Grokster P2P Update
In June 2005, the U.S. Supreme Court issued its ruling in MGM Studios v. Grokster holding that anyone distributing “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 copyright infringements by third parties, such as end users of peer-to-peer (“P2P”) networks. (See update dated June 28, 2005). Since then, there have been a number of interesting developments in litigation, usage trends, and the development of lawful P2P networks.
Federal Appeals Court Affirms Damages Judgment against P2P End User
In December 2005, the U.S. Court of Appeals for the 7th Circuit upheld a lower court’s ruling granting copyright owners $22,500 in statutory damages against a woman who was caught by the RIAA illegally downloading music files over the KaZaA P2P platform. Although the case, BMG Music v. Gonzalez, breaks no new legal ground, it is the first appellate court ruling affirming significant damages against a P2P end user in the controversial RIAA campaign for bringing copyright infringement litigation against consumers for illegal music downloads.
In Gonzalez, the defendant asserted that her downloading of music files was fair use and therefore lawful. She asserted that she was merely “sampling” the music and either already owned or had bought CDs for many of the songs she downloaded. The court rejected her fair use argument that relied on the Supreme Court’s Sony Betamax case. Betamax involved video taping of broadcast programming for the purpose of watching the program once at a later time than the original broadcast. The Supreme Court found that the broadcasters distributed their programming over-the-air to consumers without charge and thus “time shifting” did not impact the nature of the broadcaster’s copyright license. In contrast, a downloaded file retained on a hard drive “is a direct substitute for a purchased copy” without the license fees paid to copyright holders.
The 7th Circuit also focused its analysis of the “fair use” defense on one of the four “fair use” factors considered under Section 107 of the Copyright Act: “the effect of the use upon the potential market for or value of the copyrighted work.” The defendant argued that “downloading on a try-before-you-buy basis is good advertising for copyright proprietors, expanding the sale of their inventories.” However, the court rejected the defendant’s argument because it was premised on the incorrect view that copyright owners’ only interests are in the sale of CDs containing multiple songs. “Not so” said the court, pointing to the sale of single songs by download and otherwise. The court also noted that terrestrial and web radio stations pay royalties for the right to allow sampling of music prior to purchase, but most sampling is not of entire songs. The court concluded that defendant’s conduct of downloading without proper copyright compensation “cannot be deemed ‘fair use.’”
P2P Usage Continues to Expand Rapidly
In September 2003, RIAA filed 261 civil lawsuits against P2P end users claiming that their file-sharing activity constituted copyright infringement. Since then, over 15,000 similar lawsuits have been filed, including the one against Ms. Gonzalez discussed above. These cases typically settle out of court for between $3,000 and $4,000 each, and as the Gonzalez case emphasizes, there is great risk in not settling. Although one would think that this litigation would have a deterrent effect and slow down the development of illegal file sharing, the success of this litigation is subject to dispute.
What is clear is that over the last two years, there has been a rapid expansion in P2P usage and the introduction of even more advanced P2P protocols. By June 2004, it was estimated that P2P users online at any given time were sharing a petabyte (10 million gigabytes) of data. Furthermore, according to one study, between September 2003 and June 2005, the number of average monthly P2P users had more than doubled to nearly 9 million global users. This usage represents between 50 percent and 70 percent of bandwidth consumption over ISP networks.
The introduction of more advanced protocols with faster downloads and more robust search features has no doubt contributed to the rise in P2P usage. Even before the Supreme Court’s ruling against KaZaA in MGM v. Grokster last summer, KaZaA was losing favor with P2P users. BitTorrent and eDonkey are on the rise and the adoption rate is staggering. In the summer of 2004, another P2P study reported that BitTorrent surpassed KaZaA as the most prevalent P2P service on ISP networks with 53 percent of the total P2P traffic. This is significant because BitTorrent is optimized for large file transfers and has contributed to the very rapid increase of movie and video piracy over its P2P network. More recently, this study was updated and revealed that in August 2005, eDonkey surpassed BitTorrent in traffic.
The Rise of Lawful P2P Networks
With the clear pronouncement from the Supreme Court in Grokster making P2P networks secondarily liable for inducing copyright infringement, it is not surprising that several unauthorized P2P networks have closed their doors. It is also not surprising that entrepreneurs have viewed this case as an opportunity to “come clean” and offer legalized paid downloads over their P2P networks.
Although Grokster recently entered into a $50 million settlement with the content industry and shut down its site, Mashboxx, a company founded by the former president of Grokster, has acquired the holdings of Grokster. It will use Grokster’s directory of users and create a “copyright respecting P2P service” with content from Sony BMG, Universal, EMI and Warner Music. The new “legal” P2P service will be called Grokster G3 and is now in beta testing.
Also, in 2004, the music industry settled its legal action against iMesh, one of the first post-Napster P2P networks, for $4.1 million. Since then, iMesh, like Mashboxx, has worked with the music industry to establish a new iMesh service charging for lawful downloads and this service is now in commercial deployment.
Central to the legitimacy of the new iMesh and Mashboxx P2P services is the integration of copy protection and tracking technology into the P2P client. This allows the end user to download music files licensed by the record labels to the P2P service for distribution. The P2P service can charge for the download on either a per download or subscription basis and track precisely the titles that are being transferred. The revenue from these P2P transactions flows upstream to the P2P service provider and royalties can accurately be paid to the rights holders who have interests in that particular song.
The Informa Media Group predicts that by 2010, digital music downloads will account for $2 billion, or one-third of the $6 billion Internet digital music business. Moreover, with announcements like that of NBC Universal to release video content to authorized P2P networks, it is expected that paid video downloads and file sharing will increase dramatically in the near term. This growth in both music and video downloads will no doubt require increased amounts of bandwidth from carriers and ISPs.