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Wall St. and Business Wednesdays: The Thieving Ants and The Serenading Grasshoppers - Toward A Legal Solution For Downloading Music and Movies by Reuven Brenner

The Law lives by its words. But the world – lives.

Occasionally people’s willingness to live first and philosophize later brings about confusion and problems. Yet unless these confusions and problems are properly addressed, it becomes more costly and more difficult to address and solve them as time passes. That’s the present case with the music and movie distribution business.

In the MGM v. Grokster case, which the Supreme Court now considers, the Hollywood studios and record labels asked the Court to hold the developers of popular software for Internet downloading, known as “peer-to-peer file sharing, accountable when users of their software download copyrighted music and movies. Though that is NOT what the court should decide, they should definitely consider the case and make – hopefully – a decision whose nature is discussed below.

The record labels won a federal appeals court order shutting down Napster in 2001. Then they tried to go after other distributors, such as developers of two programs Grokster and Morpheus. But in 2004, the same San Francisco court that shut down the old Napster refused to do the same to these developers. The court argument was that since Grokster and Morpheus allow users to trade music and movie files without passing through a central site like Napster, they should not be held accountable for bootlegged material swapped using their software. The entertainment industry appealed to the Supreme Court, which agreed last December to hear the case. The parties expect a decision by the summer.

The arguments from the various parties are well known. The entertainment companies say that they lost billions in sales to downloaders, and expect more of the same. The movie industry executives argue that the unsettled recognition and enforcement of property rights prevents them from distributing movies through the Internet. The Congress, however, has refused to pass a law that would hold software and hardware makers liable when people download copyrighted material.

What’s the legal solution? It is pretty simple.

The technology changed the meaning of the words. A “consumer” is a person who acquires goods or services for direct use or ownership rather than for resale or use in production and manufacturing. A “distributor” has two meanings: 1). Someone, person or company, who markets merchandise; 2). a person with authority to allot or deal out.

Napster, Grokster, Morpheus, or the new, faster kids on the bloc, such as BitTorrent and e-Donkey (it’s good to have access to informed teenagers), allowed “consumers” to become “distributors.” Obviously, though, access to the technology did not mean that the consumer acquired the right to distribute merchandise. Although, the technology did allow them to turn into “using” music in “production,“ and in “manufacturing.” Yet the law continued to treat consumers who also became “distributors” as if they stayed mere “consumers.”

The courts and Congress were thus right in deciding that the aforementioned companies should not be held accountable for material swapped using their software. The law does not hold car producers or private highways accountable for consumers who use them for fast delivery and distribution of stolen goods. Even those buying the cheaper goods may not be held liable – unless there is proof that they should have known the goods’ dubious origins. The law holds the persons committing the acts liable.

The reluctance of the court to prohibit all sharing of copyrighted material is understandable and has precedents too. After all, limited, well-defined use of Xerox machines, tapes, CDs and DVDs for copying copyrighted material for distribution is acceptable. Anyway strict prohibition would be not enforceable, and would even bring about a backlash.

The recording industry made a mistake by suing individuals for alleged illegal downloads. Instead, they should have sued individuals for becoming “distributors” without fulfilling the obligations that such function requires. The entertainment industry should encourage such competition for legal diffusion of its products, since it increases its profits. Middlemen would cost less. If consumers decide to upload songs and become their “distributor” – and pay the owner of the copyright royalties – what could be better for the music business – and for society?

Thousands of music-frenzied teens, becoming young entrepreneurs. How they would make their business commercially successful, is another question, which is of concern to the record business only when these new distributors do not pay the required royalties. The record business can then sue them, and the unsuccessful young entrepreneur would file for bankruptcy. But this would impact their future credit ratings, the expectation of which would make them think twice about launching a music or movie distribution business on the net, or not.

Some clarification: The fact that distributors of downloaded music did not upload their music with the “intention” of distributing it, but just to “share” among friends – is irrelevant. Motivations are irrelevant for defining the consequences for one’s actions,. The technologies have been developed for distribution, and are advertised as such. Thieves may declare they are Robin Hoods too. But words are cheap, and they would be held accountable. Also, the fact that cars offer quicker escape than say bicycles, and crowded cities offer greater anonymity than villages, and enforcement costs more – does not mean that thieves in a city should be offered greater lenience, or that there should be a change in legal principles. Thieves are thieves, and neither the technology they use, nor their declared motives are relevant for defining actions.

Briefly: the legal solution is simple - the sticking point may turn out to be enforcing it internationally, not domestically, as well as the evolution of technology which might make identification of thieves of valuable digits more difficult. For the moment, however, one should let software and computer code writers do whatever they want. But if a "consumer" becomes a "distributor", then the law should treat him as such. How much tolerance the law should allow in using a technology for distribution, and for a "consumer" to stay a "consumer" rather than being labeled a "distributor"? When technology causes words to loose their meaning, there are no precise answers to such questions.

A few contested cases – and time - will tell.

As to international enforcement: A historical reminder. When North African countries harbored pirates well into the 19th century, who attacked Western ships, and demanded ransom for the crew, the US sent warships and President Madison, at a stage in the war, wrote to North African rulers that, "The United States whilst they wish for war with no nation, will buy peace with none. Peace is better than war, war is better than tribute." Whereas I do not expect the US to declare war for pirating music and movies, there are trade negotiations that can achieve similar effects.

What happens if the Court decides against the aforementioned solution, or technological innovations will make enforcement costs prohibitive? How will creativity in the entertainment business be compensated for? There are non-legal solutions. First, music will be priced differently, and I-pod’s very visible success shows (though this market is minuscule relative to the free online swapping of songs). The more entrepreneurial artists will change their "business models," using their talent as loss leader, and leveraging it toward clothing (P. Diddy, J. Lo), jewelry and perfume lines, children books (Madonna), amusement parks (Dolly Parton). Others will work harder and perform live more often (Celine Dion). New technology always brings about commercial opportunities, though it requires occasionally drastic restructuring and much resistance.

And, may be it requires some re-education. Perhaps Aesop taught us the wrong lesson (about the benefits of savings) in the fable about the singing crickets and the hard-working ants, and the lesson might be this:

During the long days of summer,
the ants were working hard.
The grasshoppers were serenading them,
from daybreak till dark.

When winter came,
the ants had food stored away.
The grasshoppers begged them for mercy,
but the ants turned them away.

The lesson here is, I would say,
Never give songs away -
- But insist on payments along the way.

Reuven Brenner is Management Professor at McGill University holding its REPAP Chair. He is also a partner at Match Strategic Partners. He can be contacted via e-mail at:

Wednesday, May 4, 2005

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