OPINION
Making P2P a Capitalist Tool

This month the U.S. Supreme Court is expected to decide MGM vs. Grokster, the case that could determine whether or not a peer-to-peer (P2P) company can be held liable for illegal activity on its network. The decision is key, but the future is also being shaped by the marketplace.

The digitization of content and the ability to share it quickly and easily has shaken Hollywood up in a big way. The music industry, in particular, seemed to have been taken completely off guard, as free services such as Napster, Kazaa, and Grokster allowed for the easy and illegal sharing of content. But instead of embracing the digital revolution and using it for capitalist purposes, the music industry's instinct was to strike back.

The industry sued its fan base and lobbied Congress for laws that gave it more control over the technology that was destroying outdated business models. This initial hesitation to use technology as a market tool left a capitalist void in the digital music space. Leadership of the music swapping issue went by default to those promoting principles that will harm a free society in the long run, such as a "commons" for intellectual property. But it seems that the tide may be turning.

Unique Ways of Thinking

The traditional music industry might still be reactionary but there are some entrepreneurs in Silicon Valley who are thinking outside the box and looking for ways to build legal and profitable P2P file-swapping networks. A case in point is a company called Mercora, run by former McAfee CEO Srivats Sampath.

Mercora claims to have built the world's largest and legal music radio network mostly by using music resident on user's computers. Think of it as a big Internet radio station composed of uploads from music fans, and with TiVo-like qualities.

For example, a user can search for an artist such as "Madonna" and the system will bring up all the Madonna songs that users of the network have available to swap. Then, if the user likes the song, he or she can record it and listen to it again later, even if the provider of the song isn't online.

The way the system remains legal is that Mercora pays a royalty to the copyright holder every time the song is played, just like a regular radio station. And if the copyright holder doesn't give permission, songs can't be burned and transferred to another device. Mercora protects the songs on its network with digital rights management (DRM) technology. So far it appears to be working, contrary to claims by some that DRM is useless and therefore the only way to protect digital property is through government mandates. But while the DRM seems to be effective, not all copyright holders want to stop the free distribution of their songs. One example is an artist aptly named Perk.

Models Evolving

Perk told a San Francisco audience this week that he allows his songs to be downloaded on Mercora for free because he is looking for greater exposure. He is hoping that networks like Mercora can help him gain profile and move him away from making money mostly by live performances and selling T-shirts. Free distribution of his songs is a stepping-stone on the way to becoming one of the artists that do not allow free downloads. Now that's the kind of network that harnesses self-interest, property rights, and true market competition.

Free and non-free songs are available at the same place and part of other user's song lists that people can browse to explore new titles. Known quantities like Madonna can choose to force consumers to buy songs and less-well known artists such as Perk can swim among them and try to win over fans. The new business model for the music industry is slowly evolving, making it imperative that Congress or other legislative bodies decline to step in and try to pick winners and losers.

The Supreme Court's decision on MGM vs. Grokster could affect levels of investment in technology companies if the court finds that Grokster is liable for what others do with its product. Harm to investment in this area could ironically slow down the innovative juices that will solve the problem of how to protect private property in the digital age.

Capitalist forces are finally aimed at the digital music space, opening up hope for a stable solution to the digital commons problem. Entrepreneurs are looking for ways to make legal profits and it seems to be working. The future of the music industry rests on the somewhat shaky assumption that the government won't attempt to tinker with the market for political gain.