but was positioned to take a major stab at major labels and the RIAA. “They don’t understand that the rip-off days are over,” Kim Dotcom told Torrentfreak. ”Artists are more educated than ever about how they are getting ripped off and how the big labels only look after themselves.”
Dotcom and MegaUpload were planning to offer 90% of revenues back to artists, even on free downloads; an offshoot of the megaupload model that paid uploaders (regardless of ownership) based on the number of subsequent downloads received. “We have a solution called the MegaKey that will allow artists to earn income from users who download music for free,” Dotcom outlined. “Yes that’s right, we will pay artists even for free downloads. The MegaKey business model has been tested with over a million users and it works.”
In order to promote the site among the creative community, Dotcom named producer and former UMG artist Swizz Beats acting CEO, who even now is vowing not to walk away from the position. These developments presented an immense risk to the business models of a major label system that is doing everything it can to monetize the product of recorded music and control its copyrights. Thus a system that claims to have paid “over a million users” (sic: does this refer to artists & proper rigthsholders or just uploaders) rightfully scared the hell out of the RIAA and its member companies.