Grokster Bites the Dust! Ho-hum

On Monday, June 27, the Supreme Court handed down its decision in Metro-Goldwyn-Mayer Studios, et al. vs. Grokster, et al., and the early buzz was that the entertainment-industry plaintiffs had won, and won big. It was a rare unanimous ruling: 9-0. The Recording Industry Association of America immediately put out an upbeat press release stating: "This decision lays the groundwork for the dawn of a new day — an opportunity that will bring the entertainment and technology communities even closer together, with music fans reaping the rewards." Cue chirping birds and Beyoncé Knowles riding into the courtroom naked on a white horse, hand in hand with Metallica’s Lars Ulrich, several major-label CEOs, and maybe even Napster founder Shawn Fanning, all of them singing, "Free at last! Free at last! Thank God Almighty, we are free to make money again, at last!"

Unfortunately, this lovely vision was quickly shattered for anyone who actually read the court’s decision.

Yes, the Supremes did reject lower-court rulings in favor of the defendants, Grokster and StreamCast Networks (a.k.a. Morpheus), distributors of peer-to-peer (P2P) file-sharing software. Those lower courts had accepted a Grokster defense strategy based on 1984’s famous "Betamax" case. That decision said it was all right to sell a tool capable of copyright piracy as long as that tool was 1) "capable of substantial, noninfringing uses" and 2) as long as its creators didn’t have "actual knowledge of specific instances of infringement."

P2P advocates hoped Grokster and its cohort of second-generation P2P services might avoid a guilty verdict because their software was constructed with a decentralized architecture. They didn’t maintain central servers tracking the files being traded. Technically speaking, they had no "actual knowledge" of infringement.

A close look at Justice David Souter’s lead opinion shows that he saw right through this bluff: "We hold that one who distributes a device with the object of promoting its use to infringe copyright, as shown by clear expression or other affirmative steps taken to foster infringement, is liable for the resulting acts of infringement by third parties."

That middle clause is really important. Music-industry gadfly Bob Lefsetz pointed out just what this means in an edition of his daily e-mail bulletin, "The Lefsetz Letter": "If you think the Grokster decision is a referendum on P2P, you just haven’t read it. Rather, it’s a referendum on SCUMBAGS! That’s what Grokster and StreamCast are. [Napster’s inventor] Shawn Fanning was eager to create a system for people to acquire music. Grokster and StreamCast just wanted to sell advertising."

Indeed, Justice Souter was careful not to indict the technology employed by the defendants, instead zeroing in on two aspects of their business plan. First, he wrote, ". . . each company showed itself to be aiming to satisfy a known source of demand for copyright infringement, the market comprising former Napster users." He’s right: The defendants actively promoted themselves as Napster substitutes in the aftermath of the 2000 court decision that shut that service down — via their newsletters, advertising and (in the case of the StreamCast service) a server blatantly called Open Nap.

Second, and perhaps more crucially, Souter and the Supremes found Grokster suspect because ". . . both companies generate income by selling advertising space, and they stream the advertising to Grokster and Morpheus users while they are employing the programs. As the number of users of each program increases, advertising opportunities become worth more . . . Users seeking Top 40 songs, for example, or the latest release by Modest Mouse, are certain to be far more numerous than those seeking a free Decameron, and Grokster and StreamCast translated that demand into dollars."

In fact, what was condemned here was not P2P, but P2P services specifically designed, distributed and maintained for illegal uses; P2P services whose makers widely advertise their capability to steal copyrighted work; and P2P services that use the traffic generated by piracy to sell advertising.

In essence, the biggest revolution in the court’s ruling is that it’s figured out that a file-sharing network is not the same thing as a VCR, and they needed to correct accordingly. Most of us already understood the difference long ago.

The upshot of all this is that a more threatening next generation of P2P services, like BitTorrent, could well get away scot-free. Since BitTorrent has no ads and survives entirely off donations, its operators have no clear profit motive and don’t appear to be taking "affirmative steps taken to foster infringement." The software’s inventor, Bram Cohen, calls it "a free-speech tool" — although for most people, BitTorrent’s main draw is that it allows them to acquire entire movies and albums many times faster than older P2P services did.

So, how important was this opinion?

Two days before the court handed down its decision, even the long-reviled former head of the Recording Industry Association of America, Hilary Rosen, contributed a discerning opinion about its import to the Huffington Post. She wrote: "It is said that the Supreme Court’s decision will be one of the most important copyright cases ever on the books. I think it has all the makings of being famous for another reason. Because while the victory of whoever wins may be important psychologically, it just won’t really matter in the marketplace."

Here’s what the marketplace had to say about this case. On the day of the decision, Sony BMG chief executive Andy Lack announced a desire to move forward with a legal version of Grokster — even though Grokster had just been sued out of existence. And then there was Wall Street’s reaction. Optimistic? Pessimistic? Well, the closest thing the major labels have to a pure play, Warner Music Group stock, was trading at normal volume, and it fell 5 cents a share. That’s called indifference.


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