Commentary: Record labels in denial about peer-to-peer

By Robert Batchelder, Gartner Analyst

The recording industry won the battle to shut down Napster, but the U.S. Appeals Court's ruling also asserted that peer-to-peer (P2P) file sharing is legal--and many services will take advantage of that opening.

The Appeals Court ruled that Napster's architecture and the way the venture ran its service violated copyright laws. Napster lost because it tried to stretch "fair use" laws (which allow individuals to duplicate copyrighted materials for personal use) too far. Napster facilitated mass swapping of copyrighted material between parties who were largely unknown to each other.

Generally, a party that enables such activity is not liable unless it knows copyrighted material is being illegally swapped and has a reasonable way to stop it. Internet service providers (ISPs) that simply forward e-mail can legitimately claim such a defense. However, the court believed that Napster (with music companies' help) could have better policed its centralized online directories and subscribers.

The court also ruled that

	See news story: Is there room on the Net for P2P?

individuals who share copyrighted material via Napster without the owners' permission do so illegally. Interpreted broadly, the ruling could imply that P2P file swapping on the Internet is not protected by the fair use doctrine. Interpreted more strictly, the ruling could mean P2P swapping of copyrighted material is illegal if the parties are anonymous.

Opening a door to other systems
However, the court did state that file-sharing services are legal--even if they have the potential to transmit copyrighted material improperly. That part of the ruling opens the door to file-sharing systems architected differently from Napster's. Napster maintained centralized, searchable directories that enabled users to connect with each other and swap copyrighted music in MP3 format.

P2P file-sharing systems not based on central directories will minimize the legal risk because their operators will have no practical means of knowing what type of information is exchanged. For example, America Online does not create one large searchable directory out of its members' buddy lists. Aimster adds a further degree of anonymity because all messages and files are encrypted during their transfer (via third-party servers).

The inevitable progression of P2P technology means big trouble for copyright holders in general and the music industry in particular. The Napster ruling has not killed P2P file sharing--quite the contrary. File-sharing services will simply look for the same kind of insulation that ISPs have; that is, they will operate without knowing the content being exchanged. Thus, P2P systems will be used extensively for downloads of every type of content, copyrighted or not.

The music industry's challenge is to embrace this method of distribution effectively. Record companies today focus on mass distribution; they are abysmal at micromarketing and distribution--for which Internet is a perfect vehicle. Record companies have to learn how to make $1 each on 1,000 bands rather than $1,000 on one band.

Bertelsmann plans to sell subscriptions for accessing its record library through Napster. However, Gartner believes that such arrangements will have limited appeal for consumers. The record companies should take a lesson from Gillette, which gives away the razor to sell the blades. Hit songs are the razor, the complementary revenue streams that a song generates are the blades.

Building communities of interest
Napster's success demonstrated consumers' preference for loosely organized communities centered on a common interest. Record companies would therefore do well to sell modestly priced membership in P2P communities focusing more narrowly--say, on particular artists.

Hit records would act not so much as revenue generators in and of themselves but as free advertisements. With that mindset, record companies would want hits to be distributed in as many places as possible, to induce consumers to sign on. For a year's subscription, consumers would get access to all of an artist's music as well as information about the artist, concerts, memorabilia and so on.

The record companies will likely have to take the risk of losing revenue from hits to drive revenue from communities. Otherwise, consumers will simply turn to P2P sites that will offer the same music for free. The industry will not be able to stamp them out as it did Napster, and it will be very difficult, if not impossible, to enforce copyrights and collect royalties.

Given the court's ruling and the pace at which P2P technology advances, the music industry has months, not years, to develop a credible Internet distribution strategy. Unfortunately, the music industry does not seem to realize how quickly it will lose the P2P war, even though it won the Napster battle.

(For related commentary on bandwidth problems created by such activities as downloading MP3 files, see TechRepublic.com--free registration required.)

Entire contents, Copyright © 2001 Gartner Group, Inc. All rights reserved. The information contained herein represents Gartner's initial commentary and analysis and has been obtained from sources believed to be reliable. Positions taken are subject to change as more information becomes available and further analysis is undertaken. Gartner disclaims all warranties as to the accuracy, completeness or adequacy of the information. Gartner shall have no liability for errors, omissions or inadequacies in the information contained herein or for interpretations thereof.