Federal Trade Commission Report - Peer to Peer File-Sharing Technology

Excerpts and Highlights:

The technologies also present new legal and policy challenges, including how to protect property rights, privacy, and the competitive process while still allowing creativity and innovation to thrive.

What is p2p?

P2P technology is a distributed computing software architecture that enables individual computers to connect to and communicate directly with other computers. Through this connection, computer users (known as “peers”) can share communications, processing power, and data files. With respect to file sharing specifically, P2P technology allows “decentralized” sharing. That is, rather than storing files in a central location to which individual computers must connect to retrieve the files, P2P technology enables individual computers to share directly among themselves files stored on the individual computers.

Commercial Uses:

Current commercial uses of P2P technology include the licensed distribution of games, movies, music, and software. One commenter stated, for example, that major video game publishers distribute their games through P2P and have achieved a total of more than 200 million downloads. In addition, some independent movie studios, music recording labels, and artists have licensed copyrighted material and promote and sell their products over P2P networks. Other commercial applications include video streaming, video on demand, Instant Messaging (“IM”), and use of computers to provide telecommunication service through voice-over-Internet protocol (“VOIP”). Further, P2P technology is used to back up storage of documents and other digital content, and for intra-business collaborative project management.

Non-commercial Uses:

Panelists and commenters also described several academic and other non-commercial “collaborative” applications of P2P technology....P2P technology also is being used in certain data processing functions in the applied mathematics and medical research contexts. Other uses include the non-commercial distribution of software, writing, art, photography, or other data by publishers who do not wish to charge for the content – for example, the free distribution of electronic books to enhance literacy, and the dissemination of free academic curricula such as music lessons from a college of music.

Future Uses:

Participants stated that P2P file-sharing technology can substantially reduce costs and enhance efficiencies. In the business environment, for example, using P2P technology to eliminate the need to house data, such as accounting data and inventory data, in centralized servers can save on storage space and costs. Such use also can yield savings on maintenance and energy costs related to data retrieval, sharing, and processing.

"Network Effect" - More users increase technology benefits:

A panelist emphasized that the benefits of P2P technology appear to increase as the number of users increases. Economists call such a phenomenon “network effects” – that is, certain products become more useful as more and more people use them. The viability of future applications likely will depend in part on how P2P technology’s benefits balance out compared to its potentially significant side effects, such as copyright infringement and other risks, including viruses and spyware.

Scope of Internet traffic for p2p:

Notably, P2P file sharing comprises a large percentage of current Internet traffic. One panelist provided data indicating that in the first half of 2004, more than 60% of all Internet traffic in the United States consisted of file sharing through P2P software programs. Several participants also stated that the amount of P2P file sharing continues to rise.

Liability for Copyright Infringement:

For example, between September 2003 and June 2005, the Recording Industry Association of America (“RIAA”) sued more than 11,000 individuals who allegedly traded copyrighted music files illegally using P2P file-sharing software programs. In addition, the Motion Picture Association of America (“MPAA”) has brought several rounds of copyright enforcement actions against individuals operating servers involved in file sharing through the BitTorrent, eDonkey, and Direct Connect applications.

Federal authorities have brought criminal charges against alleged participants in online software piracy networks, including those that use P2P file sharing. For example, in August 2004, the U.S. Department of Justice announced “Operation Digital Gridlock,” the first federal enforcement action against criminal copyright piracy conducted over P2P networks. This operation resulted in the seizure of more than 40 tetrabytes of pirated content from computers located in several states. More recently, in May 2005, the Department of Justice announced another criminal enforcement action targeting individuals committing copyright infringement using BitTorrent file-sharing technology.

Watermarking technology and Copyright Infringement :

One panelist described technology that blocks users of file-sharing software from downloading copyrighted materials. This technology creates a unique “fingerprint” for each copyrighted movie, musical work, or game, based on objective measurements of various attributes of the file. For music files, for example, the fingerprint might be based on measurements of the way the audio sounds to humans. The filter then blocks transmission of any file with that fingerprint. This filtering technology currently operates at the network level, as opposed to the desktop level, and is being marketed primarily to universities, corporations, and other entities operating their own networks for Internet access.

At the workshop, several representatives of the music and movie industries asserted that P2P distributors could include these copyright blocking filters in their programs, thus making the filters operational at the desktop level. However, none identified any mechanism for doing so in a way that would preserve the decentralized nature and attendant benefits of the P2P technology. Several participants pointed out that filtering for copyrighted materials would require a huge database and massive processing, and that these capabilities could not be incorporated into small P2P programs for operation at the desktop level. In light of this disagreement between the music and movie industries and the P2P file-sharing industry, one distributor of a file-sharing program proposed that both sides sponsor a study by an impartial group of scientists to determine whether decentralized copyright filters would be viable.

Economic Effect and Copyright Infringement from p2p:

Economists also tell us, however, that because other things are not in fact equal in economic life, advances in technology may generate harmful as well as beneficial effects. Assessing the net economic impact of technological change requires weighing the costs and benefits and evaluating the trade-offs. The costs and benefits, in turn, can depend greatly upon the institutional structure of existing property rights and assignment of any new legal rights to the new technology.

P2P file-sharing programs reduce the marginal costs of distributing digital content to zero or near-zero. This feature of P2P file sharing, on the one hand, holds the promise to yield substantial benefits because of the low costs; yet, on the other hand, it also is accompanied by potentially significant undesirable side-effects such as uncontrolled free access to digital content, some of which may be protected intellectual property (i.e., digital content to which legal rights attach), which, in turn, can have detrimental effects on the incentives to create new works.

A key question for public policy, therefore, is how to balance intellectual property protection to encourage the creation of new works with the freedom for technology developers to advance new technologies that hold the promise of benefiting consumers through economic growth and enhanced business efficiency.

Reformation of Legal Regime around Copyright Protection:

[O]ne panelist argued, the applicable legal regime must define property rights for all relevant parties involved in the production of musical composition intended for commercial sale and must structure those property rights to allow rights holders to enforce them to the maximum extent practically possible. In order that long-run investment decisions not be distorted, the panelist stated that the legal regime must ensure that all costs associated with the creation (artists), production (manufacturers), and sale (distributors) of musical composition are recoverable.

As a solution, this panelist proposed joining P2P file-sharing technology with some combination of filtering technology, digital rights management technology (“DRM”), and negotiation of licensing agreements carried out by collectives of copyright holders and P2P. software providers. According to the panelist, both filtering and DRM technologies are currently effective. Moreover, he said, collective negotiation of licensing agreements internalizes and reduces (albeit imperfectly) transaction costs that otherwise prevent successful bargaining, and thus competition policy should accommodate such collaborations among competitors.

Other panelists argued that filtering and DRM technologies do not provide a solution. panelist argued that effective filtering is neither technically feasible nor economically feasible. In addition, he argued that there is no currently operational DRM system and, even if one developed, people may be able to design file-sharing programs that circumvent it.

Reformation of Entertainment Industry Business Model:

Other panelists asserted that the music industry’s sales-based revenue model needs to move into the digital age. Some panelists thought that lawful access to full, unfettered, DRM-free file sharing was a necessity and that, without it, there have been fewer licensed transmissions of fewer works, and therefore fewer royalties than otherwise may have been earned. Thus, one panelist urged the creation of a single unified digital transmission right, subject to a statutory license, to replace the reproduction, public performance and distribution rights for purposes of digital transmissions; royalties would be paid on a census of all licensed transmissions.

Other workshop participants argued that music sales have not declined or have even increased since the advent of P2P file-sharing programs. In addition, some participants asserted that if music sales have declined during this period of time, it may be due to causes other than P2P file-sharing programs.

Moreover, some participants stated that P2P file-sharing programs may have a positive impact on music sales by some artists and may increase overall sales in the long run. The crux of their argument is that P2P file-sharing programs expand the music market to reach a greater number of potential listeners. Absent these programs, they argue, some listeners would not have known about some artists and therefore would not have purchased their copyrighted works anyway. According to these panelists, trading copyrighted works through P2P file-sharing programs therefore does not necessarily constitute lost sales. Moreover, because P2P file-sharing programs expose users to new artists, use of the programs can expand the artists’ fan base and generate revenue from future purchases of recorded music, increased concert attendance, or greater sales of related merchandise. For instance, one artist explained that to generate interest in his work, he offered all of the music on his first album for free to anyone who wished to remix his music, and “remixers” around the globe used his tracks.

Clarifying the legal framework:

The Supreme Court’s impending decision in Grokster likely will clarify the legal framework applicable to P2P file sharing and have a profound effect on the future structure of P2P file-sharing programs.