Grokster and Corporate Laziness

CommuniK Commentary by K. Matthew Dames

Commentary by K. Matthew Dames, executive editor.

Political Washington is all abuzz about the confirmation and swearing in last Thursday’s of John G. Roberts, Jr. to be the nation’s 17th Chief Justice of the United States. Roberts’ confirmation was made official just in time for the U.S. Supreme Court to begin its new term this morning, Monday, Oct. 3.

For me, though, the new Supreme Court term is significant not only because the Roberts court will hear and decide its first cases, but also because the new term will be the first Court term that decides intellectual property cases under the new standards the Court established in its Grokster decision.

In one of its final opinions from the previous term (which ended in late June), the U.S. Supreme Court ruled (.pdf) in MGM v. Grokster that the companies that owned and operated file sharing networks could be held liable for acts of copyright infringement that are committed by its users. The Court based its ruling in part on a theory of inducement: one who induces or encourages another to commit copyright infringement is, itself, liable for infringement.

The Grokster decision gave the movie and music industry the ability to sue file sharing companies and software distributors directly for copyright infringement, providing those plaintiffs with a potential deep pocket from which to recover damages. To date, the Recording Industry Assn. of America (RIAA), the lobbying arm for American music labels, and its foreign counterparts have sued nearly 15,000 individuals for alleged copyright infringement. Most of the lawsuits have been based on allegations of illegal trading in music and movie files over peer-to-peer networks.

There are practical problems with suing individuals, including the reality that many individual defendants will not have the financial capacity to pay a large judgment if the court levies one. This means that the entertainment industries’ primary objectives in filing these lawsuits are to extract some level of financial settlement, however small, and to create an atmosphere of fear that keeps individuals from participating in the P2P networks.

These objectives, however, seem to be failing. According to, only about 23 percent of the individuals whom the music industry sued have settled thus far. Further, the same publication notes that use of file sharing networks has increased from 3.85 million users in August 2003 (the date the RIAA began suing individuals for alleged copyright infringement in P2P networks) to 9.6 million users in August 2005.

It should be obvious to any person with a modicum of business sense that the entertainment industries’ strategy of litigation of legislation are used to merely slow or halt a changing business environment to which they cannot — or will not — adjust. I once thought that the entertainment industry would use “litigate and legislate” just long enough to allow them to adapt to and control the new environment on their ideal terms and conditions, but it seems that the industries have no plan to adjust to a new business environment.

At the recently concluded Buying Digital conference in New York, I spoke to an executive at a reproductive rights organization who flat told me that he has been trying to get his executives in his sector of the entertainment industry to leverage the new technologies and potential new business models for years. But all the executives can see, he said, is what they stand to lose based upon their known way of doing business, not the royalties and fees they can make by embracing the new technological landscape to their advantage.

This person’s frustrations pale in comparison to those experienced by customers who actually want to buy or license books, movies, music, or other content, but have no way of doing so because the entertainment industry has failed to respond to legitimate demand. In Congressional hearings last week before the Senate Judiciary Committee (which has jurisdiction over intellectual property legislation), the president of one of the file sharing companies said:

Tens of millions of consumers are thirsting for the content created and distributed by the major labels and studios – there will be – there must be – numerous business models that will generate immense profits from these individuals. It may be the incumbent business model or it may be a modification to that model. Or it might be a different model all together. I firmly believe that no legislation will serve us well unless it facilitates creative market solutions rather than mandates a specific outcome.

Yet, the entertainment industry’s adherence to “litigate and legislate” can be summed up by an RIAA official, who applauds Grokster as “[a] decision [that] gives us the chance to compete in a legitimate marketplace, to earn a return on our investment, to continue offering great music for fans everywhere.”

(The music industry — of all industries — cannot lay a claim to seeking a “legitimate marketplace” after the Federal Trade Commission found, five years ago last month, that its “minimum advertised price” policy violated antitrust laws. Now, the music industry is seeking higher prices and profits from Apple’s iTunes store after Apple CEO Steve Jobs virtually handed them the new, profitable, legal business model.)

It is apparent that the bluster with which these companies trumpet competition, “survival of the fittest,” and “may the best man win” apply to everyone except them. Instead, they “litigate and legislate,” seeking the endless time out. The strategy is intellectually and commercially lazy at best; at worst, it is a dereliction of corporate duty. Unfortunately, the Grokster decision merely reinforces such executive laziness, allowing the entertainment industries another tool with which they can can continue a strategy that ultimately will fail them anyway.

See also:

Frank Ahrens. June Supreme Court Ruling Taking Toll on Music Sharing. Oct. 1, 2005.

Thomas C. Greene. Congress Mulls ‘Post-Grokster’ Legislation. The Register. Sept. 29, 2005.

Nancy Gohring. US P-to-P Companies Will Disappear, Exec Says. Macworld. Sept. 28, 2005.

U.S. Senate Committee on the Judiciary. Protecting Copyright and Innovation in a Post-Grokster World. Sept. 28, 2005.

Jefferson Graham. BitTorrent Gets $8.75M from Venture-Capital Firm. USA TODAY. Sept. 27, 2005.

Red Herring. Bronfman Fires Back at Apple. Sept. 23, 2005.

CopyCense. Supreme Court Rules Against Grokster. June 28, 2005.

Federal Trade Commission. Statement of Chairman Robert Pitofsky and Commissioners Sheila F. Anthony, Mozelle W. Thompson, Orson Swindle, and Thomas B. Leary In the Matter of Sony Music Entertainment, Inc., et al. Sept. 6, 2005.

Barry Willis. FTC: No More Minimum Advertised Pricing on CDs. Stereophile. May 14, 2000.


Tony Smith. Artists’ Managers, Royalty Collectors Turn on iTunes. The Register. Oct. 3, 2005. Lest one think I was totally off base in suggesting that the music and movie industries are lazy, I just found this post from Copyfight in which Alan Wexelblat discusses how asinine it is for the music labels to cry foul over iTunes royalties when Steve Jobs gave them a profitable business model five years after “Napster blew their model to smithereens.”

Written by sesomedia

10/03/2005 at 10:00

Posted in Uncategorized

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