EMI scraps plans for merger with Warner Music

The makers of file sharing software that allows millions of users to illegally download music and movies have been told to "go legit or go under", after the company behind Kazaa paid more than $100m to settle law suits from the music industry.

The victory provided some relief for the global music industry and came as EMI and Warner Music said their plans to merge had been abandoned. The merger has been dropped after European courts annulled the 2004 regulatory clearance of the SonyBMG rival music merger.

Kazaa has become one of the most popular file sharing services but the company said yesterday that it would now try to filter out copyrighted material sought by its users.

Sharman Networks, the Sydney-based company which owns Kazaa, had been sued in Australia and the US by the four biggest music labels - EMI, SonyBMG, Universal and Warner Music.

Sharman will pay the four companies $115m (£61m) and will also pay a smaller amount to film studios.

Some 239 million computer users have downloaded the free Kazaa software. The music industry estimates that users of such file-sharing software and other unlicensed download sites have illegally downloaded about 20 billion songs in the past year.

Mitch Bainwol, the chairman of the Recording Industry Association of America, said: "Services based on theft are going legit or going under."

Yet the derailment of the Warner Music tie-up with EMI somewhat takes the shine off the Kazaa victory. The two music giants have traded bids over the past two months, but no agreement was reached and both have decided to put the merger on hold until the regulatory landscape is clearer.

EMI said: "The board has decided not to pursue a combination with Warner Music for the time being. The board will review this position in the light of future developments."

Warner Music echoed that sentiment: "Warner Music will monitor the situation carefully but until matters become clearer... [it] does not believe that it would be prudent to pursue a combination."

The companies await the outcome of the SonyBMG situation. The merged company could yet win an appeal against the European Court of First Instance's decision or re-obtain EU clearance of the merger.