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Wed Mar 30 16:53:19 PST 2005

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GROKSTER AND STREAMCAST FACE THE MUSIC
Mar 30th 2005  

The entertainment industry has taken its battle against illegal
downloading to America's Supreme Court. But attacking the technology
behind file-sharing could stifle innovation without tackling the
industry's long-term problems

THE music business should have stuck by Thomas Edison's technology if
it wanted to avoid the threat of piracy. His wax cylinders could record
a performance but could not be reproduced; that became possible only
with the invention of the flat-disc record some years later. On Tuesday
March 29th, America's Supreme Court began to hear testimony in a case
brought by the big entertainment companies that is intended to stop the
illegal downloading of copyright-protected music and film. The
industry's target is the peer-to-peer (P2P) technology that allows the
swapping of files directly over the internet. The case in question pits
two makers of file-sharing software, StreamCast Networks and Grokster,
against the entertainment business, represented by one of Hollywood's
most famous studios, Metro-Goldwyn-Mayer (MGM). And the judges, despite
their years, showed that they were well acquainted with the world of
file swappers and the digital gadgetry that a ruling against the P2P
firms might stymie.

The entertainment business has long been susceptible to copyright
infringement--and it has usually blamed the electronics industry. The
music industry first cried foul at the introduction of the
cassette-tape recorder in the late 1960s. More recently, the
digitisation of music has led to widespread "burning" of music tracks
on CDs using home computers. The latest threat to the record companies
is a copying technique of even greater speed, ease and scope. Every day
some 4m Americans swap music files over the internet, according to
figures from Pew, an independent research organisation. Now the
swapping of new films online is also gaining ground, to the chagrin of
the movie industry. Donald Verrilli, the lawyer representing the
entertainment business, said in Tuesday's court hearing that
file-sharing was "a gigantic engine of infringement" that allowed the
theft of 2.6 billion digital music, film and other files every month.

The file-sharing threat has come at a particularly bad time for the
music industry, which is struggling to reverse a long-term decline.
According to the IFPI, a recording-industry body, worldwide music sales
plunged in value by 22% in the five years to 2003--a drop of over $6
billion. In 2004, sales fell by 1.3%, though that decline looks less
bad when revenue from legal digital downloads is added in. Though there
has been a debate on the extent to which file-sharers would otherwise
have gone out and bought copies of the songs they are downloading, the
music industry largely blames them for its ills, noting that CD sales
are dipping steeply in countries where broadband internet access is
growing fast. Since P2P software allows computers to talk directly to
others running the same program without intermediaries, Grokster and
StreamCast argue that they are unable to control how their software is
being used, and thus are not responsible for any illegal sharing. 

Some suggest that the latest attempt to curb illicit
file-swapping--legal action against the technology that drives P2P
networks--threatens the future of innovation. Justice Antonin Scalia
appeared to have some sympathy with this view. He suggested that a
ruling for the plaintiffs in MGM V GROKSTER could stifle development of
new technologies, since potential innovators might fear that, as he put
it, "I'm a new inventor, I'm going to get sued right away."

THE BETAMAX PRECEDENT 
In court, the two software firms cited the case of Sony's Betamax
technology as a precedent. The home video-recording system, which was
eventually superseded by the rival VHS format, faced a suit in 1984 in
which Disney and Universal called for its ban. The film studios feared
that the ability to record on to video would allow considerable
infringement of their copyright. The Supreme Court ruled then that Sony
was not liable because the equipment had "substantial" uses other than
infringement, such as the recording of TV programmes for later viewing.
(Ironically, Sony nowadays owns a giant music-recording business and
thus finds itself, awkwardly, on both sides of the argument.)

Similarly, the software produced by StreamCast and Grokster has
significant non-infringing uses, such as sharing music that is not
copyright-protected and making phone calls over the internet. In fact,
some make the case that P2P technology could make the internet more
robust and secure by avoiding the use of centralised servers, and that
the entertainment companies' lawsuit is thus harmful to the web as a
whole. Richard Taranto, Grokster's lawyer, pressed the justices to
apply the Sony precedent but was reminded by Justice Ruth Bader
Ginsburg that the previous ruling was longer and less straightforward
than merely deciding if a technology had some non-infringing uses.

Napster, the first and best-known of the file-sharing businesses, was
killed off by the music industry in 2001. Because it used central
servers and so had the ability to block users who broke copyright laws,
a judge issued an injunction ordering Napster to shut its servers down.
At the time, it boasted some 14m users. Since then, the industry has
ramped up action against file-sharing and widened its attack by going
after individual downloaders as well.

At present, some 8,000 individuals around the world face lawsuits for
illegal file-sharing. The industry has backed up its legal moves with a
publicity offensive aimed at convincing the public that unauthorised
downloading is theft. As well as cinema- and TV-advertising campaigns,
45m instant messages have gone out to users of P2P services, warning
them to stop putting copyright material on the internet. America's
Department of Justice has weighed in too, even suggesting that P2P
services could be used to support terrorism. Others have muttered
darkly that the technology is a conduit for illegal pornography.

There are some signs that these measures are working: surveys suggest
that internet users are becoming more wary of illegal file-sharing, for
instance. However, according to the IFPI's own figures, the number of
unauthorised music files on the web has grown in recent months after
falling sharply in the first half of 2004 (see chart). The number of
users is also up, with 8.6m offering illegal files compared with 6.2m a
year ago. 

The music business has employed other defensive measures. Apart from a
round of mergers and cost-cutting over recent years, the industry has
tried to embrace legal downloading. Napster itself was reborn as a
legal downloading service. In 2004, says the IFPI, the number of
legal-download sites increased four-fold to 230 and the number of legal
downloads to over 200m. Apple's iTunes, the largest legal-download
catalogue, has more than 1m songs and handles over 1m downloads a day. 

The Supreme Court is expected to take about three months to rule on MGM
V GROKSTER. But even if the entertainment business wins the case, while
managing to coax more users into downloading legally, its problems are
unlikely to go away. The rush into legal downloading is bound to
cannibalise sales of CDs and DVDs, hitting profits. And perhaps the
decline in global sales is indicative of a far greater problem for the
music industry--that consumers simply think many of its products are
not worth paying for.

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