P-to-P vendors forge ahead with business plans

Under attack from the U.S. entertainment industry and some members of the U.S. Congress, the largest peer-to-peer (P-to-P) software vendors are forging ahead with business plans that some critics find ironic: the distribution of music and content licensed from the very industry that calls them "outlaws."

At a kick-off event Sept. 29, the six members of the newly formed P2P United lobbying group pushed for Congress to legalize the sharing of music through P-to-P software by setting up compulsory licensing that would require the entertainment industry to make its content available on P-to-P networks for a price. Congress needs to "hold a gun to the head" of the entertainment industry, Wayne Rosso, president of Grokster Ltd., said in an interview.

Most P-to-P vendors agree that the unauthorized trading of copyright material has to stop, Rosso said. "I think you'll find that most of us feel the future for us is in original content," he added. "There are two ways to stop piracy online: nuclear holocaust and licensing the content. Obviously, the RIAA (Recording Industry Association of America Inc.) has opted for nuclear holocaust."

Meanwhile, Sharman Networks Ltd., owner of the popular Kazaa Media Desktop P-to-P package, wants to persuade companies in the music and movie industries to voluntarily license content to them. Sharman Networks is pushing ahead with this business plan even as it sues those industries for what the company calls an industry-wide "conspiracy" to shut Kazaa out of the market of distributing licensed content.

P-to-P vendors say it's almost inevitable that the entertainment industry will embrace P-to-P as a distribution model. They argue that P-to-P, with most digital content residing on users' hard drives, is a more cost-effective and efficient model of distributing digital content then maintaining a large array of central servers. They also talk up P-to-P's "viral" marketing benefits, where users trust recommendations from other users more than products hyped by large companies.

The goal of Sharman Networks and its partner Altnet is to become the premier distributor of licensed -- that is, authorized -- digital entertainment, said Alan Morris, Sharman's executive vice president. P-to-P companies including the privately held Sharman and Grokster feature authorized downloads of some video games and music from some independent artists or labels, and they also carry advertising, through banner ads or pop-ups that users must endure if they don't want to pay for ad-free versions of the P-to-P software.

"We want to work with them," Morris said of his current opponents in the entertainment industry. "(Licensed content) is not a sideline for us. I don't need the hassle of fighting lawsuits ... just to make a few bucks on some advertising."

Critics of the current crop of P-to-P vendors say there's little chance that the entertainment industry will suddenly turn an about face and start working with the vendors it has been trying to sue into submission. Compulsory licensing, which P2P United members champion as an approach that would allow artists to be paid for files traded, hasn't been part of the extensive P-to-P debate in Congress this year, although hearings on the issue have been held in past years.

"The odds that the major studios, the major record labels are ever going to want to do business with somebody who's tried to bludgeon them into going along is pretty low," said Evan R. Cox , a copyright specialist and partner with the San Francisco office of the Covington & Burling law firm. "The guys who went into this (P-to-P business) knowing how it was going to be used at the onset are never going to be viewed as trusted business partners by the establishment."

The entertainment industry might be willing to work with a new P-to-P service that pledges not to trade unauthorized music from the onset, added Cox, who filed a brief for the Business Software Alliance siding with the RIAA in its ongoing lawsuit against several P-to-P vendors.

A spokeswoman for the RIAA declined to comment on P-to-P business plans, but pointed to a recent statement from RIAA Chairman and Chief Executive Officer Mitch Bainwol, urging P-to-P companies to "finally act like responsible corporate citizens" by warning users about illegal file sharing and filtering copyright content off their networks. P-to-P vendors are "deliberately induce people to break the law," Bainwol said in his Sept. 30 statement, and in a hearing in early September, RIAA President Cary Sherman accused P-to-P services of facilitating the trade of child pornography and exposing their users to security problems.

The talk coming from the Motion Picture Association of America (MPAA) has taken an even more no-compromise tone than the RIAA's statements. "Kazaa, Gnutella, Morpheus and the rest of them are outlaw sites," Jack Valenti, president and chief executive officer of the MPAA said in a congressional hearing Sept. 30. "They do nothing but offer illegal music, movies and the most sordid pornography that your mind can ever comprehend."

P-to-P vendors fired back after a Senate hearing in late September on child pornography available on P-to-P services. They argued that P-to-P services distribute a small percentage of the child pornography available on the Internet.

"To portray us, P-to-P developers, as being purveyors of child smut is insane," said Michael Weiss, chief executive officer of Morpheus parent company StreamCast Networks Inc. "Take a look at their tactics, about how they market sexually and violently explicit music and music videos specifically to underage kids," he said of the entertainment industry.

In Congress this year, the question of whether P-to-P services have a legitimate business model has lurked in the background of debates on the dangers of using P-to-P software and the subpoena process that allows copyright owners to find out the names and addresses of suspected downloaders without a judge's review.

Since March, Congress has hosted a series of hearings on possible dangers of P-to-P file trading, from users sharing their hard drives to potential connections between piracy and terrorism to the amount of child pornography traded between P-to-P users.

In early September, the RIAA announced lawsuits against 261 P-to-P users, accusing them each of uploading hundreds of songs to other P-to-P users. And in June, the chairman of the U.S. Senate Judiciary Committee, Utah Republican Orrin Hatch, advocated that unauthorized downloaders of copyright songs have their computers destroyed, although he later backed away from that remark.

Even senators questioning the RIAA's tactics in its series of lawsuits against file traders have made it clear that they believe the unauthorized trading of copyright files is illegal. It's in this environment that the members of P2P United have begun pushing compulsory licensing, by saying it's an idea that needs to be debated instead of shouted down by music and movie companies.

The owners of six P-to-P software packages -- Grokster, Morpheus, Lime Wire, BearShare, Blubster and eDonkey 2000 -- officially launched their lobbying group in September, and they acknowledge that selling compulsory licensing to Congress may be an uphill battle.

"It's about time that congressional members hear the other side of the story," Weiss said. "We, as a P-to-P industry, have allowed the recording industry to set the agenda, and it's time for that to change."

If the entertainment industry and P-to-P vendors can't come to an agreement, Congress needs to step in, Weiss added. "It's time to stop listening to the lobbyists of the recording industry, and start listening more to the will of the 63 million Americans that use file-sharing software," he said. "It's time to find solutions to get artists paid, to keep file-sharing legal and to not criminalize 63 million Americans."

P2P United's members argue that compulsory licensing would work much in the same way that radio stations and nightclubs with juke boxes pay licensing fees to music companies, although radio licenses are voluntary on the part of the recording industry.

A compulsory license would likely be passed on to music downloaders or Internet users, in the form of a small tax on blank CDs or on Internet service. P2P United and the Electronic Frontier Foundation argue that compulsory licenses have a history dating back to the early 1900s and the player piano, and a congressional mandate would guarantee both payment for artists and a business plan for P-to-P vendors.

The RIAA has opposed compulsory licensing, saying an approach of 'if you can't beat 'em, join 'em' is the wrong way to go. "Compulsory licensing schemes ... are simply a way of substituting government regulation for the marketplace," the RIAA said in a position paper released in September. "When was the last time that government pricing and regulation worked better than the free market? Compulsory licensing proposals are a crude, inflexible instrument that can't keep pace with the dynamic, rapidly evolving Internet. Only the marketplace can do that."

Others suggest Congress may have to step into the war between the entertainment industry and P-to-P vendors. Some kind of compulsory license may not happen this year or next, but Thomas E. Moore III, a partner in the Palo Alto, California, office of the intellectual property law firm Tomlinson Zisko LLP, said it seems unlikely that the technological and legal arms race between the two sides will stop without congressional intervention.

"I would like to see a technological answer," Moore said. "But I think at some point Congress almost has to step in. You've got an enormous rebellion on your hands among millions of downloaders across the United States, and they're people you do not really want to criminalize."

Kazaa distributor Sharman Networks isn't part of P2P United, and one of the differences is the view on compulsory licenses. Sharman Networks, through its partner Altnet, wants to license digital content and distribute it with digital rights management-enabled click-wrap licenses, with an e-commerce-style payment mechanism included with files.

Instead, Sharman Networks has been trying to encourage a dialog among Internet service providers, copyright holders and P-to-P vendors through its trade group, the Distributed Computing Industry Association. Sharman Networks sees compulsory licensing as one tool that could be used by P-to-P services, although it "freaks out" the RIAA, Morris said.

Sharman Networks has signed licensing deals with entertainment companies outside the U.S., including those in India and the U.K., and will continue to do so even if the U.S. entertainment industry refuses to play along, Morris said.

If the U.S. entertainment industry wins in Congress and the courts, "then we pack up and go home," Morris said. But that scenario may end up being the recording industry's "worst nightmare," he said, because other P-to-P services not interested in working with the RIAA will spring up and flourish.

"There are hacked versions of Kazaa Media Desktop out there," Morris said, predicting what could happen. "The code goes wild ... so instead of there being 60 million-plus users worldwide served by what we like to think are very responsible companies trying to do the right thing, the whole thing fragments and goes underground."

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Grant Gross

IDG News Service

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