TCS Daily

Keep In on the Down-Load

By Benedikt Koehler - March 24, 2005 12:00 AM

The British Phonograph Industry has levied over £50,000 in fines against various individuals guilty of swapping pop music downloaded from the internet. This successful conviction of music file-swappers in Britain made a great impact. To begin with, millions of panic-stricken British parents charged into their teenage children's rooms on suspicion that junior's collection of Moby and Franz Ferdinand may force them to take on a second mortgage to pay for copyright infringements. The bigger picture is that the BPI's action was a volley fired in the copyright cyberwars, where the next battle is joined on 29th March, when the US Supreme Court hears MGM v Grokster.

In the general scheme of things £50,000 is small change in the entertainment industry, barely enough to kit out a single Eminem stage set. The point the BPI is making is that when copyrighted material changes hands, copyright owners expect somebody somewhere to pay them. In Europe, the BPI thinks they have a case against cybersquatters. In the US, MGM is going after Grokster, blaming the problem on software which enables file-sharing in the first place.

To date, MGM's suit has not had much luck. The Court of Appeal held against MGM citing the 1984 Betamax precedent. The issue at the time was whether manufacturers of video blanks were accessories to copyright pirates who taped movies and sold them on the black market. Then as now the court decreed that manufacturers were not culpable if customers used products illegally.

It would be a stunning turnaround if the Supreme Court overruled the Court of Appeal. No matter which outcome, the Supreme Court's judgment will set out ground rules for competition in markets where high-tech clashes with copyright. The decision is key to information markets on both sides of the Atlantic. The precedent in European courts is Magill (1991).

At the time of Magill each broadcaster in Ireland issued individual TV guides. Magill, a Dublin publisher, thought it was absurd viewers had to check three separate magazines to find out what was on TV and spotted a market for a single magazine combining all three listings. The broadcasters sued Magill for copyright infringement, and won. However, the court's affirmation had a sting in its tail. Though upholding broadcasters' copyright, the court charged broadcasters with abuse of dominance for "preventing the emergence on the market of a new product." In due course a consolidated TV guide came to the market.

There's the rub. Grokster's software not only challenges copyrights, but also the way artistic output reaches the public. The world's entertainment industry is built on a business model where a substantial element of revenues comes from managing distribution. The industry's logical riposte to its challenge has been to permit distribution via internet, provided users pay a fee. However, at issue is not only whether customers should pay, but at what price. The cost of disseminating information via the internet is substantially lower than via CD sales outlets. It is a fact of life that consumers will challenge prices unless they are justified by costs. As Alfred Marshall put it succinctly, "no one could get extra high wages for making eggs stand on their ends after Columbus's plan had become public property."

The BPI's successful raid on file-swappers may turn out to be a Pyrrhic victory. The Ninth Court of Appeal observed "we live in a quicksilver technological environment" and that "the introduction of new technology is always disruptive to old markets." Producers take note. Whenever producers offer products at prices higher than they could be, markets will undercut them. Courts will protect copyrights and patents, but business models have to survive on their merits.


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