Eli Noam: Heroes of the internet frontier

Richard Epstein: Industry saviour, industry scourge?

James Boyle: Pirate to pirate or pathway to progress?

Thomas Hazlett: Businesses make business policy

The US Supreme Court agreed last week to hear the music industry's case to shut down file-sharing websites such as KaZaA, Grokster and eDonkey. These operations enable users to download millions of songs from each other for free instead of buying at least some of them in a music store. In aggregate, the traffic generated by music and video file-sharing can account for more than half of all internet traffic. Music companies, their revenues in decline, have been trying to suppress these "peer-to-peer" (P2P) practices in the courts, legislatures and by spreading deliberately defective copies of songs. They view P2P users as thieves who must be prosecuted. But traditional media companies should perhaps see P2P as to their long-term advantage because it helps create new markets and forms of distribution.

P2P is part of a large family of "grassroots" activities in the media. In the early years of broadcasting, radio amateurs congregated on the airwaves in the absence of commercial broadcasters. In the 1970s, personal computers were built by enthusiasts who successfully created the challenge for International Business Machines where giants such as RCA and the government-subsidised Bull had failed. Today, the open source movement has created Linux as an alternative computer operating system. The internet is perhaps the best example. It cannot be said that such voluntarist arrangements are more efficient than a market-based system. In theory at least, most of the arrangements listed above could be better created by companies with professional management, financing and marketing channels. Yet the frequency with which these grassroots movements emerge suggests some solid economic reasons behind them.

What all these activities have in common is that they are network operations. The more participants, the lower the activity's average cost and the higher its benefits to every participant. When the size of such networks is small, per-unit costs are high but benefits are low due to the small number of participants. Hence in many cases, the cost exceeds benefits and buyers will not show up, meaning insufficient "critical mass" for self-sustaining growth.

If an activity is ultimately desirable, one way ahead is for government to step in with subsidies, as in the early days of the internet. A second way would be for a company to underwrite the early deficit and then profit from subsequent growth. The problem is that competitors could access such a user base and share the benefits even though the early provider bore the costs of the original investment.

The third alternative is the community approach. For each member, belonging to a leading-edge group while beating the establishment becomes its own reward. Financially, the community activity lowers costs by contributing free labour to the common endeavour, such as skilled programmers' hours, and by sharing pirated content. Together, these efforts lower the number of participants required for critical mass. From there, the activity will often grow to a size sufficient for profitable commercial entry. Examples include commercial radio in the early 1920s; commercial internet providers in the 1990s; and, most recently, Apple with iTunes, its wildly successful music download service.

When such commercial entry takes place, private companies almost inevitably push aside the community that made it all possible. We can decry such evolution as a business takeover. Or we can celebrate it as part of the innovation process, in which community entrepreneurship plays an important but under-appreciated role.

Established media companies therefore should value the community efforts that create the user base for their own entry. While upholding the copyright principle, they should accept some early messiness in new applications in order to grow future markets. Twenty years ago, some of the same companies that are today challenging P2P also fought before the same Supreme Court against the video cassette recorder, citing the same piracy potential. They narrowly lost, but the VCR enabled widespread home video use that has proven immensely profitable to these companies.

It is not only about music. Today, with broadband internet emerging around the world, there are enormous secondary benefits to the economy and to innovation from rapid deployment of high-speed networks.

Entertainment uses are the "blockbusters" for broadband that will make it attractive to millions, thereby creating beneficial "network effects" that will enable other applications and future innovations. Suppressing P2P activities that prime the pump for subsequent commercial activity will only harm users, media companies and the digital economy as a whole.

The writer, professor of economics and finance at Columbia University and director of its Columbia Institute for Tele-Information, is a contributor to FT.com's New Economy Policy Forum, www.ft.com/techforum

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Richard Epstein: Industry saviour, industry scourge?

Eli Noam’s ingenious column MGM v. Grokster misses the boat on the key issues raised by the “peer-to-peer” (P2P) sharing, the legality of which is now before the United States Supreme Court. Of course everyone understands that the value of a network industry depends on the number of individuals or firms that are part of the network. But the same can be said of the magnitude of the harm stemming from P2P practices that deal in the transfer of pirated music. The bigger the network, the worse the situation.

All Noam’s examples of networks that have contributed to human happiness and welfare conform to the legal rules establishing private property rights and governing voluntary transactions. The original development of the airwaves in the 1920s depended on the ability of new entrepreneurs to use unoccupied portions of the spectrum so long as they did not interfere with the like rights of others. Until swept away by the Federal Radio Act of 1927, every private actor complied with all the rules for property acquisition at common law. The computer enthusiasts who started the boom in personal computers used their own resources on their own time. While I harbour some doubts about the economic sustainability of the open source software movement, I have none about the right of individuals to pool their talents and resources through any contractual scheme they choose, including those which do not conform to the proprietary models in vogue with large corporate enterprises. iTunes and its various competitors also deal only in proper traffic of copyrighted works.

What these examples tell us about Grokster is, however, hard to see. Hypothetically, P2P system may be used for many purposes. But in practice the overwhelming fraction of the volume is in bootleg music. Unlike the networks that Noam describes, no one doubts that all the individual buyers, sellers and traders of music on Grokster are guilty of copyright infringement and thus subject to criminal and civil penalties. They are thieves of intangible property, whom Grokster assists. But these users are not easily prosecuted, so why not allow record companies to attack the organizations whose systems facilitate these illegal transfers? With revenues falling because of widespread piracy, it’s wholly improper to suggest that “established media companies should value the community efforts that create a user base for their own entry.” These firms have a good sense of their own interest, and they are quite capable, as iTunes suggests, of creating their own legal networks without bearing the huge financial drubbing they’re now receiving. Let’s hope that the Supreme Court will think so too.

The writer is the James Parker Hall Distinguished Service professor of law at the University of Chicago and Peter and Kirsten Bedford Senior Fellow at the Hoover Institution

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James Boyle: Pirate to pirate or pathway to progress?

Music industry executives will be shaking their heads as they read Eli Noam’s article. How can he compare file ‘sharing’ networks dominated by illicitly downloaded music with the decentralised production networks of open source software? One is passive, consumptive and built predominantly around theft of the property of others. The other is active, productive and built on content that the parties create themselves. It is like comparing a swap-meet for stolen goods with a group of volunteer scientists working to cure cancer. Isn’t it? If we are comparing the statistically predominant activity that goes on within these networks, then the answer is yes - even if some of us might use less loaded analogies.

So is Noam wrong? No, I do not think he is. To understand why, we have to understand what is at stake in the Supreme Court case he mentions. The legal issue involves the requirements for contributory and vicarious copyright infringement - two ways of being responsible for copyright violations committed by third parties. But lurking in the background is a larger question: the relationship of copyright law to technology.

Twenty years ago in the Sony case, the Supreme Court was confronted with the question whether copyright law made it illegal to distribute a machine that could be used to violate the copyrights of others. The court famously held that taping TV shows for time-shifting purposes was “fair use” and thus not a violation of copyright law. Since VTR’s could be used for this activity, and a variety of others (including copying public domain movies, sports events and episodes of “Mr. Rogers’ Neighbourhood”!) they were capable of “significant non-infringing uses.” Thus their manufacturers could not be held responsible for potential copyright infringements. That is the rule that Sony is remembered for. But it actually stands for a deeper point. The logic of the movie studios’ argument in Sony was that copyright law had to get into the technology-regulation business. Providing a technology that could be used to make unauthorized copies was like renting a printing press to a pirate printer, knowing he was going to run off editions of Grisham and Clancy. The Court, to its credit, saw through this analogy immediately. It called the movie companies’ argument “extraordinary,” legal shorthand for “stupid.” Why? It would effectively mean that when the state gave you a copyright, it was also giving you a right of control over any technology that might infringe that copyright. It would declare an entire technology “contraband.” That, said the court, we cannot do.

It is this principle that may be at risk in the Grokster case, though the court could and should decide the case on narrower grounds. I do not have much sympathy for the particular P2P networks involved. But I have a great deal of sympathy for P2P networks in general and even more respect for the reasoning of Sony. If we give copyright holders control over any technology that can be used to violate their rights, we will be doing the equivalent of turning over the regulation of electric light to the companies that sold lamp oil. The Sony court saw that copyright law should balance the protection of property rights with the need to leave some space in which potentially disruptive technologies can arise: technologies that could end up helping established businesses, as Noam suggests, or perhaps that could yield entirely new ways of doing business. Let us hope that principle comes out of the case unscathed.

This writer is William Neal Reynolds Professor of Law at Duke Law School, a board member of Creative Commons and the co-founder of the Center for the Study of the Public Domain

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Thomas Hazlett: Businesses make business policy

Prof. Noam courteously sets the table for adiscussion of what may be a crucial turn in intellectual property rights, and we have a banquet of tender issues before us. Here I deal with just one. Noam has directed his argument to the U.S. Supreme Court when his brief - a business case study - is prepared for the board room.

Suppose that everything said is correct: the Noam argument is that substituting in a new file-sharing business model will increase long-run industry profits. The argument is of keen interest to faithful executives of the copyright-holding firms in question. They scrap and scrapefor economic advantage. Just as the argument was being made that content owners were too smug, nervous, or silly to grasp the possibilities of Napster, they flocked to Apple’s iPod. Show the profit-hungry a better mousetrap and chances are high they will smell the cheese.

But Noam aims his pitch at the highest court. Instead of trusting content owners to conjure the New Economy, nine jurisprudential hipsters are asked to educate them. The insight into alternative business models revealed to the Chief Justice and his Associates may soon be bequeathed to the hapless shareholders of Disney and Time Warner.

Noam may well be correct in his business acumen, perhaps having missed his calling as an entrepreneurial visionary. It isn’t too late, surely, for our still spry colleague to amass his billions. But the purpose of property rights is to allow a system wherein these revelations come by market competition, not legal decree. The content owners are perfectly free to buy Eli’s marketing judgment. Judges are not.

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