Kaboom!

That was the sound heard throughout wall street asentertainment stocks blast off into the stratosphere upon the mid day news that MGM got the best of the Grokster decision. Wall Street traders and investors recognizing that the decision would lead to certain demise for illegal P2P filesharing sites and result in an explosion of music sales over the coming months and years, pushed stocks such as Warner Media Group to all time highs on record volume.

Except that didn’t happen.

In the business world, one way to evaluate the financial importance of news is by watching to see how Wall Street responds to it. If there is the slightest glimmer of hope in a news announcement, at least one person is going to think it will have some level of impact and make a bet on the stock and/or industry impacted.

There wasn’t a Kaboom, there wasn’t a whisper in the market. Not one buyer or seller of stocks gave a damn. Warner Music Group, probably the only public company that is a pureplay proxy forthe music business, traded almost exactly the same number of shares as it does every day. The stock was down a nickel.

In other words, no one cared. No one on Wall Street thought that this decision would impact the music business at all.

Of course that’s because it won’t.

THe MGM Grokster decision won’t help the contentbusiness make more money. It won’t help artists make more money. This deal gave something to both sides, but it gave the most to lawyers and lobbyists.

The good news is that at least the SCOTUS kept the focus on how technology is marketed rather than what it does.The bad news is thatthe MPAA and RIAA will jump all over the slightest double technolgy entendre that any marketing blurb or item could have.

I’m not sure how companies are going to protect themselves against it.

How are companies who invest in technology going to protect themselves and their investments against it?

This is from a contract for an investment that I was looking at.It was a very smart moveto ask for this protection and i have every intention of stealing it and using itin any digital asset acquisition I undertake in the future.

Digital Millennium Copyright Act Compliance. Seller has complied with all the requirements in Section 512(c) and 512(i) of Title 17 of the United States Code to qualify for a limitation on liability for copyright infringement, including without limitation (i) having no actual knowledge that any material or an activity using the material on the Seller Websites is infringing; (ii) having no awareness of facts or circumstances from which infringing activity is apparent; (iii) upon obtaining knowledge or awareness that material or an activity using the material on the Seller Websites is infringing, acting expeditiously to remove or disable access to any infringing material, and (iv) upon receiving notification of claimed infringement, responding expeditiously to remove or disable access to material that is claimed to be infringing or to be the subject of infringing activity.

With the Groksterruling, going forward,just how onerous will theprotection language be for purchases of, or investments indigital technology? Will it be enough forthe target company to promise that they complied?

Or, will contract appendixes have copies of all marketing materials as confirmation that the target companynever induced anyone to infringe on a copyright? What about emails sent to prospects and customers? Will we have to save them all to confirm what we did or didn’t suggest when marketing and promoting the technology?

Is this the start of a “Sarbanes Oxley” type environment for technology companies? Will companies have to save and document everything they do in the marketing and promoting of their technologies? Will they, or rather, should they video all presentations and record all phone calls?

How else can we know that we are protected against unwarranted law suits that are used as competitive weapons to slow new technologies?

I don’t know how it will all turn out. It’s probably not as bad as our worst nightmares, but there is the risk that it just might be.

I guess the only certainty from all of this is that it’s probably a good time to create a new type of insurance that insures companies against the cost of defending the Grokster lawsuits that are sure to come.

See what the blogosphere is saying about the ruling

31 thoughts on “Kaboom!

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  7. I’ve never understood the RIAA argument. When I was a kid I used to sit by the radio with a blank tape ready to go so I could record songs I liked. Wasn’t that copyright infringement? Nobody bitched back then. In college I would borrow CDs from the library and burn copies. Same thing. But the truth is that if I really like an album I usually go buy it in the store. It’s the same reason I buy videos of movies I’ve seen and hardbacks of books I read in paperback or checked out of the library.

    Comment by Rob -

  8. Yeah, it seems to me that this is all about how something is marketed.

    I’ll throw in with Charles. I read the decision, I coked my head and I laughed. This is a terrible decision for the RIAA. There is such a thing as winning the battle but losing the war. They’re now on the path of losing their war.

    Just wait for it. It’s a matter of time before a P2P service pops up, and whenever you load it, the first thing you see is a whole series of independant and authorized content. Furthermore, the service would actually do searches on people sharing that content and give “points” or something like that to people sharing that content. Then they could use a BitTorrent-esque swarm mechonism to actually get the content from one person to the next.

    This is the RIAA’s worst nightmare. (The MPAA are more neutral in this way, mainly because they really don’t have a whole lot of aminosity…yet.) Why? Because it’s independant artists getting promotion. And that’s the reason they’re trying to shut down P2P. Piracy? Losing sales? They’d do more good with an ad campaign against used store sales to be honest. People equate P2P not to CD sales, but to the Radio, which is cultural to “tape” things from the radio for personal use. That’s the culture that made them lots of money. They’re really going to have to live with it one way or the other.

    Comment by Karmakin -

  9. I think it is ridiculous to hold the software company responsible for illegal activities of the users of the program. P2P programs do have a legitimate use, and it is not the software companies fault if the users are using the program to share copyrighted files. Limiting the functionality of a program to ensure that is not being used illegally makes me cringe.

    Imagine this: an operating system which required a DNA sample each time you tried to delete a file. You wouldn’t want to let an unauthorized person delete someone else’s file, would you?

    Comment by kris -

  10. Just an FYI, most ISPs or ISP-like entities (service providers) have filed or should have filed DCMA contact information with the Registrar of Copyrights in DC. See the link below for more info.

    http://www.copyright.gov/onlinesp/

    This goes a long way towards showing that you’re not promoting infringement on your service. Infringement clauses should also be in your ToS and click-through as well. And, of course, you shouldn’t be promoting the un-kosher uses of your stuff.

    Ask your lawyer for more info. It’s actually pretty interesting.

    Comment by Manny Veloso -

  11. I’m disappointed, i don’t know all the specifics of the case, but why grokster would go this way and CDs,DVDs,DAT tape,VCR tape didn’t makes no freaking sense…

    how about copy machines, and digital cameras…how come canon, and nikon aren’t being sued because people can take snapshots of celebrities… arg…

    congress, is almost technology illiterate.. with 1 exeception, attorneies seem woeful in their grasp of technology.
    and the supremes, they were much better 30 years ago at carrying a decent tune.😉
    kurt.

    Comment by kurt -

  12. Dear Mark,

    I’m a bit confused here, but what I understood is that a p2p file sharing program is not ilegal if it is promoted to have a “greater use” other then incite piracy. This made me wonder: university students who use I2hub for academic p2p file sharing are going to be made legal? After all I don’t see a “greater use” of file sharing other than academic…

    I hope to hear something from you or any other person who could explain to me this specific case of the I2hub file sharing.

    Best,

    theConfused

    Comment by theConfused -

  13. re: “I guess the only certainty from all of this is that it’s probably a good time to create a new type of insurance that insures companies against the cost of defending the Grokster lawsuits that are sure to come.”

    Mark, they already have it — it’s called E&O Professional Liability with technoloogy and media perils coverage. If you know someone that needs help, send them my way.

    Comment by Kevin Heller -

  14. Mark,

    Someone called you a rabble-rouser on the link below.

    I may rable but I’m not feeling terribly ‘roused by you. [Ducks.]

    http://toob.typepad.com/content/2005/05/ho_ho_very_funn.html

    Comment by DaTSauce Guy -

  15. Charles, thanks for the background. If that’s the case, then it smells like a business opportunity for somebody.

    I think part of the problem is a principle that Chris Anderson articulated in the classic Wired Magazine “Long Tail” article, which shows how internet distribution dramatically increases the revenue potential for mid-market and backlist content.

    Anderson makes a convincing case that in order to have a strong “Long Tail” business, you need to have hits in addition to niche content. One of the reasons that some of the early indy-focused digital music ventures failed is that they focused on niches and didn’t have hits. Amazon and Netflix let someone who’s looking for a hit to find tasty and obscure artists who have similar fans.

    Also, I’m wondering whether the opportunity is very tactical. The engineers who started the p2p companies don’t know the people or business of entertainment. Are there any p2p companies that want to hire an entertainment pro as VP of business development? Will the Grokster case help matters, since the tech companies will be looking for non-infringing business models?

    Comment by Adina Levin -

  16. If you read Wil Wheaton’s blog (Star Trek Next Generation) or his interview at Slashdot.org, he’ll say that piracy hasn’t hurt him as much as creatative studio accounting. It seems the director of The Lord of the Rings, Peter Jackson, feels the same way, in the tune of $100 million. I remember seeing TLC on MTV or VH1 saying they sold millions of records but had to file bankruptcy. They started listing their expenses and the “cuts”. They said it was the best deal they could get at the time for new artists.

    I am so excited about the new technology and finally, finally, we’ll be able to actually listen to a lot of good music, instead of these homogenized, commercialized, cookie cutter “artists”. I’d rather support the artist directly, and today we can.

    Comment by DigginTheDancingQueen -

  17. In Canada, our courts to date have said downloading music is a legal practice but uploading is not. The presiding judged ruled that P2P sites are not liable in the same manner photocopier companies are not liable for library patrons using copiers to copy books. i.e. it is not companies fault that users decided to use a device in an unlawful manner.

    Canadians pay tax on blank cd-r, dvd-r, ipods, etc that is supposed to go back to the music industry so they can still benefit in some way to people downloading there copyrighted material.

    Comment by Mark -

  18. Greg,
    Not quite — in brief, it means that P2P providers must take an active and public stance against copyright infringement. This means that they must not include any text or marketing material that could potentially be construed as “get free stuff here!”

    Brad,
    Grokster is still legal, they are now just liable for copyright infringement. Here is the money shot:
    “We hold that one who distributes a device with the object of promotion 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.

    The impact of this is debatable in the lower courts, but ostensibly it means that you must actively advertise “Do not steal music” in your P2P service. The real answer as to why Grokster is potentially liable, and an iPod is safe is because of the iPod’s prominent sticker, that warns “Don’t steal music.”

    Comment by jss -

  19. The supreme court ruled today in favor of enterntainment giant MGM. MGM had a problem with P2P provider Grokster. MGM v. Grokster

    If I am understanding this correctly than the Supreme Court feels that P2P companies are responsible for the irresponsibilty of their users in that the companies failed to filter out copywritten content.

    That is fine. I’ll ignore the utter stupidity of the record labels for not evolving and making money off of P2P, instead of suing them….(STUPID F’ERS!).

    I’m going to stick to a more “pissing-me-off” outcome of this ruling.

    If the Supreme Court feels that companies are responsible for their customers using products illegally, than how in the hell can the Supreme Court not rule against gun companies, alcohol companies, BOEING!!!!, etc. Hell based on the Supreme Court logic we should sue the schools the justices went to for making a product (the justices) that is unintentionally harming people.

    If their logic applies to the music industry, than it most certainly applies to vice companies….especially since vice companies are intentionally creating something that will injure people.

    So next time you see a lobbyist thank him for ruining the fabric of this country.

    Comment by Greg -

  20. Wow Charles (#4)! I predicted MGM victory two months ago in comments at Hack the Planet and on Corante’s Copyfight and Moore’s Lore. I predicted it based on a business model test. I posted a summary of my prediction the night before on my own very new blog (see my link). Of course, I’m not in like Flynn with the whole EFF echo chamber, so my prescient thoughts were dismissed with acid and bile.

    Mark, Grokster is a very balanced decision. If I had to recommend a clause to put in your standard contract it would be something like “I understand why iPods are legit and Grokster is not”. Right now, if someone doesn’t get that instinctively, s/he probably doesn’t belong in the tech business.

    Comment by Brad Hutchings -

  21. Adina,

    Good question, but I think you may have confused me a bit. I don’t think the P2Ps had any hope at all in dealing with major labels/studios. I’m only addressing the situation surrounding independents, and in all fairness, the views I’m expressing here are, at least, in part, personal.

    Without revealing too much about my private life, I independently produce a show for a new cable company, and I’m a strong advocate of shaking up the marketplace RE: the entertainment industry. Frankly, I love these disruptive technologies. People like me do exist. =)

    Yes, I’ve dealt with the P2Ps over the last few years. Yes, they have worked with independents, including me. But it’s the lack of imagination/aggressiveness that I find so troubling. Despite the high stakes involved in this fight, they have remained rather tepid in their indie strategy, even though indies may have been their most “life-saving” strategy, and even though they had enough leverage to make a real difference (i.e., millions of humans constantly online at the same time)

    Just saying “this or that” indie artist is available on this or that P2P network was/is not enough too achieve legitimacy in the entertainment industry – even among independents – but that’s all they did for the most part. I think they could have – and should have – backed a few WORTHY artists/filmmakers; artists who were willing to promote and promulgate P2P as much as anybody else. And what about P2P sponsoring some concerts? It’s not like all their revenue had to go to software development and legal fees (at least, I doubt it)

    But having said all that, you’re still quite right to point out the stubborn attitudes among many industry people, indies included. I’m sure the P2Ps struggled with that as well.

    Comment by Charles -

  22. So silly all this stuff.
    I mean if the music biz hadn’t stuck it’s head in the sand of denial when this “Internet” thing started [Napster 1.0] and had any common sense they could have owned this space and we’d all be downloading songs legally for [agree with jss] $2 a cd [what they are actually worth in the digital era] and the lawyers could all be fighting over Microsoft, or Diet pills or something else…
    Do you think the music business is actually run by the lawyers? That’s really the only viable explanation.

    Comment by SmartMoneyDaily -

  23. The RIAA and MPAA guys doesn’t seem to learn the lesson. Yesterday Wired News (and the blogosphere) published a story about the TV Pilot for a series called Global Frecuency, which was rejected by WB to be developed for next season. The pilot was leaked to the BitTorrent network and it has trived there, and now viewers are pushing so the network accepts the series. Something that would’ve been impossible if P2P didn’t exists. The story is here: http://www.wired.com/news/digiwood/0,1412,67986,00.html?tw=rss.TOP

    Comment by Jorge Rodriguez -

  24. Charles, what evidence do you have that the p2p players weren’t pursuing business partnerships with the major content providers.

    It seems a lot more plausible that the content providers just keep ignoring opportunities to use the new technology to make money, and instead are pursuing a maximalist legal strategy to put the new technology out of business.

    More opportunities for content distribution innovators like Mr. Cuban.

    Comment by Adina Levin -

  25. I agree that the limited scope of this ruling is truly what’s surprising, essentially limiting itself to how a product is marketed. Reading the ruling, you can tell that SCOTUS examined the business model of StreamCast, which was ad-based (rather than subscription-based), and basically figured out that they were mainly going to provide the exact same service as something which was shut down.

    This is the exact reason that BitTorrent is successful (not commercially, of course) – there IS no business model. Bram Cohen (i hope that’s his name) just has a paypal donation button, and for those who can’t contribute, a Hot or Not link. I think he’s like a 9.5 now or something. But he’s not selling anything, he just came up with a brilliant new distribution medium which can be taken advantage of by ANYONE and IMO will eventually change the entire client-server dynamic of the web.

    And not to be pushy, but I’ve written more here:
    http://antonymous.blogspot.com/2005/06/grokster-case.html

    Comment by anton -

  26. I don’t pay attention to MGM stock, but as a TWMC shareholder, I was pleased to see the effect of the Grokster ruling on the stock price. (TWMC is the parent company of several Music/Video retail chains).

    Anyway, to be nitpicky, it seems like some of us investors gave a damn about the ruling.

    Comment by Wade -

  27. Gayla,
    Why should they be liable? There is a very useful and legal community that uses Grokster. Of course, they could make it more clear that it isn’t intended to be used for illegitimate purposes, they don’t say “download all the major label music and movies you want for free!” (Like Kazaa used to).

    The difference between a file sharing utility, and the fake penis is that a file sharing utility has valid and legitimate uses. I use BitTorrent quite extensively to download various things, including movie trailers and authorized software. It’s really quite handy and useful.

    History is just repeating itself — this isn’t going to deter unauthorized distribution of copyrighted material at all. Zero. None. Nothing will except for having a cheap alternative, and iTunes isn’t cheap. A dollar per track when you get nothing of value like you do with a CD (like a non-DRM music file that I can copy on to all of my computers through my house, my portables, and leave the CD in my car’s CD changer). I’d pay $0.10 for a crippled file, but nothing more.

    Now I buy my CDs used for about $2 a pop, rip MP3s and go from there. When the RIAA stops this silly nonsense and lets me buy music on the internet for the equivalent price of a used CD, I’ll probably shop it.

    Comment by jss -

  28. Perhaps the “kaboom” was more of a “gasp”. No one I know predicted a victory for MGM. And certainly no one predicted a unanimous decision.

    In my view, the P2P companies, in typical insubordinate geek fashion (and I mean that in an affectionate way), weren’t aggresive enough in their attempts to partner with legitimate quality independent producers/distributors, many of whom LOVE the disruptive effects of P2P as well as other technologies.

    But for some odd reason, the P2Ps have been too focused on changing the minds of the –AA’s, kinda “hoping and praying” that the laws would eventually cover them at some point, somehow, some way. Not a wise strategy.

    But consider this: What if Grokster could have claimed ownership – or even sponsorship – of a new original television show or an HD movie series? What if Grokster purposely gave away tons of THAT content for FREE on their network, like they’re doing with these MP3-based podcasts? What if they were notorious for ushering in a new revolutionary method to distribute LEGIT content?

    What if the aggressive promotion and distribution – or BACKING – of indies had been the central ostensible focus of Grokster? While I’m aware that they could never afford to back a so-called Hollywood outfit, on the other hand, clearly, they could have done wonders for quality independents.

    Ultimately, our public conversation RE: P2P would have extended well beyond a mere case of “illegal file-swapping”. Apparently, that’s exactly what Grokster needed yesterday.

    I don’t think that the SCOTUS would have unanimously voted to let the –AA hounds loose on the fair free-market efforts of new independent content creators.

    But we’ll never know now, huh? =)

    Comment by Charles -

  29. Really, the Supreme Court’s decision today was surprisingly limited. The RIAA and MPAA will of course push the intentional inducement language as far as they possibly can, but based on the opinion (see footnote 12!), it doesn’t look like they’d get very far. Someone else pointed out BitTorrent as a good example of a program with a use profile that looks a lot like those of Napster and Grokster, but without the sort of active inducement the ‘sters had and the Supremes focused on today. I think Mark’s observation is right, that today’s decision probably won’t be all that important in the long run, but the lawyers and lobbyists will decide how the future will look.

    Comment by Tom -

  30. Each time, there is a successful enforcement or a new way to catch the developers of P2P software with copyright liability, they reinvent themselves and generate another two or three year court proceeding.

    And now, a majority of them are hosted outside the United States. There is no court ruling whose enforcement can keep up with this. The entertainment industry is still far too often spending time comparing the profit margins and risk of new ideas to an earlier time when the world was less digital.

    Comment by heth -

  31. It’s a sad sad day. Consumers won’t forget though, the music industry will continue to suffer until they realize that our money lets them live like kings.

    Comment by Drew -

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