Grokster and StreamCast face the music
Mar 24th 2005
From The Economist Global Agenda
The entertainment industry is taking 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 will begin 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 defendants in the case are two firms that make file-sharing software: StreamCast Networks and Grokster.
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 allowed “burning” of music tracks on to CDs with the help of a computer. 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. And now the swapping of new films online is gaining ground too, to the chagrin of the movie industry.
This comes 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 umbrella group, 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. The music industry largely blames illegal file-sharers for its ills, noting that CD sales are dipping steeply in countries where broadband internet access is growing fast.
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. P2P software allows computers to talk to others running the same software without having to use intermediaries. Grokster and StreamCast argue that they are not able to control the use to which their software is put, whether it be searching, downloading or sharing.
In court, the two software firms will no doubt cite the case of Sony’s Betamax technology as a precedent. The home video-recording system, which was eventually superseded by VHS, faced a suit in 1984 in which Disney and Universal called for its ban. The entertainment firms feared that the ability to record on to video would allow considerable infringement of their copyright. America’s Supreme Court ruled that Sony was not liable because the equipment had “substantial” uses other than infringement, such as the recording of TV programmes for later viewing.
Similarly, the software produced by StreamCast and Grokster has significant non-infringing uses, such as sharing music that is not copyright-protected and internet-routed phone calls. 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.
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 copyrighted 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. And in 2004, according to the IFPI, the number of legal download sites increased four-fold to 230 and the number of legal downloads to over 200m (a figure that could double in 2005, according to forecasts). Apple’s iTunes, the largest legal download catalogue, has over 1m songs available and handles over 1m downloads a day.
But even if the entertainment business manages to coax more users into paying for legal downloads and succeeds in court against Grokster and StreamCast, its problems are unlikely to go away. True, a Supreme Court ruling in the industry’s favour would put paid to other P2P services. But it is not clear that curbing illegal downloading will translate into extra sales for the music business. A rush into legal downloading would hardly be good for sales of CDs: some cannibalisation is inevitable. And perhaps the decline in global sales is indicative of a far greater problem for the music industry—consumers simply think that many of its products are just not worth paying for.
