Disruptive Innovation

Life after Napster

by Kieran Connelly

“The introduction of new technology is always disruptive of old markets, and particularly to those copyright owners whose works are sold through well-established distribution mechanisms” - Judge Sidney R. Thomas, 9th Circuit Court of Appeals, August 20th, 2004. (Richtel)

In 1999, 18-year old Shawn Fanning slaved away day and night to create peer-to-peer (P2P) file sharing technology. Fanning’s company, Napster, would go on to become the vehicle for the peer to peer technology he invented, linking two computers that could be on opposite sides of the world and allowing them to share files through a decentralized server.

Fanning was able to facilitate this technology by merging a file-sharing system with an instant messaging program, allowing users to communicate directly with one another, without having to use a centralized file server, which, at the time, Fanning believed would prevent any legal, as well as technical, complications.

As Napster continued to grow, however, more and more concerns arose amongst those in the music business. Soon a mild concern became a growing tempest of discomfort to those who owned the copyrighted material that was regularly being traded on Napster. The company’s constant growth (it was the fastest growing site in history, passing 25 million hits in less than a year of operation) prompted the Recording Industry Association of America (RIAA) to attempt an injunction against Napster for use of copyrighted material without permission. The suit was filed on behalf of the musicians whom composed the works being shared, as well as the music labels that controlled the copyright status of the songs themselves.

As Portland entertainment lawyer Peter Vaughn Shaver explains, “once you establish rights in a piece of property you have the right to control how that thing is being used. That applies to sales, transfers, display, and performance of that material. The overarching concerns of the copyright law would be that file sharing is an unauthorized use of protected material.”

Though Fanning’s program kept Napster free from direct copyright infringement, the district court applied the injunction after finding that Napster was guilty of contributory infringement and vicarious liability. The court found Napster guilty for providing the software to exchange files and profiting from the exchange via advertisements on their site.

“If you’re anywhere in the chain of copyright infringement you’re considered a contributory infringer,” Shaver explains, “and you could be held liable with the actual party being sued.” In this case, the actual party that Shaver refers to became the users themselves.

The RIAA’s suit against Napster effectively forced it to shut down, but in it’s place dozens of decentralized file sharing services sprung up and the majority of the users just switched servers. CD sales continued to drop after the suit. According to Nielsen SoundScan, sales in 2003 dropped to 667.9 million albums and singles in stores, down from 683.2 million in 1983 and according to a study by the Pew Research Center “the record companies attribute a 25% drop in CD sales since 1999 to online piracy, however, some have disputed this notion, citing a slumping economy, rising CD prices and fewer titles being released.”

The next major court case in the battle of Record Industry v. Napsteresque file sharing companies came four years later, this past August. In the years between suits several companies had gained considerable membership, among them, Morpheus and Grokster, the primary defendants in the August suit. The Ninth Circuit Court of Appeals found that “those companies did not have enough control over the operations of their decentralized networks to make them legally responsible for copyright infringement.”

The Napster case was also originally decided by the Ninth Circuit Court, however, the contrast of the two cases lies in a small adjustment of technology. While Fanning strove to establish a decentralized network to avoid this exact litigation, his network was still a concrete site that allowed users to directly connect with each other. Though the material was never on the site, per se, the site was still acting as a meeting place for the users. Meanwhile, Morpheus and Grokster more or less provided the software and got out of the way. Unable to hold the companies directly liable for the copyright infringement the RIAA and record companies chose to pursue individual users.

The two rulings resulted in the individual prosecution of nearly 5,000 people in the past year for illegal file sharing. The record companies have now begun to seek criminal charges on defendants under the No Electronic Theft Act. The various suits were well publicized and resulted in numerous television commercials featuring the prosecuted defendants. “It was a PR stunt,” explains Shaver. “You had all these commercials that came out afterward, ‘I’m a 13 year old girl from New Jersey who downloaded this stuff and got busted for it and now I’m a good girl, now I buy CDs.’ There were a lot of people they could have gone after, but they just did a representative sample to sort of scare people and to let them know that it’s education for the Napster generation about copyright law. This stuff is protected, just because you can do it doesn’t mean it’s legally or morally right to do it.”

The various suits resulted in considerable response from both sides of the argument. Each side has representation from musicians, record labels, industry groups and lawyers. One of the most outspoken bands has been San Francisco artists Negativland. Their statement regarding the Napster case is as follows; “As musicians who make a living selling our music, we believe in the spirit of copyright as set forth by our founding fathers who designed copyright to be a limited right, seeking to balance private profit and personal possessiveness with the greater public good inherent in free and open access to all ideas. Corporate America has ignored this original mandate and now seeks to re-make copyright into an endless and exclusive private property right through lawsuits such as this one. It ignores a basic human fact: Culture healthily evolves when it is shared. And we consider P2P systems to be a new and unexpected part of that sharing.”

Negativland’s sentiment is a microcosm of the feelings of frustration with major record companies that many feel is part of the cause behind illegal file sharing. That same sentiment was widespread by not only fans, but musicians as well, as summed up by Dave Gerritsen of Polite Fiction; “When CDs came out the industry jumped on it because it was an opportunity for them to sell you all the same crap they sold you on tape, or on vinyl, no wait, on 8 track. This has been a long time coming. The public has been screwed by the music industry time and time again over the last 40 years.”

Dave Allen, a veteran of the music scene as a member of London’s Gang of Four, the head of San Francisco’s World Domination Records and now in Portland doing promotions, web development and just about everything else, has echoed the same view; “You’re almost forcing people into illegal downloading. Kids have learned a long time ago that that 17-dollar CD with that song they liked was a pile of crap. They got the song and then they got 11 fillers.

“CDs are way overpriced,” Allen continues, “One time the public was happily buying vinyl at a certain price, then got duped into buying it all again on CD. By the time the third time came around with digital everyone was like, fuck that, I’m gonna spend another 1,000 bucks buying everything on I-tunes? I can get it for free. And the labels didn’t realize that the price structure for their product had died overnight. I don’t think Napster harmed the industry, I think the industry had already harmed itself. Napster was just a new way of exposing kids to music.”

In the wake of the suits, two distinctive camps established themselves. One, including many musicians, the major record labels, the RIAA and others is composed of those that have had success in the past and stress that the old way of life needs to be respected. They argue that people’s jobs throughout the industry depend on people being respectful of the copyrighted material as referenced by Brad Buckles, Executive Vice President of the RIAA; “illegal distribution of copyrighted music in both physical and digital form costs the music industry thousands of jobs and hundreds of millions of dollars every year.”

Ironically, record companies and others have now begun to take advantage of the technology created by Fanning. Apple claims its i-tunes online music store has sold more than 100 million individual songs. Traditional retail sales remain much larger, and are even up so far this year, but industry analysts maintain that they have suffered over the long term because of the online onslaught.

In the past year, more than 20 schools have signed up for deeply discounted access to music services such as Napster, MusicNet and RealNetworks’ Rhapsody. In the same period, 158 students have been sued for copyright infringement. In some cases, the traffic devoted to peer-to-peer networks on campuses has dropped by as much as half. 100,000 songs had been downloaded every day by the 12,000 students using the new services, at times through programs that charge the students less than $3 per month.

The other side of the Napster debate has looked at the potential positive beneficial effects to musicians of both the company as well as the file sharing technology itself. Again, Allen; “While I was at Intel I was trying to get some feedback on how badly Napster is affecting the music industry and the startling news was that it was actually good for the music industry, because it meant the kids could sample a track from the internet that they would never even consider buying, and then they would go out and buy the album.”

Napster’s primary argument in its defense during the RIAA suit was that it helped smaller independent bands gain exposure. The courts didn’t find that justification to be true yet, years later, there are several artists that continue to use file sharing networks as their primary means of exposure. Many musicians, while not necessarily backing Napster and its illegal use of copyrighted material, nonetheless have been allowed a viable existence in a saturated market specifically because of the technology that Napster rode to fame. Gerritsen explains; “Whether it’s right or wrong, file-sharing is accomplished through the same technology that allows an artist to gain previously unattainable exposure”

Many feel that the record companies are just trying to fight off the inevitable. “Who’s supporting what and why are the labels so good for us?” Allen continues. “It’s just business practices trying to hang in there in the face of adversity. It’s the same as the Buggy whip manufacturers. When Henry Ford came out with the car, the buggy whip manufacturers, instead of throwing in the towel because no one’s going to buy a horse and cart anymore, just made bigger, better, fancier buggy whips. The idea being ‘we can compete.’ You’ve got this beautiful handmade buggy whip, but I want a car. It’s called disruptive innovation, the ability to take the 1s and 0s and turn them into an MP3 format and send them to your friends is a disruptive technology. The labels, as I tracked them over the years, did what the buggy whip manufacturers did. They started spending more money on glossier products as if that would fend off the inevitable collapse of their business, it didn’t and hasn’t.”

Regardless the opinion on Napster, Fanning’s technology has changed the scope of the independent music scene forever; “The Decemberists, Pinback, the Shins, the Lifesavas, all these bands are making a living with their music,” says Gerritsen. “They’ve got health insurance, they’re able to buy houses, they’re blue collar workers, but they’re making a living with their art. There is a whole new class of musicians now and it’s just getting better.” -mlp