As piracy has continued after Napster, and the legitimate music and movie services experienced minimal success, many have argued that the movie and music industry must eventually abandon selling copies and pursue models.  Over the last three years, the sales revenue dropped about 17%, an approximately $1.3 billion net loss for the industry.[1]  Though the issue is controversial, evidence suggests file-sharing is partly responsible,[2] and it reasonably can be expected to reduce sales increasingly in the long run.  While the movie industry has grown recently,[3] it is at risk of having its revenue sources diminished in the future.

But business as usual might not be entirely over if the recent growth in Digital Media Stores is any indication.  The Digital Media Store attempts to recreate in the online market the basic structure for selling copies in physical stores.  Copyright holders sell or license to vendors who store music or movies on their servers, and customers then "go" to the Store to download or stream digital media.  In today's market, the model should seem familiar, with Apple's iTunes, Napster 2.0, and Movielink among the many existing offerings.  Though copyright holders can still pursue the revenue streams from this paper's first model, they will depend primarily on controlling distribution to sell copies.

            While this model has the potential to succeed and sustain the movie and music industries in the online environment, the Digital Media Store still faces a rather uncertain future.  The current Stores are deficient in several ways compared to free alternatives on P2P, and, even to the extent they can improve, P2P may remain a more attractive option.  Various technologies and the law could impair piracy and improve the industries' chances, but they will come with many drawbacks.

In Part I, below, we will explain the Store model's premises in greater detail.  Part II will then discuss the Digital Music Stores and their outlook in the current environment.  The movie industry will be treated in abbreviated form, because the potential for harm is attenuated in the short run, and many insights about the Music Stores will be equally relevant.  Part III will consider the costs and benefits of leveraging technology with the law to inhibit piracy.  In so doing, we will assess two possible scenarios in which technology is an effective deterrent.


Part I: The Digital Media Store in Theory


The P2P era mantra "you can't compete with free" has always implied that price is the only factor that influences consumers’ choosing P2P over for-pay services.  The Digital Media Store starts from the premise that there are many other important factors, which can be matched and even improved in this model.  When coupled with a reasonable price, these features will lead more people to use the legitimate services.  In addition, the Store model contemplates legal and technical measures making P2P comparatively disadvantageous.

To compete with free, Stores must first focus on ease-of-use and ensuring deep catalogs, providing users whatever they want, whenever they want it.  P2P interfaces are generally quite simple, with searching and downloading possible in a few steps.   Also, the full spectrum of popular and obscure artists can be found on P2P along with rare, live, and back-catalog items.[4]  Second, Stores must minimize—or even eliminate—digital rights management (DRM) usage restrictions.  The more DRM intrudes upon legitimate uses, the more likely users will turn to P2P's unencrypted content. Third, Stores can add value through ancillary services, like features that facilitate customer interaction; recommendation systems; special deals and information on live performances; and much more.

That said, the Store model does not ignore the importance of price.  Rather, it assumes that a low but non-zero price, combined with these other factors, will attract a sufficient number of consumers. Because complex-pricing arrangements can confuse consumers, price can factor into ease of use as well.

Stores can also benefit from P2P's monetary and non-monetary costs.  P2P systems are filled with incomplete and poor-quality files, along with viruses and other harmful content,[5] and P2P software is sometimes bundled with bothersome ad- and spyware.[6]  Copyright holders can actively diminish the ease of file-sharing by flooding P2P systems with bogus versions of files ("spoofing").[7]  The biggest stick in the deterrence bundle, however, may be legal rather than technical: suing file-sharers for copyright infringement, as the recording industry has already begun to do.

The Store model does not depend on any one factor, nor does it require that copyright holders employ DRM, spoofing, or lawsuits.  The model's key idea is simply that a substantial number of users will weigh these variables and choose to purchase media legitimately.


Part II:


A. The Digital Music Store in Practice

            Before Apple’s iTunes Music Store debuted, Music Stores experienced meager growth.  MusicNet, Pressplay, and Rhapsody, the three main services, initially had small catalogs that did not include all major record labels.  Their interfaces were criticized to varying degrees, and they all required large monthly subscription fees, rather than a la carte downloads.  What’s more, the usage restrictions were onerous, requiring payments for CD burns and permanent downloads.[8]

By focusing on creating an experience comparable and, in some ways, superior to P2P in the ways described above, iTunes Music Store re-invigorated the market.  First, iTunes' has exceptional ease of use with a catalog that includes songs from all major labels and 200 independents.[9] Purchasing and searching through iTunes' 500,000 songs is simple to perform and understand, seamlessly integrated into the iTunes music player software package.  Second, iTunes' DRM is relatively unobtrusive, allowing unlimited audio CD burning and copying to portable players as well as copying to two other computers.  Third, iTunes provides special features, including free samples, music videos, album art, and recommendations to customers based on others’ purchases.  Finally, iTunes' pay-per-download (PPD) pricing ($.99/song, $9.99/album) is comparatively cheap[10] and flexible. By selling singles at low prices, Apple can attract P2P users who would normally download a song on a whim. Indeed, Apple reports that 55% of its sales are singles.[11]

Apple had 2 million downloads in its first sixteen days and 30 million over the year,[12] encouraging many other firms to create substantially similar offerings.  More than a dozen could operate domestically by Summer 2004.  Many Stores also operate in integrated software, but some are stand-alone websites.

Though the PPD market is growing faster, subscription models are also developing.  Napster 2.0 and Rhapsody offer unlimited streaming from their entire catalogs for $9.99 per month. Customers might prefer this service because they experience music at close to zero marginal cost as they would on P2P.  At the same time, Napster 2.0 and Rhapsody charge extra to shift songs to CD or a portable player and to keep songs after the subscription has ended.  In contrast, eMusic used to provide unlimited, unencrypted MP3 downloads for a flat fee, though large licensing fees and a limited catalog hampered its growth.[13]

            Though the international market is more fragmented and small,[14] it has some similar Stores.  OD2 operates numerous PPD Stores, which are branded by various firms, including Microsoft and Coca-Cola.[15]  Though they currently act as stand-alone services, OD2 is creating a software component with a new recommendation feature.[16] Typical DRM and prices are relatively similar.


B. Digital Music Store Outlook


In 2003, the domestic PPD market blossomed to $36 million and subscriptions grew to $47 million.[17] Though the online market is still only .8% of gross revenues,[18] some statistics suggest that the tide is turning for the entire industry.  The industry lost 6.0% compared to 8.2% the previous year, and sales were actually up by 5.6% in the 4th quarter when many new online services arrived.[19] Though this is simply a correlation, this year has provided reason for optimism that the Digital Music Stores might be part of the solution to the industry's problems.

            Optimism is not only warranted by the market’s growth, but also by survey data suggesting that the model’s premises are sound.  Polling taken recently and during the original Napster’s existence suggests that depth of catalog, flexibility, and convenience are often just as important as price for consumers who download via P2P.[20]  A Harris Interactive poll of teen P2P downloaders found that only 44% did so to get music for free,[21] and Jupiter Research found that half of sampled consumers would pay if offered the prices and DRM flexibility similar to the current PPD services’.[22]  Furthermore, Apple has reportedly sold 95% of its catalog at least once, indicating the value of a deep catalog.[23] 

            The market will also benefit from the competition among the multitude of new services.  Competition will help sort out strengths of subscription and PPD markets, and all services can continue to differentiate themselves by special features.  Napster 2.0, for instance, is unique in its mimicking P2P users' ability to comb through each other's music collections.

             The emergence of the new services will also benefit independent bands and labels.  As noted in this paper's first model, falling production costs and Internet distribution make subsisting outside the major labels easier.  Sites like, IUMA, and have shown great promise for independents selling their music online, but they have failed to generate large sales and financial success.[24]  The excitement surrounding the Stores featuring major label content could rub off on the indie sites, and, by placing their music in the new Stores, independent artists can increase their exposure.  While physical limitations contributed to brick-and-mortar stores relegating independents to less prominent placement (if placed at all),[25] the online Stores can host a practically infinite number of artists.  Recommendation systems will help consumers find indie artists who would normally be drowned out by stars' advertising, and Apple’s sales data suggests that consumers will seek out lesser-known material.[26]  As a result, one can expect a greater diversity of available music in the long run, as more artists leverage these tools to prosper as independents

            Based on the foregoing evidence, it seems the Store model does have promise and will grow substantially beyond its 2003 size.  But, beyond that broad assessment, many questions remain: To what extent can the Stores sustain and stabilize the industry, curbing its losses and even generating renewed growth?  Moreover, can the market grow fast enough to limit more severe industry losses in the near future? Several variables cumulatively suggest a difficult future for the industry, particularly in the short run.

            First, creating a sustainable online music market will depend on the industry's ability to adapt to and leverage the Stores' qualities.  For instance, the industry will have to adapt to consumers' ability and desire to buy singles rather than albums.[27]  Creating a sixty-minute album—with perhaps several filler songs—will be potentially wasteful and costly.  In addition, the Store's special features can be used to support additional revenue sources.  For instance, by selling access to Store-based artist fan clubs, with advance access to albums and tour tickets, the industry could add value to the Store and increase revenue.  Such ancillary sources would complement (but, unlike in this paper's first model, not supplant) selling copies. 

Making those types of changes in business practices will be important to the industry generally, and the changes' speed will be especially important to the current labels' roles. Their business model is structured around manufacturing and selling albums, not singles or services.  To some degree, the industry's need to maintain physical distribution until more CD buyers shift to the online world will constrain this model's adoption.  The faster this shift happens, the better chance the current labels have to survive in some form.  Where the labels fail others may eventually succeed, but a lengthier transition will create more industry instability, likely leading to short run adverse effects on the entire online music market.

The current Store implementations may also have to improve, for they still fall short of P2P's benefits in several respects.  Most significantly, DRM impairs legitimate activities, decreasing the product's value and frustrating consumers.  Of the utmost concern currently is DRM's limiting compatibility with software and hardware players.[28] For instance, because of how Apple has chosen to license its proprietary DRM, the only portable player compatible with iTunes’ songs is the Apple iPod, which cannot play other services' DRM-locked formats.[29]  As services continue to enter the fray, many bring with them new formats, leading inevitably to more incompatibility.[30]

What interest would the services have in a fragmented marketplace?  By tying the Store’s songs to a portable player and excluding competitors, Apple and others like them can sell songs at a loss but still make a profit overall.[31]  According to various sources, record companies take about 65-70 cents of every song sold in a PPD service.[32]  Credit card costs eat up another 10-12 cents, but decrease with greater volume.  To turn a profit on these thin margins, many services sell songs to drive sales of more profitable services and products.[33]  Apple and others can pursue this strategy with regard to portable players because distributing a device that can unlock the DRM would violate the Digital Millennium Copyright Act (DMCA).[34] 

Though the labels have put pressure on the Stores to forge compatibility, a solution in the short term seems unlikely given market trends.[35]  The incompatibility might help some Stores, but will slow consumer adoption of the services and thus harm the music industry.  Many consumers will opt for P2P because all players support the unencrypted, easier-to-license MP3 format.  As new player manufacturers and Stores face barriers to attracting a broader consumer base, incompatibility will also inhibit innovation and competition in those markets.[36]  Unlike in instances such as the MP3 compression codec contending with Windows Media Audio, the DRM standards' technical capabilities do not affect the actual content's quality in any meaningful way,[37] and thus little is gained from the standards competition.

            Consumer frustration will be compounded by the likely demise of many current Stores.  Unless the volume of users grows significantly this year, the market cannot bear a dozen services.[38]  Indeed, as Stores like Wal-Mart's[39] undercut the competition and sell music as a loss leader, services that are trying to profit simply from selling music will be squeezed even tighter.  Formats from defunct Stores will inevitably go unsupported in newer hardware players, and consumers will be forced to confront the incompatibility.

            While the compatibility problems are most stark, many other DRM restrictions may also depress consumer demand.  Even permissive DRM like iTunes' will encumber uses such as making multiple back-up copies in data formats, creative appropriations (e.g., sampling), and reselling purchased copies.[40]  Regarding services that restrict the latter, a GartnerG2 survey shows that 28.8% of teens and 32% of adults are "much less likely to subscribe."[41]  In addition, the subscription services' lack of portability conflicts with consumer expectations.[42]  One could argue that, particularly in regard to the iTunes-like PPD services, these limits will not significantly impact the market, for they might not be too bothersome or even noticeable to most people; however, to the extent they do impact users, they provide another reason to turn to P2P. (DRM's possible benefits to the industry—and thus the costs of removing restrictions—will be considered in Part III.)

            Just as current DRM implementations are less intrusive but still potentially impeding adoption of legitimate services, the Stores' catalogs are improving but nowhere near what P2P has to offer.[43]  Five hundred thousand songs is approximately 50% of the songs in print, 10% of total released recordings,[44] and far less when factoring in the many other recordings one can find on P2P.  Gaps in the catalog can harm the entire industry, for they lessen the Store’s value to consumers and thus make it more likely that they will primarily turn to P2P. 

To grow the Stores' catalogs, the industry can adjust at several layers. Though a legal change may ultimately be necessary, publishers themselves can take steps to make mechanical licensing as easy as possible for Stores.  The Copyright Act does not clearly delineate whether streaming services must pay mechanical (in addition to performance) fees, the compulsory licensing system is outdated and burdensome, and the Harry Fox Agency, the principal private licensing organization, is sometimes no better.[45]  Meanwhile, the Stores can greatly increase their connections with independents, and the record labels must convince artists to end their online holdouts in spite of fears that singles sales will eat away at album revenue.[46]

Finally, and perhaps most importantly, labels and artists must accommodate downloaders’ demonstrated interest in out-of-print, live, and obscure recordings.[47]  Some recordings (like live bootlegs) might exist only in P2P users' collections, but many songs exist in the record companies' archives, waiting to be digitized and distributed.[48] Today, sites like record live performances and place them online for purchase within 48 hours,[49] and there is little reason why the entire industry could not do the same for more artists. The industry has started to do so, but only in a limited fashion.[50]

Even if the Stores could improve those aspects, current price points will still turn off many consumers.  Of course, some consumers will be willing to pay no more than zero and that will be a continual barrier; however, even for those willing to pay, prices might not be low enough to substantially reduce industry losses, particularly in the short run.  As far as the PPD Stores, growth in user volume could lead to more pricing flexibility, but in the short run the tight margins will likely preclude significant changes.  With decreasing demand for albums and thus potentially lower revenue opportunities, the labels are also unlikely to reduce their royalty rates.  The labels benefit from reductions in manufacturing and distribution costs, but the lower Store prices basically offset these savings.[51]

However, some have suggested that if the record industry reduced royalty rates and the Stores reduced prices, they would make up their losses in higher volume.  In a recent survey, Jupiter Research found that 54% of adults would pay $.51 to $1.00 while 74% would play $.50 or less.[52]  Similarly, over a six-week period, Rhapsody cut its rates for CD burning rates in half to $.49 and purchases subsequently tripled.[53]  Still, neither Rhapsody users, who already are willing to pay large subscription fees, nor adults[54] are necessarily representative of all online consumers.

The all-you-can-listen subscription services offer more attractive pricing to many consumers and might grow into market leaders, but they are unlikely to do so in the near term.  Their profit margins are better, with lower credit card costs and royalties reportedly at one cent or less per stream.[55]  For high volume downloaders, the services are comparatively much cheaper and, just as on P2P, every marginal download will feel free.  On the other hand, until the services allow greater portability and consumers become more accustomed to renting their music, these services might only have limited market penetration.[56]  At least the former will change in the long run as services become capable of sending music directly to Internet-enabled devices.[57]  Even then, prices might still have to come down to achieve broad appeal, for they are currently significantly above the average consumer’s yearly spending on music.[58] 

The wildcard amidst these variables is the record companies' lawsuits against individual P2P users.  While the lawsuits could vastly improve the industry's prospects, they also might leave it unchanged or make it even worse.  P2P usage reportedly dropped by 18 million users after the suits began,[59] but other studies suggest that P2P usage and traffic went up[60] and that 75% of people believe that downloading should not be illegal.[61]  P2P services and other software vendors have also begun to introduce features that hide the user’s address such that they cannot be readily identified.[62]  In turn, the suits might simply be shifting users towards more secretive systems while angering potential customers.[63] Indeed, some contend that that the lawsuits are not only bad for business but also for society in general, as immense damages will be assessed almost randomly and thus, perhaps, unfairly. [64]

The foregoing variables suggest an uncertain future for the Digital Music Store model.  The Store model does provide some hope for a growing online music market, but it will be a difficult transition for the industry.


C. The Digital Movie Store?


             The Digital Movie Stores are in a more primordial state, approximating where Music Stores were when MusicNet and Pressplay first arrived.  Just as labels owned MusicNet and Pressplay, the studios own Movielink; CinemaNow is the only other licensee, but it does not have agreements with all major studios.  Both services' prices are generally above what one would pay at Blockbuster, and only CinemaNow allows permanent downloads, albeit from an extremely limited portion of its catalog.[65]

            Of course, the market for downloading movies—legitimately or not—is still relatively small.  Broadband connections are needed to download movies quickly, and it is unlikely that most consumers want to watch movies on their computers.  In time, more people will have broadband, and computers will become a more integrated part of the home entertainment system, but the movie industry is unlikely to suffer significant losses from P2P downloading for now.

            Eventually, the industry will face many of the same challenges that the music industry faces now.  Though theater exhibition will still retain much of its value due to its superior picture and sound quality, home sales, rental, pay-per-view (PPV), and other downstream markets will likely decline.  P2P systems are already evolving in ways that aid movie downloading.[66]  As such, Movie Stores and the movie industry also face an uncertain future.

            In anticipation, the movie industry has made some limited headway.  First, Movielink and Cinemanow recently upgraded such that users do not have to finish downloading before beginning to view the movie.  They are also considering allowing some content portability as well as subscription pricing schemes.[67] Second, the industry has begun to pursue new distribution technologies, even though they might siphon revenue from other more profitable streams.  For instance, Disney recently introduced Moviebeam, a set-top box for the TV that receives movies via analog TV signals.[68]  If the industry can continue shifting towards alternative, more flexible distribution schemes, they will be better prepared for widespread P2P downloading.

            But the industry is also showing signs of hesitance, pushing for legislation mandating DRM in media devices to reduce the threat from P2P.[69]  The potential for such solutions will be discussed in detail below, but suffice it to say that the industry's strategy might only slow its transition and increase losses.


Part III: Technology, the Law, and Alternative Scenarios


A.  Baseline of Technology and the Law


            So far, we have primarily discussed technologies aimed at impeding infringement in terms of consumers' willingness to pay for restricted content.  The following sections will expand the scope in two ways.  First, how can technology reduce infringement?  Second, what broader social costs and benefits do such technologies have? This section will address these questions in relation to the current environment.

            The affected industries have hoped that DRM, with its support from the DMCA, will reduce piracy, perhaps offsetting its costs in reduced consumer interest.  However, DRM most likely makes little difference to piracy today. Even setting aside the near certainty that DRM will be cracked in spite of the DMCA, files can be ripped and encoded in an unencrypted format once burned to CD or as they are outputted in analog form.  While the DRM may reduce the initial number of uploaders to P2P, one copy can quickly propagate through a P2P system.[70]

            DRM's practical benefit seems unclear, but its costs from consumer and societal perspectives are quite apparent.  Limits on copying reduce the important social benefits derived from the public's freely accessing and manipulating creative material under the fair use and first sale doctrines.[71]  Consumers would lose the greater personal flexibility and control that the digital media environment enables; for instance, iTunes-like DRM stunts the sampling, editing, and other creative appropriations that digital technology makes easy. What's more, DRM will never allow for all fair use because it is an evolving legal doctrine, applying a balancing test on a case-by-case basis rather than protecting a discrete set of uses.[72]

            DRM and the DMCA also hinder legitimate uses in ways that have little relation to preventing piracy.  Among the many collateral damages,[73] control over technologies like portable players impedes technological innovation and competition.[74] Lawsuits have already enjoined compatible DVD and streaming media products, as well as competing printer cartridges.[75]  Indeed, many industries and actors unrelated to copyrighted entertainment content will bear the DMCA’s costs.  By including even a trivial amount of copyrighted content, anyone can potentially use DRM to protect tied technologies and non-copyrightable content as well.[76] The DMCA has also obstructed legitimate research on such matters as software security and website filtering lists.[77]

             Spoofing's benefits are also uncertain. It might be more effective, for its impact persists beyond the creation of one unencrypted copy. At the same time, its effect diminishes as legitimate copies spread, and its use thus far has not seemed to slow P2P usage. Because P2P systems can (and likely will) implement counterattacks that limit spoofing's effects,[78] copyright holders cannot rely on this strategy forever.  Finally, spoofing causes some minor harm, cluttering P2P systems and slowing file searches for legitimate content.

            In sum, technologies and the law do not dramatically improve the industries' chances, and, particularly in DRM’s case, may be a net loss for society.  The following sections will imagine two scenarios in which technologies have a more substantial positive impact for the industries.


B. An Alternative: Technology as Speed Bump Scenario 


The Digital Media Project's Technology as Speed Bump scenario envisions copyright holders being able to inhibit piracy more successfully for a limited time period.  The technologies that could create such a window of opportunity would evolve over time, but the currently plausible options are interdiction, DRM, watermarking, and spoofing.  Interdiction entails downloading a song from a P2P user such that no one else can download it at the same time.[79]  Unlike in the current environment, DRM might be more useful in this context by reducing the initial number of uploaders and thus the number of users who must be interdicted.  To create a credible ex post threat, unique watermarks for each sold copy could help copyright holders identify and sue initial uploaders.[80]  Spoofing would create an even greater nuisance, as the fake files would more easily outnumber the real versions.

These technological changes may require or benefit from supporting laws.  A bill to allow interdiction has been proposed,[81] as it currently could be construed as an illegal denial of service attack subject to the Computer Fraud and Abuse Act.[82]  Legal penalties could also be targeted at those who initially distribute infringing materials.  (The DMCA already protects DRM and copyright information embedded in watermarks.)[83]

Though this scenario assumes arguendo that these technologies create a meaningful window of time, they will realistically form an imperfect barrier.  The scenario only imagines that some—but not most—users will gain illicit access when content is first released, with more able to do so as the speed bumps' effectiveness degrades over time.  Furthermore, copyright holders will go through a continual cycle of creating technological measures and having them evaded.

            Three reasons suggest that creating this window would provide an important boost to the industries' revenues.  First, to frame it in terms used at this paper's beginning, the speed bumps create non-monetary costs to P2P that consumers will have to weigh along with the other incentives to choose the Store instead.  For some, waiting to get something for free might be such a nuisance that they will abandon P2P entirely, while others might selectively decide to buy early.

Second, creative products lend themselves to a business model that focuses on early returns.  Creative products typically exhibit "network effects," increasing in value with increasing popularity.[84]  Consider the many conversations one has with friends about new art, or the various pop culture references one experiences daily; forgoing consumption of the art means not participating in those interactions as well.  If sales simply trickle in, there will be less buzz, less shared excitement, and thus less network effects.  In turn, it is to the industries' advantage to hype a product's release, attracting a multitude of consumers whose interest will draw in others.

            Third, reliance on early returns already exists in both the music and movie industries to some extent.  In general, initial sales periods are critical because the industries desire a quick return on expensive investments.[85]  Most albums sell well for only a short time, and the major record labels position their releases to maximize initial sales.[86]  Though record companies derive about a third of total sales from albums older than 18 months,[87] securing the initial sales would still provide a meaningful boost.  For movies, the situation is a bit more complicated, but still favorable to this business strategy.  Studios concentrate on a film's opening week, which typically accounts for 40% of total box-office revenue; initial sales are taken as good predictors of total revenue and help generate greater success in downstream markets.[88]  Still, an altered sales timeline will challenge the movie industry because the downstream markets are approximately 75% of revenues,[89] and, by the time those sales periods occur, copies made from the theatrical release will already be available on P2P. Moving up those markets' release dates may cannibalize theatrical revenue.  On the other hand, the movie industry is already eager to move up DVD releases to take advantage of its high profit margins.[90] Moreover, though it has often done so hesitantly, the industry has always been able to integrate technologies that upset current sales periods, such as the satellite and PPV.[91] 

Shifting to a greater focus on early returns may occur to some degree regardless of technology acting as a speed bump. Many new music and movie releases have been available on P2P prior to their release,[92] and the industries' reaction has already begun. The movie industry is adjusting its DVD releases as noted in part to respond to piracy, and X-Men 2 and Matrix: Revolutions debuted worldwide.[93] Meanwhile, several labels have begun releasing music online before the in-store release to ensure online shoppers have a legitimate option.[94] In this scenario, the industries' greater opportunity to exploit the initial sales window will intensify and expand the changes.

             While the speed bumps would ease the industry's effort to make these business changes and induce consumers to pay, this scenario has several deficiencies.  To begin with, though they might boost industry revenues in the aggregate, the speed bumps are unlikely to benefit all artists.  Generating high initial sales will require large upfront costs for marketing and the speed bumps, which will only be worth investing in where there is a high probability of success.  For independents and artists who do not have large established audiences, it might be impossible or simply impractical to spend large sums before the release.  Many such artists today can rely on word-of-mouth and promotional tours to increase sales and build audiences gradually, but, by the time they are confident that they can sell well, the speed bumps’ window may already be gone.

Indeed, intensifying reliance on early returns may reinforce the industries' current tendency to heavily invest and promote a few immensely profitable hits while marginalizing the vast majority of artists.[95] Inasmuch as this strategy has entailed only investing in works with the broadest possible audiences for the largest profitability, it has arguably created greater homogeneity.[96]  With this scenario, the major labels and studios might invest even less in riskier artists, contributing even less to artistic diversity.  Still, to the extent independent artists can subsist anyway, this pernicious effect will be ameliorated, especially as production costs decline.[97]

            The speed bumps technologies themselves will have social costs. Beyond DRM's and spoofing's harms, interdiction will limit other activities of the targeted user, and, when on a shared bandwidth connection (like cable broadband), the legitimate activities of others.[98]  Given copyright holders' misidentification of infringing material in past instances,[99] this technology will likely be accidentally targeted at innocents, though penalties for mistakes can ease this problem.  Interdiction and watermarks, like DRM and spoofing, will increasingly be evaded, [100] and, as the inevitable technological arms race proceeds, more severe speed bumps will be needed generating increased collateral damage.[101]

            In sum, while this scenario might create a better environment for the industries and Store model, it might not be better overall.  Even assuming that this scenario would be preferable to today's environment, one must ultimately take into account the probability it can be reached in practice to determine whether it is worth pursuing.  After all, this scenario will not simply evolve by itself, but rather by coordinated legislative and private actions.  Some would argue that consumers will continually outmaneuver the speed bumps, the law will not be able to change fast enough to support the speed bumps, and thus they can never create a meaningful sales window.[102]  From a policy-maker's perspective, this possibility must also be weighed along with the potential costs and benefits.


C. A Second Alternative: Technological Lockdown


            The previous scenario is in the middle of a broader spectrum.  On one end is a scenario where no legal or technological impediments are used to impede P2P.  On the other is the Technological Lockdown scenario, which envisions the law and technology being leveraged in an attempt to eliminate file-sharing.

            Like the previous scenario, this scenario's exact make-up would have to evolve with technology, but it would likely involve the following components.  First, it would incorporate and enhance the speed bumps.  Congress would legislatively mandate that all digital and analog media hardware devices incorporate DRM, making it much tougher for the average person to evade copy-controls.[103]  Second, statutory change or court rulings to make P2P providers liable if they do not design their systems to prevent infringement, thus reversing MGM v. Grokster,[104] which protected decentralized P2P services Morpheus and Grokster.[105] 

            This scenario does not assume the complete elimination of infringement.  After all, the current decentralized P2P networks cannot be shut down, DRM evasion will still occur to some degree, and the reach of these legal changes is unlikely to be global.  This scenario does imagine for the sake of argument, however, that domestic use of P2P will only exist in smaller networks with far less users and files.  Wide-scale infringement will become much more difficult for most people.[106]

            The major benefit is obvious: the affected industries could employ the Store model largely without having to compete with free.  With industry losses slowed, the Stores and the labels would not need to adjust their models as urgently.  At the same time, the Store model's increased viability will provide an incentive to adjust quickly to obtain the large cost savings possible by eliminating manufacturing and distribution costs. The result will soon be a flourishing of Stores that will still be cheaper and more convenient than consumers' current brick-and-mortar offerings.  For the short term, the labels might appropriate most of the cost-savings from online distribution, but, as production costs fall, more artists will be able to go independent and obtain these benefits themselves.  With a model viable for more independent artists, this scenario could eventually make possible a more diverse artistic culture.

            This scenario could also provide greater revenue through enhanced price discrimination.[107]  Price discrimination means selling different consumers the same good at different prices.  For instance, the movie industry price discriminates by releasing films first to theaters and then in secondary markets at differing prices. They could release the movie in the theater and DVD at the same time, but some consumers willing to pay the higher theater price would simply rent the DVD.

Copyright holders can price discriminate some of the time because creative products are imperfect substitutes for each other.  DRM provides the second necessary component by preventing people from reselling goods at a different price.

DRM also enables price discrimination by allowing copyright holders to monitor and profit from typically private consumer activities.  Consumers could be offered, for instance, one price to listen to a song once, with additional fees for extra listens, moving it to a portable player, backing it up on CD, and so on.  This tactic, combined with aggregated data from other sources about the individual's purchasing habits, would help copyright holders approximate the amount the consumer is willing to pay for a good.  Such price discrimination is possible today, of course, but free alternatives act as a constraint on copyright holders.

Price discrimination will certainly generate additional revenue for the movie and music industries, and it might also be beneficial from a social welfare perspective.  Though a consumer willing to pay $90.00 dollars for an album would pay that much, price discrimination will also enable consumers able to pay only $1.00 to acquire the good.  The market would in this sense work more efficiently and expand access to entertainment products.[108]

Though this scenario improves on the current environment in those ways, it also generates severe costs.  First, there will likely be greater constraints on fair use and first sale.  With free alternatives diminished and the ability to profit from consumer uses, there would be stronger motivation to institute stricter controls than exist today.  To many, this will mean further jeopardizing important consumer rights and socially beneficial uses.[109]

To others, however, this may seem less problematic, for fair uses will simply become licensed rather than free.  If fair use is justified only by market failure, then enhanced licensing abilities seemingly render it irrelevant.[110]  But, even if one accepts this view, price discrimination through DRM will not cure all inefficiencies and will still impede important uses.  Payment mechanisms integrated into DRM will help reduce transaction costs, but they will not affect the non-economic incentives for refusing to license.[111]  Artists might prevent copying for parody because they see it as an insult to their integrity.[112] Also, copyright holders will likely charge socially inefficient prices for uses that produce social benefit exceeding what they (and licensees) can capture in profit.[113]  Copying for educational and critical purposes, for example, produces social benefit beyond the producer and consumer in the form of conversational topics and an informed populace.[114]

Price discrimination and DRM could also breach the privacy and autonomy of consumers.[115]  When a consumer pays to move a song to a portable player, that information could be reported to the copyright owner along with information about listening habits that might improve a profile of the individual's purchasing power.  In a pay-per-use system, access to one's own goods might indefinitely be in someone else's control.  Even without this monitoring harming the consumer directly, it might feel rather uncomfortable to experience media in this way.[116]

The most severe drawback, however, would be encumbered technological innovation.  By mandating that devices embed DRM, technology creators will lose flexibility to design tools with novel features.[117]  Rather than general purpose tools that users can experiment with, manufacturers will have to allow only a discrete, authorized set of uses.  Robustness requirements for the DRM will inhibit open source software, for it is by definition not tamper proof.[118]  We will never fully know the innovations that we have precluded, for technology evolves unpredictably.

Heightened third-party liability would be similarly harmful to innovation.  Innovation in P2P systems would be stunted, as would legitimate communications that depend on or benefit from uncontrollable, decentralized systems.[119]  Moreover, because P2P is simply a tool for searching for and transmitting files, heightened liability will likely apply to myriad other Internet applications.  As such, the Internet as a platform for innovation will be in jeopardy, for technology creators in general will have to create more restrictive technologies to avoid potential liability.[120]  

Like the Technology as Speed Bump scenario, this scenario is better in some respects, but worse in others compared to the current trajectory. Because some believe that even technological lockdown will have little practical effect, that possibility must also be taken into account when evaluating this option from a policy-maker's perspective.




            Until this year, "you can't compete with free" often seemed to be industry orthodoxy.  Now, the Store model's capacity to aid the industry seems plausible, at least in the long run.  Though the Stores' current implementations have comparative deficiencies, including restrictive DRM, limited catalogs, and price points, these aspects can change over time.  Altered business practices that leverage the Stores to match consumer demand and create additional revenue streams will also improve the industries' prospects.  However, so long as these shortcomings and free alternatives remain, the extent to which the Stores can stabilize and sustain the industries is uncertain.  The rush to open new Digital Music Stores is not truly indicative of the music industry's making it over the hump in facing the online environment.  Rather, it simply exemplifies how far the pendulum has swung away from the "can't compete with free" mantra.  Making today’s hopes tomorrow’s reality remains a difficult task.

            Furthermore, as discussed in Part III, competing with free may come with social costs.  The more technology and the law aid the industries, the more they are likely to curb technological innovation and legitimate uses.  Though one might consider the net effect positive, the costs should give reason for pause.

            Can the industry keep selling access to copies without using the Store model?  Notably, not only does the Store model compete with free, but also with P2P.  These strategies are not necessarily the same.  In the next section, we will consider a business model that attempts to embrace P2P but sells copies much like the Stores.

[1] See RIAA, 2003 Yearend Statistics, at  Digital downloads are not included in the RIAA's estimate, so it is a little high.  To calculate the net loss, I multiplied the amount by 54%, which is what Professor Fisher estimates as the industry's cut from brick-and-mortar retail.  See William Fisher, Promises to Keep, (forthcoming, Stanford University Press, 2004) at Chapter 6.  See also Benjamin Compaine and Douglas Gomery, LinkWho owns the media? : competition and concentration in the mass media industry, (Mahwah, N.J. : L. Erlbaum Associates, 2000, 3rd ed.), 376 (making an estimate of approximately 50%).

[2] See Stan Liebowitz, Will MP3s Annihilate the Record Industry? The Evidence So Far, (June 2003), at

[3] See generally MPAA, 2002 MPA Market Statistics, at  See "Deluge of DVD in a watershed year: spending on the disc rose 40% in 2003," Video Business 24(2):1 (Jan. 12, 2004)("Consumers spent a record $22.2 billion renting and buying DVDs and videocassettes in 2003, a 9.3% jump from 2002…. Spending on DVD comprised more than half of rental revenue, and the format dominated sales. Of the $14 billion consumers spent buying videocassettes and DVDs, $11.9 billion was spent on discs. Combined sales were up 15.7% from 2002.")

[4] See Leander Kahney, "Buck A Song, or Buccaneer?" Wired News (October 21, 2003), at,1367,60901,00.html?tw=wn_story_page_prev2 (quoting researcher asserting that most of the typically 700 million total files available on KaZaA are music); Gwendolyn Mariano, "Study College Students Would Pay for Napster," (April 10, 2001) at (reporting research about Napster users finding "26 percent of the students download rare, live or out-of-print recordings; 50 percent download songs considered alternative, mainstream or older works"), Carly Carioli, "The iCollector," The Boston Phoenix (October 2, 2003) at (discussing rare recordings available on P2P system Soulseek); Lawrence Lessig, The Future of Ideas, (New York: Random House, 2001), 131, citing Testimony of the Future of Music Coaltion on "Online Music and Copyright Law," submitted to Senate Judiciary Committee (April 3, 2001), 13 ("Research reports have confirmed that one of the major reasons that [adults] are [using Napster] is to access commercial recordings that are no longer commercially available."),

[5] See, e.g., (list of known P2P viruses); PestPatrol, KaZaA: The Hidden Threat from P2P Networks, (June 2003) at (discussing adware, spyware, and viruses in KaZaA)

[6] See Pestpatrol, id. 

[7] See James Maguire, "Hitting P2P Where it Hurts," Wired News (Jan 13, 2003) at,1412,57112,00.htm

[8] See, e.g., Jim Hu, "Labels Defend MusicNet, Pressplay," (July 8, 2002), at; John Borland, " lands last Big Five label," (July 1, 2002) at

[9] See

[10] Typical CDs cost between $13-18.See Fisher, supra note X, at chapter 1 (placing the average price at $18); Andrew Weschler and George Schink, CDs: A Better Value than Ever, prepared for the RIAA (May 21, 2002) available at (placing average cost in 2001 at $14.64 per album); Paul Festa, “Music Giant Slashes CD prices,” (Sept. 3, 2003) at (noting Universal cutting suggested retail price to $13 from $17-19).

[11] See John Borland, "How much is digital music worth?" (December 8, 2003) at

[12] See Evan Hansen, "Microsoft, again: Apple's Old Nemesis," (May 29, 2003) at; "Over Two Million iPods Sold," (Jan. 6, 2004) at

[13] See John Borland, "Emusic sold; unlimited MP3 downloads nixed," (Oct. 10, 2003), at (discussing eMusic's shift from unlimited to limited downloads service, citing large licensing fees).

[14]See IFPI Online Music Report, published by IFPI, 4-5, available at

[15] See

[16] See Krishna Roy, "OD2 Trials New Jukebox Service," Net Imperative (Jan. 29, 2004) at

[17] See Forrester Research, "For downloads, things are looking up", (Feb. 4, 2004) at  For a breakdown by service, see "Tracking Online Music Services," Online Reporter at  For an upbeat general report on the last year domestically and internationally, see IFPI Online Music Report, supra note X.

[18] See "For downloads things are looking up," id.

[19] See RIAA, supra note X.  Again, this figure does not include digital downloads.  Others have placed the figure lower, see Phil Gasllo, "Music biz fails to hit higher notes in 2003,"Daily Variety (Jan 2, 2004) (3.6% sales drop).  Brian Hindo, "Did Big Music Really Sink the Music Pirates," Business Week Online (Jan. 16, 2004), at (5.6% sales growth in fourth quarter)

[20] See Phil Leigh, Online Music Starts Rocking, (December, 2003) at (citing research by now defunct Webnoize that breadth of choice and convenience were more often cited than price); Paul Horn, Eliot Maxwell, and Susan Crawford, Promoting Innovation and Economic Growth: The Special Problem of Digital Intellectual Property, report from Committee on Economic Development (March 3, 2003), 72, available at (citing same study); Harris Interactive, "Reasons that Teens Downloaded Without Paying, 2003" (October 2003), reprinted by eMarketer in radio interview with Phil Leigh, at (finding 59% wanted to get "one or two songs", 48% wanted music quickly, 46% found music too expensive, 44% wanted music for free, 40% wanted songs unavailable elsewhere)

[21] See Harris Interactive, id.

[22] See "The Apple Music Store," Jupiter Research (May 30, 2003) at

[23] See "Post-Conference Report on  Midem 2004," Digital Media Wire, at

[24] See Michael Regan, "Musicians cheer return of Internet site for lesser-knowns, but can it survive?" Associated Press (June 7, 2002) (discussing and IUMA); Jon Healey, " to Change Owner and Format," Los Angeles Times (Nov. 15, 2003) (discussing's demise).

[25] The major record labels often pay for prominent placement through "cooperative advertising" agreements.  See Michelle Wilson-Morris, " 28 States Sue Major Labels and Retailers Over Alleged Price Fixing Conspiracy," Musicdish (August 8, 2000), at (discussion of this phenomenon in its relation to recent price fixing case)

[26] See supra note X

[27] Concerns abound about this transition.  See Brian Garrity, "All Aboard The Digital Train?" Billboard (Sept. 20, 2003).

[28] See Paul Gluckman, "Building Business on Legal Downloads Isn't Easy, Panelists Say" Washington Internet Daily (Feb. 10, 2004) (citing a Universal exec describing "the multitude of mutually inoperable codecs and DRM solution as 'the hand that's pushing down the market' for licensed downloads to portable devices that could work with one another. He said incompatibility was the leading subject of consumer complaints noted at eLabs.); Brian Garrity, "Music Biz Urges Download Harmony," Billboard via Reuters (Feb. 1, 2004) (discussing industry's concern abou this issue).

[29] Apple could support WMA, but it has chosen only to support AAC and MP3, so in this sense the iPod's incompatibility problem could be easily reduced.  However, restriction on format-shifting in locked WMAs also contributes to the problem.

[30] Most other services use the proprietary WMA format.  RealNetworks's Music Store has its own Helix DRM, see John Borland, "Real offers new tech, song store," (Jan. 7, 2004), at, and Sony's new Connect service will use the proprietary ATRAC format, see Richard Shim, "Sony unveils music store, gadgets at CES," (Jan. 7, 2004) at

[31] See Ina Fried, "Will iTunes Make Apple Shine?" (Oct. 16, 2003), at (Apple Senior Vice President Phil Schiller stated bluntly in an interview: "The iPod makes money. The iTunes Music Store doesn't.")

[32] See Hansen, supra note 11See also Chris Gaither "Online Music May Finally Play a Tune of Profit," Boston Globe (Oct. 16, 2003) at; Claire Neesham "All played out" Belfast Telegraph (Feb. 9, 2004).

[33] See Scott Kessler, "The Mighty Lure of Online Music," Business Week Online (Feb. 27, 2004) at

[34] See 17 USC 1201; Universal v. Reimerdes, 111 F. Supp. 2d 294 (precluding interoperability of DVD players without a license); RealNetworks v. Streambox, 2000 U.S. Dist. LEXIS 1889 (W.D. Wash. 2002) (prohibiting creating compatible program to access streaming media files); Sony Computer Entertainment America Inc. v. Gamemasters, 87 F.Supp.2d 976 (N.D. Cal. 1999) (restricting creation of chips that would allow foreign games to be played on video game system); Lexmark v. Static Control, 253 F. Supp. 2d 943 (ED KY 2003) (prohibiting compatible printer cartridges)But see Chamberlain v. Skylink Technologies, 2003 U.S. Dist. LEXIS 15298 (ND Ill. August 29, 2003) (rejecting a claim made against an interoperable garage door manufacturer).  See also Derek Slater and Ivan Reidel, iTunes Case Study, DRM and DMCA Module (Berkman Center).

[35] See Brian Garrity, supra note X. Some are also pursuing "open" DRM standards which are only beginning to be developed, see, e.g., Content Reference Forum, at, Faultline, "Phillips leaks Intertrust 'open' DRM details," The Register (Jan. 6, 2004), at

[36] See Slater and Reidel, supra note X.

[37] They might differ slightly in terms of their rights languages, and how flexibly they can set usage rules.  In this way, they might eventually affect the way Stores and the industry can specify certain complex uses.  However, all current DRM can express equally well the relatively simple rules of today's services, such as those for burning and portability.

[38] See Bernhard Warner, “Cds will die but Net music may be a business bubble,” USA Today (Jan. 26, 2004) at; Neesham, supra note X.

[39] Walmart sells all singles for $.88 and albums for $9.44.  For a discussion of their strategy, see "Wal-mart Sells Songs for 88 cents," AP via Wired News (Dec. 18, 2003) at,1412,61659,00.html?tw=wn_tophead_5.

[40] Of course, the impact of DRM varies depending on the service and the severity of the restriction.  Most PPD services are substantially similar to iTunes, but differences do exist.  For instance, iTunes allows unlimited CD burning, while Wal-Mart only allows ten burns per song. For a summary of how various services restrict some personal uses, see Deirdre Mulligan, John Han, and Aaron Burstein, How DRM-based Content Delivery Systems Disrupt Expectations of 'Personal Use,'  published by ACM in DRM '03, available at  The summary does not include the numerous services with similar DRM to iTunes.

[41] [GartnerG2 survey, February 2004 – see iTunes Case Study, Berkman Center]

[42] See Berkman Center and GartnerG2, Copyright and Digital Media in a Post-Napster World,(Aug. 2003) at 17, available at (arguing that consumers have expectations of portability based on data stating that 82%, 77%, and 60% of consumers think it is legal to make a copy for back-up, to move to a portable device, and to share with a family member, respectively).  See also Jupiter Research, supra note X (showing people’s reduced demand with less portability in PPD services).

[43] See supra note 4.

[44] See Leander Kahney, "Music Biz Buzzing Over iTunes," Wired News (May 2, 2003) at,1294,58706,00.html

[45] See Testimony of Jonathan Potter on "Section 115 of the Copyright Act: In need of update?", before subcommittee on Courts, the Internet, and Intellectual property, (Mar. 11, 2004) available at (making these criticisms and others); Jonathan Potter, Keynote Speech at Digital Music Forum, (Mar. 1, 2004), available at  See also Testimony of Marybeth Peters,  (discussing the many issued involved, noting proposed rule changes to streamline compulsory licensing procedures).  But see Testimony of Carey Ramos, (supporting current legal and private licensing systems); Testimony of Cary Sherman, (making some criticisms, but generally supporting current licensing relationship with Harry Fox Agency). For the compulsory license, see 17 USC 115.

[46] See Frank Ahrens, "Music Fans Find Jukebox Half-Empty," Washtington Post (Jan 19, 2004) at; Billboard, supra note X

[47] See supra note 4 (Napster data on consumers downloading these types); Harris poll, supra note X.

[48] See Kahney, supra note X; see also Bill Holland, "New Tech Requires Old Masters; Rise Of DVD," Billboard (Nov. 6, 1999) (discussing the industry's trouble digitizing quickly)

[49] See Seth Schiesel, "Seeing Payday, not Piracy, Musicians Put Concerts on the Web," New York Times (Jan. 22, 2004) at

[50] See Ethan Smith, “Net music sales get boost with outtakes, mixes,” Wall Street Journal via Baltimore Sun (Mar. 8, 2004) at,0,5954638.story?coll=bal-business-headlines (discussing release of non-studio album recordings exclusively online)

[51] For PPD services, sources have speculated that record labels receive 65% of each dollar see supra note 32.  The difference between 54% of a 15 dollar CD ($8.10) and 65% of 10 dollar downloaded albums ($6.50) is mostly made up by removing manufacturing costs (8%, $1.20).  Essentially all of the lower cost comes from a lesser cut for the retailer (typically 38%, $5.70) and absence of a distributor (8%, 1.20).  For approximations of CD costs, see Fisher, supra note X, at chapter 1.  The industry also tends to draw from the amount allotted to artists to cover packaging, breakage, “free goods,” and CD returns.  For approximations, see Fisher, supra note X, at chapter 2.  However, all such costs do not exist in the online market.

[52] See Spencer Ante, "What Price Online Music?" Business Week Online (Oct. 17, 2003) at

[53] See id.  See also Amy Harmon, "What Price Music?" New York Times (Oct. 12, 2003) at

[54] See Edison Media Research, "US Online Music Downloaders by Age, 2003" reprinted in interview with eMarketer by Phil Leigh at (noting that 58% of downloaders are ages 12-17)

[55] See Knowledge@Wharton, "Online music's winners and losers,"  (Dec. 27, 2003) at (noting the low royalty rates and suggesting stronger long term potential).  Given that the record labels set their rates for the PPD stores at about the amount needed to approximate CD sales, one can infer that the subscription royalty rates are set up similarly.  However, that is not entirely clear.  Assessing the total record label cut is more complicated because the labels are paid per stream rather than per song or album purchase, and consumers pay for access to a catalog rather than for a particular song or album. See also Forrester Research, From Discs to Downloads audio summary, previously available at,1338,16076,00.html (suggesting strong long term prospects for subscriptions).

[56] See Knowledge@Wharton, supra note 55; PJ McNealy, “Commentary: RealOne a good step,” (December 4, 2001) at (noting that consumer expectations to own music take time to change).

[57] See Knowledge@Wharton, supra note 55.

[58] Though 2002 spending was probably depressed given the overall downturn in the industry, it is still a good rough indicator.  See "US per capita consumer spending on each of nine forms of entertainment / media forecast for 2002 in dollars," Plunkett's Entertainment & Media Industry Almanac (Jan. 7 2002) (placing consumer spending at $71/person).  The subscription services currently charge $9.99/month = ~ $120/yr.

[59] See Pew Internet & American Life Project, Sharp decline in music file swappers: Data memo from PIP and comScore Media Metrix, (Jan. 4, 2004) at

[60] See "Did Big Music Really Sink the Pirates?, supra note X (citing BayTSP and BigChampagne data on this point); Marguerite Reardon, "Oops! They're swapping again," (Jan. 10, 2004) (stating that usage is up after an initial decline).

[61] See Robert Leitman, "Americans Think That Downloading Music for Personal Use is an Innocent Act," Harris Interactive (Jan. 28, 2004) at

[62] See John Borland, "Covering Tracks: New privacy hope for P2P," (Feb. 24, 2004) at  Consumers are also becoming savvier about avoiding uploading, while continuing to download, for the industry can only track and sue the former, see Patrick Day, "So not deterred," Los Angeles Times (Feb. 15, 2004) at,1,1149916.story?coll=la-home-style.

[63] See NPD Group, Consumers Delete Large Numbers of Digital Music Files from PC Hard Drives, (Nov. 5, 2003), at ("A MusicLab survey fielded by NPD in September noted that consumers’ overall impressions of the recording industry were negatively affected by threats of litigation. Two-thirds of consumers who had recently shared files on P2P networks reported that the lawsuits caused them to have a 'much more' or 'somewhat more' negative opinion of record companies in general. Just over 40 percent of consumers who had not downloaded music in the previous four weeks felt similarly."); Richard Shell, "Suing Your Customers: A Winning Business Strategy?" Knowledge@Wharton (Oct. 22, 2003) at (arguing that lawsuits will only anger customers and drawing an analogy to a patent fight between Ford and Seldon that created consumer outrage against the suers).

[64] See Mark Lemley and R. Anthony Reese, Stopping Digital Copyright Infringement Without Stopping Innovation, forthcoming publication, at (noting this drawback); Doug Lichtman, "KaZaA and Punishment," Wall Street Journal (11 Sept 2003) available at$340 (making this point and suggesting increased third-party liability instead). 

Concerns may also remain about privacy and due process.  Privacy concerns were reduced with the appeals decision in RIAA v. Verizion, 351 F.3d 1229 (D.C. Cir. 2003), which ruled that the accelerated subpoena process in 17 USC 512(h) did not apply to P2P systems.  Before, the RIAA had unmasked defendants without any court oversight.  See for briefs discussing the privacy concerns.  Still, with the RIAA filing John Doe lawsuits, concerns remain, see EFF Media Release, "RIAA Cuts Corners in Crusade Against File-Sharers," (Feb. 2, 2004), at (discussing amicus brief filed in John Doe suits, arguing that "the record companies have not presented sufficient evidence to compel disclosure of the alleged file-sharers' identities and do not ensure notice to the alleged file-sharers so that they have an opportunity to protect their privacy"); EFF Media Release, "Case Update: Pennsylvania Court Orders Record Industry to Sue 203 Separate Lawsuits," (Mar. 5, 2004), at (reporting a court ruling that the record companies must now sue each individual separately).

[65] See Ronald Grover, "Online Movies: Not Ready for Prime Time," Business Week (Nov. 10, 2003) (noting high prices and small catalogs, along with Cinemanow's licensing); Stefanie Olsen, "Cinemanow debuts download-to-own movies," (Jan. 15, 2004) at

[66] See Paul Boutin, "Caveat MPAA," Slate (Feb. 27, 2004) at (discussing BitTorrent, which breaks file into many pieces that can be downloaded simultaneously); John Borland, "File swapping shifts up a gear," (May 27, 2003) at (discussing eDonkey, which has a similar multi-source feature).

[67] See Paul Korzenioski, "Could It Finally Be Showtime For Online Movie Downloading Sites?" Investor's Business Daily (Dec. 9, 2003)(discussing the services generally, including recent upgrades); Chris Marlowe, "Movielink upgrading, marketing," Hollywood Reporter (Sept. 3, 2003)

[68] See Gale Daikoku, Disney's New Moviebeam Service Creates Many Opportunities, (GartnerG2, Sept. 29, 2003) at

[69] The Motion Picture Association of America (MPAA) supported a general mandate, see S. 2048, "Computer Broadband and Digital Television Promotion Act",  They have also convinced the FCC to mandate protection for digital television, see FCC Broadcast Flag ruling, at, and are pushing for mandates for analog devices, see MPAA, Content Protection Status Report (April 25, 2002) at

[70] See Peter Biddle et al. “The Darknet and the Future of Content Distribution” October 15, 2002, available at (arguing that DRM does not affect the viability of P2P and that businesses might be better off avoiding DRM entirely).  This logic does not apply to distribution via CD burning, where one copy cannot easily spread beyond a limited group and locale. In that case, DRM might have a more substantial effect.  However, given that the current PPD services allow audio CD burning, this effect is limited.  More to the point, CD burning does not appear to be as great a threat as P2P, and the recording and movie industries certainly do not treat it as such.  In turn, the matter is not treated in further detail here.  For discussion of why DRM might work for this threat model, see Ed Felten, “DRM, and the First Rule of Security Analysis,” Freedom-to-tinker (March 19, 2003) at

[71] See, e.g., Glynn Lunney, Fair use and Market Failure: Sony Revisited, 82 B.U.L. Rev. 975 (Oct. 2002) (interpreting Sony to mean and normatively supporting an idea of fair use as "public interest balancing"); Dan Burk and Julie Cohen, Fair Use Infrastructure for Rights Management Systems, 151 Harvard Journal of Law and Technology 42, at 43-54 (Fall 2001)(discussing the importance of fair use and how DRM impacts it); R. Anthony Reese, The First Sale Doctrine in the Age of Digital Networks, 44 Boston College Law Review 577 (2003) (discussing effects of digital technology, including DRM, on first sale, and outlining costs and benefits of first sale under traditional model and in the digital era.)

[72] See Fred von Lohmann, "Fair Use and DRM," (Nov. 1 2003) at

[73] See “Unintended Consequences: Five Years Under the DMCA,”, at

[74] See Slater and Reidel, supra note X.

[75] See Reimerdes, RealNetworks, and Lexmark, supra note X.  In Lexmark, Static Control may eventually be protected under 17 USC 1201(f), the exemption for reverse engineering.  The court ruled that it provides no protection because Static Control had committed copyright infringement and thus had not “independently created” the interoperable program.  Regardless, that exemption would not apply in situations involving interoperability between other types of copyrighted content besides computer programs, see Universal v. Reimerdes, 82 F. Supp. 2d 211, 217-218 (SDNY 2000), or when interoperability is not involved.

[76] Non-copyrightable and public domain works are not protected by the DMCA.  However, if circumvention to access such works also enables access to copyrighted works, the circumvention would still be illegal.  Recently, the Copyright Office rejected petition for an exemption for such a use. See Marybeth Peters, Recommendation of the Register of Copyrights in RM 2002-4; Rulemaking on Exemptions from Prohibition on Circumvention of Copyright Protection Systems for Access Control Technologies, 98-102 (Oct. 28, 2003),at

[77] See “Unintended Consequences,” supra note X.

[78] See Joseph O. Patterson, A Matter of Trust: Reputation Management in Peer-to-Peer Networks, available at (describing a technique to do so).  See also Stuart Schecter, et. al. Trusted Computing, Peer-To-Peer Distribution, and the Economics of Pirated Entertainment, (May 29, 2003) at (discussing how hardware that would benefit DRM may also benefit counterattacks).

[79] See Randy Saaf, Written Testimony for the Oversight Hearing on "Piracy of Intellectual Property on Peer-to-Peer Networks" submitted to the House Judiciary Committee (Sept 26 2002), at 

[80] See Neil Johnson et. al, A Role for Digital Watermarking in Electronic Commerce, at;  John Borland, “Tech hides data, ID inside songs,” (Mar. 20, 2003), at  As noted in both documents, watermarks can also be used for DRM, but I do not treat that use distinctly here.

[81] See H.R. 5211, available at

[82] See 18 USC 1030(a) available at

[83] See 17 USC 1201 and 17 USC 1202, respectively.

[84] See Mark S. Nadel, Questioning the Economic Justification For Copyright, (Feb. 14, 2003), 16,  available at; Robert H. Frank, When Less is Not More, New York Times (July 17, 2000); Richard E. Caves, LinkCreative industries : contracts between art and commerce, (Cambridge, Mass. ; London: Harvard University Press, 2000), 77, 178-82.

[85] See Harold Vogel, Entertainment Industry Economics, )New York, NY, USA : Cambridge University Press, 1998, 4th ed.), 79 (discussing in context of movie industry).

[86] See Wendy Moe and Peter S. Fader, Modeling Hedonic Portfolio Purchases, (Mar. 2000), 4-5, available at (focusing primarily on data from a sample of 20 albums, and noting "[F]or the most part, the dominant feature for this [album] and most other albums is the relatively smooth exponential decline that occurs over time."); Wendy Moe and Peter S. Fader, Using Advanced Purchase Orders to Forecast Product Sales, (July 2002), 5, available at (repeating the same point but also recognizing certain exceptions); Harold Vogel, Entertainment Industry Economics, (New York, NY, USA : Cambridge University Press, 2001, 5th ed.), 163 ("all but the most successful recorded music products [have] a relatively short life cycle"); Sonia Murray, "Music industry mimics Hollywood style of marketing," Atlanta Journal Constitution (Oct. 20, 2003) ("album release dates are routinely changed so that an artist known to draw a particular audience doesn't have to go head to head with a comparable act for that No. 1 chart spot. "); David Bauder, "Boom is the sound of pop market exploding," Vancouver Sun (June 5, 2000) ("First-week sales have become a measuring stick like the first weekend's box office receipts are for movies, and only add to the hype."). See also Edna Gundersen, "Stakes are high for fall albums," USA Today (Sept. 21, 2001) (focusing on first week sales as horse race); Edna Gundersen, "Off and running in album race," USA Today (April 19, 1002) (discussing sales as a horse race).

[87] See Phil Hardy, "Changes in US and UK sales patterns demand a new back catalogue market strategy from the major record cos," Music & Copyright (Aug. 26, 2003) (noting this and recent drops in catalog sales; Ed Christman, "Hit-Driven Album Sales Lead In '99 Report," Billboard (Jan. 15, 2000) ("Catalog product totaled 33.6% of all album sales" in 1999).

[88] See Natash Foutz and Vrinda Katiyali, Competitive Dynamics in the Release Date Pre-announcements of Motion Pictures, (October 2003), 9-10, available at (discussing positioning of release dates in order to avoid competing films.  Providing data demonstrating the "exponential decay in box office revenues," with about 40% of revenue coming in first weekend, 80% over first four weeks. Industry takes early revenue as best predictor of success in theatrical and later markets, and studios obtain highest cut (70-90%) in early period.) [ED: MUST GET PERMISSION TO CITE]; Liran Einav, Seasonality and Competition in Time: An Empirical Analysis of Release Date Decisions in the U.S. Motion Picture Industry, (Aug. 12, 2003), 5-6, available at (making similar points); Vogel, 5th ed. supra note X, 85 (noting sliding scale for movie studios' cut, starting with 70% or more); Benjamin Compaine and Douglas Gomery, LinkWho owns the media? : competition and concentration in the mass media industry, (Mahwah, N.J. : L. Erlbaum Associates, 2000, 3rd ed.) 377, 415 (discussing  first weekends importance to overall returns and connection between box office success and downstream markets); Charles Weinberg, Marketing Models Improve Profit Picture: It's About Time, (July 19, 2000), available at (discussing various research and noting that video rentals also experience exponential decline of 6% per week in sales, at 10); Phinjo Gombu, "Ranking movies by their big bucks is an inexact science," Toronto Star (May 15, 2002) (discussing how studios focus so much on opening weekends that they sometimes provide inaccurate data).

[89] Estimation taken by comparing figures in the following publications. See Kate Bulkley, "DVDs force the movie business to rewrite its rules," Financial Times (Jan. 20, 2004) (citing data that 62% of total revenue comes from DVDs); Fisher, supra note X at Chapter 6 (estimating DVD sales and rentals revenue at $7.8 billion ($28.4 billion gross), cable and satellite at $1.219 billion ($7.314 billion gross), PPV at $570 million (1.426 billion gross)).

[90] See Bulkley, id; Paul Sweeting, "Windows leave open too many opportunities," Daily Variety (March 3, 2003).

[91] See Bulkley, supra note X.

[92] See, e.g., Brian Briggs, "Copies of Spiderman Already on the Web," Bbspot (May 29, 2002) at; "Thief Caught Online," (March 31, 2003) (discussing Radiohead's album appearing online).

[93] "Bell Tolls for 'Zero Hour'" Video Age International (November 23, 2003) available at

[94] See, e.g., Joe D'Angelo, "Warner Responsible for Record Hitting the Net Months Before Release, " (Feb. 2, 2004) at

[95] See Fisher, supra note X, at chapter 2 (discussing the hits-based nature of the industries); Jon Pareles, "Spit Out by the Star-Making Machinery," New York Times, (Feb. 3, 2002) (“the costs of marketing new [music] releases to a mass audience have grown prohibitive . . . [and] those costs have long helped limit competition from smaller companies.”); Bauder, supra note X ("Some executives worry that such explosive [music] successes may be so distorting that the industry loses patience for promoting acts over a long term.")

[96] See Fisher, id.

[97] Though the decline in production costs will have a much more substantial impact in the music industry (see supra note X), it will also affect movies; see Peter Henderson, "PluggedIn: Technology Lets Garage Studios Change Hollywood," Reuters (Feb. 29, 2004), at;jsessionid=O2CICQ1134FQECRBAEZSFFA?type=reutersEdge&storyID=4461816

[98] See "Comments on the Berman P2P Bill,", at

[99] See, e.g., John Borland, ”L.A. Man: Labels have the wrong guy," (14 Oct 2002) at

[100] See Darknet, supra note X (discussing evasion of watermarks); Seth Schoen, Analog Reconversion Discussion Group General Comments of the Electronic Frontier Foundation, (Nov. 24, 2003) at (discussing flaws in watermarks, in particular ones for analog recordings); Testimony of Edward Felten on "Piracy of Intellectual Property on Peer-to-Peer Networks," submitted to House Judiciary Committee (Sept, 29 2002) (discussing evasion of interdiction);

[101] See Felten Testimony, id.

[102] See Felten Testimony, id.; Ed Felten, "Can P2P Vendors Block Porn or Copyrighted Content?" Freedom-to-Tinker (Feb. 4, 2004) at

[103] For examples of such mandates, see supra note X.

[104] MGM v. Grokster, 259 F.Supp.2d 1029 (C.D.Cal. Apr 25, 2003).

[105] Perhaps this rule would be the negligence standard expressed in In re: Aimster, 334 F.3d 643 (7th Cir. 2003).

[106] The Darknet paper, supra note X, lends some very limited credence to this possibility.  It discusses P2P being forced into “small worlds networks,” in which people share with trusted people, rather than strangers, and thus only have access to a limited database of music and movies.  However, the paper also notes that such small networks could still allow for massive infringement, particularly for popular files, as the networks are interconnected and individuals share and download in multiple groups.

[107] The introduction to the topic is largely based on that of Professor Fisher, supra note X, at Chapter 4.  See also Julie Cohen, The Perfect Curve, 53 Vand. L. Rev. 1799 (2000); Tom W. Bell, Fair Use Vs. Fared Use: The Impact of Automated Rights Management on Copyright's Fair Use Doctrine 76 N. Carolina L. Rev. 557 (1998); Michael J. Meurer, “Copyright Law and Price Discrimination,” 23 Cardozo Law Review 55 (2001); James Boyle, Cruel, Mean of Lavish? Economic Analysis, Price Discrimination, and Digital Economic Property, 536 Vanderbilt Law Review 2007 (2000).

[108] See Fisher, id..

[109] See supra note X.

[110] See Bell, supra note X; Wendy Gordon, Fair Use as Market Failure: A Structural and Economic Analysis of the Betamax Case and Its Predecessors, 82 Columbia Law Review 1600 (1982).

[111] Mark Lemley, The Economic of Improvement in Intellectual Property Law, 75 Texas Law Review 989, 1059-1061 (1997).

[112] See Lemley, supra note X; Robert P. Merges, Are You Making Fun of Me? Notes on Market Failure and the Parody Defense in Copyright, 21 AM. INTELL. PROP. L. ASS'N Q.J. 305 (1993).

[113] See Fisher, supra note X; Cohen, supra note X, at 1812; Lemley, supra note X, at 1056-1058; Lydia Pallas Loren, Redefining the Market Failure Approach to Fair Use in an Era of Copyright Permission Systems, 5 J. Intell. Prop. L. 1, at 49-53 (1997).

[114] Id.

[115] See Julie Cohen, Copyright and a Jurisprudence of Self-help, 13 Berkeley Tech. L. J. 1089 (1998); Julie Cohen, A Right to Read Anonymously: A Closer Look at Copyright Management in Cyberspace, 28 Conn. L. Rev. 981 (1996); Boyle, supra note X, at 2033.  For a more dramatic (and exaggerated) portrayal of this potential problem, see Richard Stallman, The Right to Read, Communications of the ACM (Volume 40, Number 2; February 1997), available at 

[116] See also Fisher, supra note X, at chapter 6 (discussing how recording of purchases to charge different prices will feel uncomfortable)

[117] See Fisher, supra note X, at chapter 4; EFF, Comments on the Final Record of the Broadcast Protection Discussion Group, (May 30, 2002) available at (making this point in the digital television broadcast flag context); Paul Horn, Eliot Maxwell, and Susan Crawford, Promoting Innovation and Economic Growth: The Special Problem of Digital Intellectual Property, report from Committee on Economic Development (March 3, 2003), 52-58, available at

[118] See Comments on the Final Record of the Broadcast Protection Discussion Group, id.

[119] See Amicus Brief of ACLU in support of Defendants at 33, appeal to MGM v. Grokster, 259 F.Supp.2d 1029, available at (discussing how centralized control can enable to censorship).  See also Alfred Yen, Internet Service Provider Liability for Subscriber Copyright Infringement, Enterprise Liability, and the First Amendment, 88 Georgetown Law Journal 1833, at 1865-1872 (Jan. 2000) (discussing how liability on Internet context threatens speech).  See also Adam Langley, "Freenet", in Peer-to-Peer: Harnessing the Benefits of a Disruptive Technology, ed. Andy Oram (Sebastopol, CA: O'Reilly, 2001), 132 (on how Freenet, a decentralized P2P system, is designed to protect speech).

[120] See generally Briefs for Defendants in appeal to MGM v. Grokster, available at