P2P ReportPrepared for Media Defender, Inc.

2

A larger volume of CD sales in 2006 were lost to borrowing, rather than to P2P

How Were Lost CD Sales Replaced?

2006

Ripped from others

30%

Paid downloads19%

Not Replaced2%

P2P17%

Burned from others

32%

Source: NPD Digital Music Study December 2006 (US Internet Pop. Age 13+)

Digital Music Study - Mainstream Consumer Analysis: Volume and spending estimates include respondents up to the 95th volume percentile per activity

3

10.6% 10.4% 9.9% 10.0% 10.2%10.9% 10.8% 10.9% 11.1% 11.7% 11.2% 11.6%

12.7%

7.8%

5.8%5.8%6.1%5.9%5.4%5.0%5.7%

4.2%5.6%

4.9% 5.3% 4.7%

Dec -05

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec -06

% o

f Int

erne

t Hou

seho

lds

P2P Legal

The upward trend of both P2P and legal HH penetration continued in 2006

Downloading Activity of Internet Households*(MusicWatch Digital Dec ‘05 – Dec ‘06)

*Includes use of all major à la carte stores, tethered downloads from major subscription services, and eMusic’s bundled downloads.

Source: MusicWatch Digital – Dec 06

4

P2P Services: Number of Households Downloading From P2P

6,7027,051

6,9737,305

8,693

6,419

5,624

5,7016,1606,258

6,4116,1336,1976,3075,892

7,9527,656

7,9797,5417,3867,378

6,9006,7296,657

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

10,000

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

In T

hous

ands

2005 2006

P2P Downloading Households (‘000s)(MusicWatch Digital Jan ‘05 – Dec ‘06)

*July 06 – Four torrent clients (Azureus, BitComet, uTorrent, and BitLord) were added to NPD’s coverage.

Source: MusicWatch Digital – Dec 06

5

The volume of P2P songs acquired continues to increase and follow a seasonal flow

258,295

392,261

577,883

395,168414,667 401,344

385,404414,311

250,743265,883258,132238,610228,210

257,338255,882227,790239,348

258,462

390,934

465,764431,442

451,140447,331412,920

320,916315,664317,252

330,207 317,371

456,313

0

100,000

200,000

300,000

400,000

500,000

600,000

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

In T

hous

ands

2005 2006Line 3

Volume of Unique Songs Downloaded (‘000s)(MusicWatch Digital Jan ‘05 – Dec ‘06)

*July 06 – Four torrent clients (Azureus, BitComet, uTorrent, and BitLord) were added to NPD’s coverage.

Volume without

additional torrent sites

Source: MusicWatch Digital – Dec 06

6

LimeWire

BearShareKazaa

Morpheus

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

10,000

Jul - 06 Aug Sep Oct Nov Dec - 06

In T

hous

ands

LimeWire BearShare Kazaa Morpheus Other

LimeWire remains the dominant source for P2P music acquisition

“Other” includes:

Blubster

Ares

eMule

Warez

Shareaza

eDonkey

SoulSeek

DC++

WinMx

iMesh (classic)

iMesh (6.0+)

BitTorrent

uTorrent (Jul ‘06)

Azureus (Jul ‘06)

BitComet (Jul ‘06)

BitLord (Jul ‘06)

*Households may have used more than one application.

P2P Downloading Households* (‘000s)(MusicWatch Digital Jul ‘06 – Dec ‘06)

Other

Source: MusicWatch Digital – Dec 06

7

Consumer acknowledgement has not yet translated into decreased P2P activity

27%

22%23%

19%

32%

26%

File sharing hurts artists Stopping is honest

Sept '04 Sept '05 Sept '06

P2P Users Say…

Source: NPD – MusicLab Sept 06

8

Reasons For Downloading More From Free File-Sharing Services

Why did you start or download more music from free file-sharing services?(Those who downloaded from free file-sharing services in past year)

28%

26%

25%

24%

23%

22%

21%

17%

13%

11%

30%

33%

37%

55%56%

51%

Like to buy specific songs instead of the full album

Purely because the music is free

If I like the song I can download/stream it instantly

I'm listening to more music on my computer

Can burn songs as much as I want

There's more music available from free services

It's easier to find music using free services

Find more music I like through digital services

Have faster/better Internet access

Free services offer more than just music

Downloading more in place of buying CD's

Burning more mixes with downloads

I have no method to pay for downloads

Music is compatible with my portable player

Have a better computer (hardware and/or software)

Share more of the music I buy with others

Source: NPD Digital Music Study December 2006 (US Internet Pop. Age 13+)

Digital Music Study - Mainstream Consumer Analysis: Volume and spending estimates include respondents up to the 95th volume percentile per activity

9

P2P Consumers: Other Music Acquisition Activities (past year) (among the US internet population age 13+)

As P2P volume continues to grow, the majority of consumers still purchase CDs

73%

28%

7%

Purchased CD Paid DigitalDownloads

Subscribed

Source: NPD Digital Music Study December 2006 (US Internet Pop. Age 13+)

Digital Music Study - Mainstream Consumer Analysis: Volume and spending estimates include respondents up to the 95th volume percentile per activity

10

$61$53

$68

P2P - started in past 6mos.

P2P - started in past 7mos to 2 yr

P2P - Started 2+ yrs ago

(Downloaded via P2P in past year)P2P Downloaders: Per Capita Music Spending (Past 12 Months)

CD $43 $49 $52

Subscription $3 $4 $8

** See appendix for assumptions used to estimate dollar value

N = 171 N = 313N = 140

Source: NPD Digital Music Study December 2006 (US Internet Pop. Age 13+)

Paid Download $7 $8 $8

Established P2P users spend more onCDs than consumers new to P2P

Digital Music Study - Mainstream Consumer Analysis: Volume and spending estimates include respondents up to the 95th volume percentile per activity

11

Appendix

12

Value Definitions

The following per-unit cost assumptions were used to calculate the per capita value.

Year 2006 Year 2005Full length CD 12.80$ 13.00$ CD Single 7.97$ 7.02$ Digital Album 9.99$ 9.99$ Digital Track 0.99$ 0.99$ *Subscription Fee 8.45$ 7.80$

*Subscription Fee is self reported. Figure reported in table above is an average for all subscribers

Source: NPD Digital Music Study December 2005 and 2006 (US Internet Pop. Age 13+)