Online pirates forced to walk the plank

Jun 27th 2005
From The Economist Global Agenda

America’s Supreme Court has ruled that makers of peer-to-peer file-swapping technology can be held responsible for the copyright infringement that their products allow. This may stop much of the free downloading of music and film over the internet, but it will not cure the entertainment business’s ills. Nor will it do much for innovation

LAST weekend over 110,000 music fans paid £125 ($228) each to attend the Glastonbury festival in Britain’s West Country and hear their favourite bands perform. In years gone by, many thousands more attended than paid, as less scrupulous festival-goers jumped the fence to watch the bands for free. The organisers stamped out the practice by building a bigger and better barrier. On Monday June 27th, a ruling by America’s Supreme Court provided the entertainment industry with the means to build a bigger and better fence against the internet pirates who refuse to pay for music and film.

The court’s unanimous ruling said that Grokster and StreamCast Networks, two makers of file-sharing software, are liable for the breaches of copyright that their technology allows, thereby reversing the decisions of two lower courts. The case, originally brought by MGM, a big Hollywood film studio, was joined by 27 of the world’s leading film and music companies. The ruling means that the file-sharing firms can be sued by entertainment companies for the theft of copyright-protected material using their software.

The outcome will cheer a music industry that is in decline and a film industry that feels increasingly threatened by piracy. In the five years to 2003 worldwide music sales plunged by 22%, and in 2004 volumes were flat (supported by legitimate online music sales). The record industry largely blames piracy for its ills. Millions of music and film fans around the world use peer-to-peer (P2P) services, which let users rapidly swap music and video files directly with other individuals. Some 4m Americans swap files every day, according to Pew, an independent research organisation. Around the world some 2.6 billion songs and 12m films are downloaded every month, accounting for around half of all internet traffic according to some estimates. In over 90% of these cases, the files swapped infringe copyright protections.

It is this high level of infringement that swayed the Supreme Court towards the view of the entertainment industry. The court considered the precedent of Sony’s Betamax video-recording technology, which had faced a lawsuit brought by Disney and Universal in 1984 calling for a ban on the system because it would allow infringement of their copyrighted material. Then, the court concluded that Betamax had “substantial” non-infringing uses, such as the recording of TV programmes to be watched at a later, more convenient date.

Proponents of P2P technology argued that it too has a variety of legitimate applications, including the distribution of licensed games, music, film and software, instant messaging and telecoms through computers using the “voice-over-the-internet” protocol. They also pointed out that legal devices such as CD burners and MP3 players could be used for copyright infringement as well as for lawful purposes. But the court was satisfied that copyright infringement was the main reason for the P2P software’s existence. Justice David Souter wrote that: “Each company showed itself to be aiming to satisfy a known source of demand for copyright infringement.”

Before the Supreme Court ruling, the entertainment industry had taken other legal action to stop file-swappers. About 8,000 individuals around the world face lawsuits. The industry had Napster, the first popular file-sharing service, closed down in 2001 (though it has since returned as a legal downloading service); a judge issued an injunction to prevent Napster continuing in business, on the grounds that it had failed to use its central servers to block users who broke the law. Grokster and StreamCast tried to get around this objection by writing software that allowed files to be swapped without a central server.

The threat of legal action against individuals has probably helped to make legal music downloading more popular. The IFPI, an industry body, says that the number of legitimate download sites has surged, and there were over 200m legal music downloads in 2004. Around 35% of music consumers now download tracks legally, according to a recent survey from Entertainment Media Research, a consultancy (though the number of users offering illegal files has also grown, to 8.6m compared with 6.2m a year ago).

The Supreme Court ruling is set to have a devastating effect on P2P networks. Though hobbyists may continue to write file-sharing software away from American jurisdiction, investors are likely to steer clear of commercial P2P operations for fear of legal repercussions there. The legitimate uses for P2P technology may thus suffer a severe setback. Although the court concluded that software firms would only be liable if their purpose was “to cause and profit from third-party acts of copyright infringement”, developers of any future P2P technologies will still have to consider possible illegal applications before unveiling new products. And although the court said that firms will not be held responsible if they discover only after launching a product that it is being used for illegitimate ends, there is considerable scope for interpretation over what may constitute encouraging copyright piracy.

Not quite the victory it seems

Nevertheless, this blow against piracy may not be the magic bullet that the entertainment industry hopes will end its malaise. A Pew survey suggests that the swapping of music and film files doesn’t just happen over file-sharing networks. Some 19% of downloads, involving about 7m individuals, now happen through someone else's iPod or MP3 player. Around 28% take place via email and instant messages. And quite apart from file-sharing, one in three CDs sold worldwide is pirated, according to the IFPI. Enforcement action to protect material under copyright has seen seizures of illegal CD-copying equipment double since 2003. Copyright theft through DVD piracy is equally worrying for the film industry, especially in countries like China, Indonesia and Mexico.

Furthermore, legal downloading could cannibalise industry profits as fans are given the ability to pick and choose favourite tracks rather than having to buy whole albums. Indeed, advocates of P2P file-sharing insist that the option to sample for nothing an artist’s oeuvre could work in the record company’s favour as music buyers discover new favourites whose material they will subsequently pay for. Ultimately, many critics of the music business claim that its problems stem from an inability to produce a product that consumers want to buy, and that most illegal downloaders will flatly refuse to pay for unappetisingly packaged songs and films that they previously got for free.

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