[opendtv] Analysis: Don't Scapegoat Grokster For Music Industry

http://www.forbes.com/2005/06/24/grokster-supreme-court-case-cx_ah_0624diglife.html

Don't Scapegoat Grokster For Music Industry
Arik Hesseldahl, 06.24.05, 10:00 AM ET

NEW YORK - All the signs are pointing to a Monday decision from the 
U.S. Supreme Court in the MGM v. Grokster case, and so June 27 may 
turn out to be a watershed day for the digital media business.

What's at stake is not the right of people to freely share and make 
copies of copyrighted content. That's already illegal, and recording 
companies have already sued nearly 12,000 people in the U.S., 
settling about one-fifth of those suits. What's at issue is whether 
the companies who make the software that enable the sharing are 
liable for contributing to the rampant copyright infringement that 
takes place.

The court has been down this road before. In 1976, Universal 
Pictures, now a unit of General Electric's  (nyse:  GE - news  - 
people  ) NBC, sued Sony (nyse: SNE -  news  -  people  ) seeking to 
stop sales of the latter's Betamax video cassette recorder, on 
grounds that it would encourage copying and distribution of their 
copyrighted material. It took eight years, but in 1984, Sony 
prevailed, and while the Betamax video format failed in the 
marketplace, consumers won the right to record TV shows and movies.

The justices figured that as long as most people used VCRs to record 
shows for their own use, that was sufficient reason to allow sales of 
Betamax recorders to proceed. From this we get the often repeated 
phrase "substantial non-infringing uses."

Lawyers for Grokster and Streamcast, the defendants in the current 
case, have argued that legally they're no different from a Betamax. 
How their customers use their software and services isn't something 
they can control, they argue, and so they're not responsible for any 
of the copyright infringement that does take place on their services.

Indeed, millions of people use file sharing networks legitimately. 
And so far, the lower courts have agreed.

But that doesn't sit well with Jeff Modisett, former attorney general 
for the state of Indiana. Now in private practice with Bryan Cave in 
Los Angeles, his clients include the Motion Picture Association of 
America, he works as a liaison with state attorney generals around 
the U.S. on issues relating to digital piracy.

For Modisett, a clear win in the case would be one in which companies 
such as Grokster and Streamcast would be barred from "building a 
business based on illegal behavior." He says Grokster and Streamcast, 
and outfits like them, can't claim they're just conduits with no 
active role in the trading of copyrighted music and other files. 
They've essentially built a business around enabling and inducing 
their customers to break copyright laws, he says.

But sometimes, trying to clean up one messy problem unintentionally 
creates another, and that's what Adam Petruszka, director of 
strategic business development at Hewlett-Packard (nyse:  HPQ -  news 
-  people ) worries might happen if the justices rule too strongly 
against Grokster and overrule the Betamax case.

He says a more rigid environment could make it more expensive and 
difficult for companies to develop digital media products. "If a 
ruling came down that said that the standard set in the Betamax case 
isn't good enough and imposed a lot of new legal tests that a device 
would have to meet in order to not be infringing, that would add a 
lot of friction and cost to the development process."

Companies would have to clear many more legal hurdles before deciding 
to release new products out of fear of being sued because someone 
uses it to infringe on copyrights, he asserts.

During oral arguments in March, Justice David Souter alluded to this 
when he spoke hypothetically with Donald Verrilli Jr., a lawyer 
arguing for MGM and the media companies. "There's never evidence [of 
copyright infringing uses] at the time the guy is sitting in the 
garage figuring out whether to invent the iPod or not. ...How do we 
know in advance anything that would give the inventor, or more 
exactly the developer, the confidence to go ahead?"

And therein lies a crucial question before the justices. Clearly, 
they need to adjust the standards set in the Betamax case to bring it 
up to date with 21st century technology. The consumer using a VCR at 
home never threatened the entertainment industry by making copies of 
Seinfeld episodes. But consumers are downloading billions of songs 
(and increasingly, movies, music videos and videogames) without 
paying for them, and that does represent substantial lost revenue for 
media companies.

But will they change the rules in such a way that smart new products 
and services lead to a lawsuit before they have even a realistic 
chance of getting off the ground? That's not going to help anyone, 
least of all the media companies suing Grokster and Streamcast. If 
anything, they need more market-driven incentives to offer their 
music and movies and other content in consumer-friendly digital 
formats. Giving them carte blanche to sue the creator of the next 
iPod certainly isn't the answer.

Why not compete with free download services on their own turf? 
Companies such as Apple Computer (nasdaq:  AAPL -  news  -  people 
), RealNetworks (nasdaq:  RNWK -  news  -  people  ), Napster (nyse: 
NAPS -  news  -  people  ) and others are making a go of selling 
music online legally. They have a long, long way to before they even 
come close to the number of pirated downloads, but the early results 
are encouraging.

Make the media companies compete, and they'll find a way to innovate 
on their own. Give them an excuse to start suing entrepreneurs with 
new ideas, and they'll just become more complacent than they already 
are.

With luck, at least five justices will see that too, and will rule accordingly.
 
 
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