File Sharing Controversy Continues To Pack Heat

The controversy over P2P -- or peer-to-peer network -- file-sharing continues as the technology and entertainment industries are this week eying the U.S. Supreme Court for a pivotal decision that could determine the future of music on the Internet.

The ruling on MGM v. Grokster, which could be announced in the coming days, tackles the problem of illegal file sharing of songs and video over the Internet, but its impact could be much, much broader.

In the meantime, the Organization for Economic Cooperation and Development (OECD), based in Paris, has released a report that claims there are economic benefits to file sharing.

Legal experts said new technologies always create moral considerations that end up in the courts.

New Technology, New Questions

"When a new technology is developed ethical questions arise," said Yale Braunstein, a professor in the school of information systems and management at the University of California, Berkeley. "It happened when the photocopier was invented -- and it happened with the player piano, too."

Perhaps signaling which way it things the courts will rule, Microsoft (Nasdaq: MSFT) is working on its own file-sharing application, codenamed Avalanche.

Unveiled at Microsoft's open day by its UK researchers in Cambridge, the project is the company's own take on peer-to-peer file-sharing technology, like BitTorrent.

"Online technologies could evolve in a manner in which unauthorized use of copyrighted works are transformed into legitimate businesses," said Sacha Vincent, an economist at OECD, and a co-author of the new report on the digital music industry.

Online music sales are set to grow dramatically during the next few years, perhaps compelling the computer and entertainment industries to rethink the business models.

"The rise of online music sales has implications for a wide range of players, including artists, consumers, the record industry, and new digital intermediaries," said the OECD report.

There is a "positive potential" for the new technologies, according to OECD, which may create new business models and inspire new social and cultural phenomena.

Governments around the world should develop new policies which balance the interests of suppliers, and consumers, providing protection for intellectual property rights, but making it easier to distribute music and other content online, OECD said.

According to the OECD, about a third of all Internet users in OECD countries, France, the United States, the U.K., Germany, and others, have downloaded files from peer-to-peer networks. This totaled 10 million users by November of last year.

Relationship Questioned

The OECD said right now it is "difficult" to establish a basis to prove a "causal relationship" between the 20 percent decline in overall music industry revenues from 1999 and 2003. "But digital piracy may be an important impediment to the success of legitimate online content markets," said the OECD report.

The report said that 2004 marked the "turning point" when an array of legitimate online music services debuted, totaling 230 in number by the end of the year. "It is mainly the record labels that generate direct revenues fro the sale of online music over third party services," said the OECD report. "Online music providers currently face low or zero margins, calling into question wholesale and retail pricing."

Presently, online music sales account for just a tiny share of revenues -- about 2 percent of all sales. That is expected to rise to 5 percent by 2008. "There are positive and significant economic ripple effects on the consumer electronics intermediaries -- e.g., digital rights management software and consumer electronics, the PC, and the telecom industry," said the report.

The downside of the growth of online file purchasing for the music industry may be the loss of access to less-well-know songs by artists, something which the OECD calls the "cultural costs of unbundling."

The study was part of the organization's project on digital broadband and content, which is being conducted by the OECD's science and technology directorate.

The OECD report seeks to convince policymakers to take a measured approach to file sharing, but, lawyers note that the Supreme Court may make policy, itself, this week, if it rules broadly on the case of Grokster and MGM.

"The ramifications of this issue are, at the polar extremes, technologies like TiVo (Nasdaq: TIVO) and iPod disappearing," said Daniel Fisher, an attorney, who filed a friend-of-the-court brief on behalf of his client, the IEEE, a professional association of electrical and electronics engineers.

"If liability were there for the makers of technology that could be used for file sharing, no manufacturer would make an iPod," Fisher said.