United States District Court

F. Blizzard's § 1201(b)(1) claim
Blizzard may prevail under § 1201(b)(1) only if Warden “effectively protect[s] a right” of Blizzard under the Copyright Act. Blizzard contends that Warden protects its reproduction right against unauthorized copying. We disagree.
First, although WoW players copy the software code into RAM while playing the game, Blizzard's EULA and ToU authorize all licensed WoW players to do so. We have explained that ToU § 4(B)'s bot prohibition is a license covenant rather than a condition. Thus, a Glider user who violates this covenant does not infringe by continuing to copy code into RAM. Accordingly, MDY does not violate § 1201(b)(1) by enabling Glider users to avoid Warden's interruption of their authorized copying into RAM.
Second, although WoW players can theoretically record game play by taking screen shots, there is no evidence that Warden detects or prevents such allegedly infringing copying. This is logical, because Warden was designed to reduce the presence of cheats and bots, not to protect WoW's dynamic non-literal elements against copying. We conclude that Warden does not effectively protect any of Blizzard's rights under the Copyright Act, and MDY is not liable under § 1201(b)(1) for Glider's circumvention of Warden.

Music Markets and Mythologies

Henry H. Perritt, Jr. [FNa1]

9 J. Marshall Rev. Intell. Prop. L. 831 (2010)

INTRODUCTION
      The revolution in the marketplace for music is in its early stages. New technologies make available new ways to perform creation, intermediation, and consumption activities. [FN1] Some emerging enterprises are experimenting with new business models for connecting musicians with their fans. [FN2] As in the early days of e-commerce, circa 1998, it is too soon to know who will become hugely successful and who will fade from the scene. It is possible, however, to estimate the basic features of the new marketplace. It will not look at all like the old one.
      Confronted with change, the major firms in the popular music industry [FN3] have mounted a major public-relations and litigation campaign premised on the idea that the world of popular music is under a grave threat. [FN4] This article debunks the myth propagated by dominant players in the current music industry that the problem is illicit file sharing. It explains how new technologies based on more powerful personal computers (“PCs”), portable music players, and the Internet are reshaping the marketplace for popular music so as to facilitate more direct access between musicians and their fans. It predicts that the overall demand for popular music will continue to increase because music is becoming more portable, that opportunities will increase for “indie” musicians, [FN5] even as the fortunes of the major record labels are eclipsed. It concludes by recommending some general directions for reform and application of copyright law in the new marketplace, and by describing new business models and labor markets for musicians.
I. THE MYTH VERSUS THE FACTS
      If one were to believe the drumbeat of the major music labels, the world of music is facing a catastrophe. A future without music looms unless intellectual property laws are strengthened to expand the labels' control over how music is distributed and consumed. Their message comprises four propositions:
       CDs (“Compact Discs”) are music. The major labels publicize declines in CD sales as though those declines represent a decline in the willingness of consumers to pay for music. [FN6]
       The major labels promote art. They characterize their own interests as equivalent to the interests of musicians. [FN7]
       Thieves are ruining everything. Consumers are less willing to pay for music and thus reward artists for their artistic efforts, the labels say, because of the misconduct of “thieves”--pirates who sell music of others below the cost of creating it and depraved high-school and college students who proliferate free copies. [FN8]
       Protecting copyright should be at the center of American foreign policy. They are distorting American foreign policy, inducing public officials to move intellectual property protection to near the top of the list of priorities for negotiations with major powers such as China, Russia and India, and with scores of developing nations. [FN9]
      The facts are out of synch with the drumbeat.
       The real goal is to stifle competition enabled by new technologies. The major labels' trade association, the Recording Industry Association of America (“RIAA”), has filed some 20,000 lawsuits, most against individuals engaged in file sharing. [FN10] Most of the suits do not go to trial because the RIAA employs contract collection agencies that threaten the defendants with ruin unless they “settle” for $8,000 to $10,000, depending on the apparent wealth and income of the defendant. [FN11] The courts have been sluggish in punishing such abusive practices. [FN12] It's as though the law had empowered typewriter manufacturers to launch a blizzard of lawsuits to discourage the early use of word-processing software and hardware.
      The avalanche of litigation is only the latest in a long tradition of major interests in the music industry trying to stifle competition resulting from new technology. Music rights holders fought phonographs [FN13] and music radio in its early days. [FN14] The major labels were found by the Federal Trade Commission to have violated the antitrust laws in the late 1990s by prohibiting retailers from selling music CDs at discounted prices. [FN15] The industry's campaign against use of the new technologies began before it was possible to buy music in digital formats. The industry had made sure of that by refusing to offer its catalog in any of the new formats until relatively recently. [FN16]
       The major record labels would not, of course, have attained their present size if they did not perform a useful function in the market. The problem they face, however, is not that they suddenly are under attack by teenage pirates; the problem is that the intermediation activities they have organized their bureaucracies to perform have become obsolete because of new technologies. In a music marketplace characterized by live performances in huge venues, recording of music on analog tape, sales of recorded music on physical artifacts such as vinyl records, cassette tapes and CDs, and over-the-air radio broadcasts, the major labels aggregated capital for capital-intensive recording sessions and concert promotion and production. [FN17] They selected what they thought were the best among hundreds of thousands of aspiring musicians and signed “record deals” with them, managed the manufacturing process for the physical recordings, advertised their rock stars and other talent through their network of paid contacts with radio stations, music reviewers, and brick-and-mortar retailers, and warehoused and distributed the physical recordings. [FN18]
      But the institutional context in which the major labels have a comparative advantage is melting away like an iceberg under them. [FN19] The threat they face is not one of attack on their property, but irrelevance. Analysis of the relative cost and efficiency of old versus new methods for selecting, recording, performing, distributing, and promoting music shows that a new architecture for the music marketplace is emerging quickly, an architecture which has little need for what the major labels do well. [FN20]
       Music revenue is increasing even as sales of physical units decline. To be sure, revenue from CD sales has declined dramatically, and the decline continues, often accelerating, with each recent reporting period. [FN21] Music consumers prefer downloadable digital files to CDs, but the revenue potential of digital sales is insufficient to support the same business model that was built on CDs. [FN22] Sales of CDs have declined every year from 2004 to 2008, by 8% from 2004-2005, 12% from 2005-2006, 17% from 2006-2007, 25% from 2007-2008, and 20.5% from 2008-2009. [FN23] Sales for 2008 were down 55%, compared with 1998. [FN24] Revenue from CD sales was down by a similar amount. [FN25] Over the same five years unit sales of digital singles increased by 163% for 2004-2005, 60% for 2005-2006, 38% from 2006-2007, 28% from 2007-2008, and 9.2% from 2008-2009 and revenue from sales of digital singles increased by the similar percentages. [FN26] Unit sales of digital albums increased 198% from 2004-2005, 103% from 2005-2006, 54% from 2006-2007, 34% from 2007-2008, and 20.2% from 2008-2009 with revenue from sales of digital albums up by similar amounts. [FN27]
      Moreover--and this is the important part--the total number of digital sales was over 1 billion in 2009, exceeding 385 million total shipments of CDs. [FN28] Digital album sales were much less--76 million. [FN29]
      This shows, not a decline in the willingness of consumers to buy music, but a shift in consumer preferences from physical to digital formats, and to singles as opposed to albums. [FN30] The hemorrhaging of major-label revenue may threaten the interests of the labels, but it does not prove that the music world is being savaged by thieves. It shows that consumers are willing to buy music. But it also shows that they prefer more convenient formats, that they resist having the songs they want being tied to songs they do not want, and that they want the prices they are charged to reflect the much lower costs of production and distribution which new technologies make possible.
      Despite the explosion in demand for downloadable digital formats, the revenue flows are much less than for CDs. [FN31] Total revenues from digital sales were $2 billion in 2009, compared to $4.2 billion for CDs shipped in the same year. [FN32] This reflects a generally lower price for digital formats (averaging just under $1 for digital singles) compared with CDs (averaging just over $14 for albums--almost all CD sales are album sales), and the consumer preference for singles. [FN33]
      Other realities limit the revenue potential of downloadable digital formats. They are available from multiple sites on the Internet, some licensed, some not, directly from musicians on their websites [FN34] or on their MySpace [FN35] and YouTube pages, [FN36] as well as from music services such as iTunes. [FN37] This results in a much more competitive market structure at the retail level, which puts continuing pressure on prices. It also makes it likely that musicians, their fans, and their promoters will make some of their music available for downloading for free.
       Manufacturing and distribution costs are approaching zero. Apple iTunes is able to sell digital music at $0.99 per song and artists are able to sell songs for less than that and still make money because the combination of digital formats, the Internet, and pervasive e-commerce utilities, have reduced the cost of reproducing and distributing music almost to zero, jerking the rug out from under a business model in which manufacturing and distribution costs dwarf other cost elements. [FN38] In addition, the same and related technologies have dramatically reduced the costs of producing music, rendering obsolete other aspects of the business model in which access to capital-intensive recording and mastering has to be rationed to allow access only to those with the highest probability of producing blockbuster songs. [FN39]
       Advertising and promotion must be performed through new channels. Outreach to potential fans through the Internet and blog reaction to new music has become more important than traditional advertising channels, rendering mostly obsolete expertise, relationships and embedded capital tied to old channels. As reduced barriers to entry increase the supply of music available to consumers, and as portability of music increases demand, tools to help consumers find new music have become even more important than before, but the relevant tools are new and have different economics from the old approaches of promotion and payola.
       Tied sales of songs are unpopular. In 2009, 94% of the digital sales (by unit) were singles and 6% were albums. By contrast, in the same year, 99.7% of the physical CD sales were albums and 0.3% were singles. [FN40] Consumers now can purchase only the songs they want rather than having to purchase a collection of songs bundled by the dozen on CDs. [FN41] The CD format ties less popular songs (or those the sellers believe would be less popular) to more popular songs. Now that consumers are free to purchase only what they want, they buy fewer copies of the less popular songs. Suppliers no longer can “push” songs by tying them to the coattails of other songs. This is not a bad thing for consumers, but it reduces revenue for suppliers of less popular songs.
      Based on RIAA figures, consumers bought 37 million fewer CD albums in the first half of 2006 than in the first half of 2005. [FN42] They bought 119 million more digital singles and 6.5 million more digital albums. [FN43] That is about 30 million fewer album sales. [FN44] If one assumes twelve songs per album, that represents a decline of 360 million in sales of individual songs. The increase in digital single sales was 119 million or almost exactly a third of the loss in individual songs on album formats. [FN45] That consumers who are free to buy only what they want would choose to buy only about a third of what is available on albums is plausible.
       As the portability of music increases, so does demand. Meanwhile, consumers are enjoying more music, not less. They are not at the mercy of major-label A&R personnel and executives to define their tastes. They get cheaper music. They can buy only the songs they want. The possibility of carrying hundreds of songs in their shirt pockets and listening to them whenever they want is not only more attractive than standing in line at the checkout counter to buy CDs selected from a limited inventory, it likely increases the overall demand for music because it opens up more hours per day during which it can be enjoyed.
      The established industry was slow to satisfy this new demand. [FN46] The attractiveness of the new technologies was strong enough that new enterprises sprang up to supply the exploding demand for music in .mp3 formats. [FN47] It was not as though someone went to a 7-Eleven store where magazines were offered for sale and elected to steal one instead. It is more like a situation in which 7-Eleven refused to sell magazines and had made commercial deals with potential importers to prevent them from importing, and people wanting to read magazines smuggled them in. Smuggling, like copyright infringement, is illegal. [FN48] But copyright infringement in the form of unlicensed conversion of music to .mp3 formats and trading in those formats exploded only when the established industry tried to block the use of new technologies with significant consumer benefits. [FN49]
      Since the mid 1990s, of course, it has been possible to buy .mp3 files over the Internet and sales have mushroomed. [FN50] People are perfectly willing to buy digital music, and only now is the industry beginning to cooperate fully in making music available in those formats, while pressuring Steve Jobs to raise prices for iTunes, and trying to throw a litigation monkey wrench into the works of the phenomenally successful MySpace. [FN51]
      It surely is not immoral for the major labels to try to protect a past technology that produces higher margins, nor for the Tower Records of the world to try to protect a business that arose to manage transaction costs that are no longer present. But the problem for the labels is a backward looking business philosophy, not an erosion of morals in those who want to listen to music in the most convenient way possible.
       The increased competition and the demise of traditional gatekeepers means a sharp reduction in prices--approaching zero--for recorded music. In a competitive market, prices approach marginal costs. [FN52] The marginal cost of a copy of an .mp3 file is effectively zero. [FN53] That means that prices for recorded music are trending inexorably toward zero.
       Copyright is unenforceable and hence essentially irrelevant except at the margins of the new order. Pervasive enforcement of copyright in connection with most exchanges of recorded music at the consumer level is impracticable. [FN54] It cannot be done without imposing significant new burdens on Internet intermediaries, [FN55] and this cannot be done without destroying the core features of the Internet. The decentralized and immediate accessibility of MySpace for direct distribution of music by musicians would be impossible if MySpace were obligated to pre-screen every upload for possible intellectual property (“IP”) infringement.
      The same is true of the web hosting sites on which musicians create their own web pages and make them available to the world.
      Law's role--particularly the role of copyright law--in the music industry has declined. It will continue to decline. Music copyright has suffered two body blows: because of the proliferation of digital copies, it has become less enforceable and, as the value of recorded music declines, it is less worthwhile to try to enforce it. [FN56]
      Copyright protection for recorded music at the consumer level has become essentially unenforceable. [FN57] Digital recording technologies make it possible to produce perfect copies of recorded music cheaply and quickly. [FN58] Compression algorithms embedded in software known as “codecs” produce relatively small files that can be distributed in a few seconds via the Internet. [FN59]
      The economic viability of licensed channels for recorded music is more a function of lower consumer transaction costs for iTunes--but not for many major-label sources--than of respect for intellectual property rights.
       New institutions for managing consumer search costs and musician promotion are emerging.
“Time is money.” Time also is not unlimited. 350,000 new songs were released on CD format in 2006. If each one takes three minutes to play, and the average consumer listens to only one minute before deciding whether he likes it, it would require 350,000 minutes, or about 6,000 hours to sample all of them. That is 250 days per year, without allowing any time for sleep. No one is that compulsive about music [--let alone] the physiological problems of sleep deprivation. [Furthermore,] that does not allow for the other new songs created each year that never get released on CDs by major record labels[, which] surely number in the tens of millions. So consumers need some way to reduce search costs. [FN60]
      Under the old model, the labels reduced search costs by selecting only a small fraction of available music to produce, promote, distribute, and sell, leaving musicians without a major record label deal mostly out of the marketplace. Radio stations exposed potential consumers to new music, almost all of it sold by the major labels. [FN61] Press and media coverage was focused primarily on artists with major record label deals. [FN62]
      The most interesting question about the evolution of the new marketplace, considered in the next section, is the shape new kinds of intermediaries will take as they meet the needs of consumers to manage search costs, and the needs of musicians to make consumers aware of their music. [FN63]

[FN1]. See Jon Pareles, A World of Megabeats and Megabytes, N.Y. TIMES, Jan. 3, 2010, at AR1.

[FN2]. See id.

[FN3]. 1 ROBERT LIND ET AL., ENTERTAINMENT LAW 3D: LEGAL CONCEPTS AND BUSINESS PRACTICES § 1.142 (2008) (noting that the Recording Industry Association of America represents the interests of the recording industry); Frank Ahrens, Music Industry Sues Online Song Swappers; Trade Group Says First Batch of Lawsuits Targets 261 Major Offenders, WASH. POST, Sept. 9, 2003, at A01 (noting that the Recording Industry Association of America represents the music industry's five largest music companies of Universal Music, Sony Music Entertainment, Warner Music Group, BMG Entertainment and EMI).

[FN4]. RIAA to Stop Mass Lawsuits, ROLLING STONE, Feb. 5, 2009, at 18 (“After suing 35,000 people since September 2003 for illegally sharing music files online, the Recording Industry Association of America announced in December that it has halted its controversial lawsuit campaign.”).

[FN5]. “Indie” musicians are independent musicians without major record label deals. Stephen Lee, Re-Examining the Concept of the ‘Independent’ Record Company: The Case of Wax Trax! Records, 14 POPULAR MUSIC 13, 13 (1995).

[FN6]. See Piracy: Online and on the Street, RECORDING INDUSTRY ASS'N AM., http://www.riaa.com/physicalpiracy.php (last visited May 24, 2010) (“It's commonly known as piracy, but it's a too benign term that doesn't even begin to adequately describe the toll that music theft takes on the many artists, songwriters, musicians, record label employees and others whose hard work and great talent make music possible.”).

[FN7]. See Who We Are, RECORDING INDUSTRY ASS'N AM., http:// riaa.com/aboutus.php (last visited May 24, 2010).

       The Recording Industry Association of America (RIAA) is the trade organization that supports and promotes the creative and financial vitality of the major music companies. Its members are the music labels that comprise the most vibrant record industry in the world. RIAA® members create, manufacture and/or distribute approximately 85% of all legitimate recorded music produced and sold in the United States.

       In support of this mission, the RIAA works to protect the intellectual property and First Amendment rights of artists ....

Id. (emphasis added).

[FN8]. Michael Carney, File Sharers Sued; Music Industry Cracks Down on Internet ‘Piracy’, WASH. TIMES, July 16, 2003, at A2; see Ann Bartow, Electrifying Copyright Norms and Making Cyberspace More Like a Book, 48 VILL. L. REV. 13, 58-59 (2003).

[FN9]. See David Lague, U.S. Official Presses China to Punish Piracy, N.Y. TIMES (Nov. 15, 2006), http:// www.nytimes.com/2006/11/15/business/worldbusiness/15yuan.html?_ r=1&adxnnl=1&adxnnlx=1267293993-zEThyTWvQA+06mRJqIqN+Q (reporting on U.S. Commerce Secretary's call to China to reduce infringement of U.S. intellectual property).

[FN10]. File Sharing, ELECTRONIC FRONTIER FOUND., http:// www.eff.org/issues/file-sharing (last visited May 24, 2010) (describing the abusive nature of music-label litigation); see ELEC. FRONTIER FOUND., RIAA V. THE PEOPLE: FIVE YEARS LATER 4-5 (2008), http://www.eff.org/files/eff-riaa-whitepaper.pdf (describing litigation and collection practices).

[FN11]. See David Canton, Peer-to-Peer Filing Sharing Now a Fact of Internet Life, LONDON FREE PRESS (Ontario), Nov. 3, 2008, at BM5 (explaining that the RIAA threatens “individuals with expensive litigation ... that leaves a lay person with no alternative but to settle for amounts ranging from $3,000 to $11,000”).

[FN12]. See Sosa v. DIRECTV, Inc., 437 F.3d 923, 928-39 (9th Cir. 2006) (rejecting Racketeer Influenced and Corrupt Organizations Act claims against satellite television service that sent more than 10,000 demand letters to consumers asserting legal claims that were “weak”).

[FN13]. See Stern v. Rosey, 17 App. D.C. 562, 564-66 (D.C. Cir. 1901) (affirming dismissal of suit by music rights holder against seller of phonograph wax cylinders).

[FN14]. See, e.g., Buck v. Jewell-LaSalle Realty Co., 283 U.S. 191, 195-202 (1931) (holding that, in suit for injunction against a hotel, radio broadcasts of copyrighted songs made available to hotel guests, constituted a “public performance” of the works).

[FN15]. See Market for Prerecorded Music, Statement of Chairman Robert Pitofsky & Commissioners Sheila F. Anthony, Mozelle W. Thompson, Orson Swindle, & Thomas B. Leary, FED. TRADE COMMISSION, http:// www.ftc.gov/os/2000/09/musicstatement.htm (last visited May 24, 2010); Press Release, Fed. Trade Comm'n, Record Companies Settle FTC Charges of Restraining Competition in CD Music Mkt.: All Five Major Music Distributors Agree to Abandon Advertising Pricing Policies (May 10, 2000), http:// www.ftc.gov/opa/2000/05/cdpres.shtm.

[FN16]. See, e.g., Patrick Foster, Record Companies Have a Trick Up Their Sleeve for Downloads; Big Four Challenge Apple with Online Album Format, THE TIMES (London), Aug. 8, 2009, at 28, available at http:// business.timesonline.co.uk/tol/business/industry_ sectors/media/article6788159.ece.

[FN17]. See PATRICK BURKART & TOM MCCOURT, DIGITAL MUSIC WARS: OWNERSHIP AND CONTROL OF THE CELESTIAL JUKEBOX 18 (2006).

[FN18]. See id.

[FN19]. See The Music Industry: From Major to Minor, ECONOMIST, Jan. 12, 2008, at 80.

[FN20]. See Henry H. Perritt, Jr., New Architectures for Music: Law Should Get Out of the Way, 29 HASTINGS COMM. & ENT. L.J. 259, 320 (2007) (exploring changing economics of music production, distribution and consumption, and relationship between these changes and copyright law).

[FN21]. See RECORDING INDUS. ASS'N OF AM., 2008 YEAR-END SHIPMENT STATISTICS, MANUFACTURER'S UNIT SHIPMENTS AND RETAIL DOLLAR VALUE (2008), http://76.74.24.142/D5664E44-B9F7-69E0-5ABD-B605F2EB6EF2.pdf [hereinafter RIAA 2008] (showing a 26.6% decline in CD sales from 2007 to 2008); RECORDING INDUS. ASS'N OF AM., 2006 RIAA MID-YEAR STATISTICS, MANUFACTURER'S UNIT SHIPMENTS AND DOLLAR VALUE (2006), http://76.74.24.142/0E3C72C6-4D76-AA00-E4E0-C62025A87126.pdf [hereinafter RIAA 2006] (showing a 13.9% decline in CD unit sales for the first-six months of 2006, compared with a similar period of 2005).

[FN22]. See Glenn Peoples, Analysis: The Digital Revenue Slowdown, Billboard.biz (Sept. 8, 2009), http://www.billboard.biz/bbbiz/content_ display/industry/e3ia3f2289d03ed2216c96c78087debf9f1.

[FN23]. RECORDING INDUS. ASS'N OF AM., 2007 YEAR-END SHIPMENT STATISTICS, MANUFACTURERS' UNIT SHIPMENTS AND RETAIL DOLLAR VALUE (2007), http:// 76.74.24.142/81128FFD-028F-282E-1CE5-FDBF16A46388.pdf [hereinafter RIAA 2007]; see RIAA 2008, supra note 21; RECORDING INDUS. ASS'N OF AM., 2009 YEAR-END SHIPMENT STATISTICS, MANUFACTURERS' UNIT SHIPMENTS AND RETAIL DOLLAR VALUE (2009), http://76.74.24.142/A200B8A7-6BBF-EF15-3038-582014919F78.pdf [hereinafter RIAA 2009].

[FN24]. See Edna Gundersen, Moving in All Directions; Sales Slides, Pirates Aplenty, Microtrends in Pop - All Altered by the Internet, USA TODAY, Dec. 29, 2009, § Life, at 1D.

[FN25]. RIAA 2009, supra note 23 (reporting revenue down 21.9% from 2008); RIAA 2008, supra note 21 (reporting physical CD shipments down 26.6% and Total Retail Revenue for physical shipments down 27%); see also RIAA 2007, supra note 23 (showing ten-year numbers that illustrate the gradual decline of physical sales).

[FN26]. RIAA 2009, supra note 23; RIAA 2008, supra note 21; RIAA 2007, supra note 23.

[FN27]. RIAA 2009, supra note 23; RIAA 2008, supra note 21; RIAA 2007, supra note 23.

[FN28]. RIAA 2009, supra note 23; RIAA 2008, supra note 21.

[FN29]. RIAA 2009, supra note 23.

[FN30]. See id.

[FN31]. See id.

[FN32]. Id.

[FN33]. RIAA 2008, supra note 21 (taking the “Dollar Value” of both digital singles and physical CDs for 2008 and dividing it by “Units Shipped” for 2008 yielded an average price of $0.99 per digital download and $14.22 per CD).

[FN34]. E.g., COLDPLAY, http://www.coldplay.com/recordings.php (last visited May 25, 2010).

[FN35]. MYSPACE, http://www.myspace.com/ (last visited May 25, 2010)

[FN36]. YOUTUBE, http://www.youtube.com (last visited May 25, 2010)

[FN37]. See ITUNES, http://www.apple.com/itunes/ (last visited May 25, 2010).

[FN38]. Christopher Sprigman, The 99¢ Question, 5 J. TELECOMM. & HIGH TECH. L. 87, 87-89 (2006).

[FN39]. See Mark F. Schultz, Live Performance, Copyright, and the Future of the Music Business, 43 U. RICH. L. REV. 685, 689-90 (2009).

[FN40]. RIAA 2009, supra note 23 (reporting total digital single sales of 1138.3 million; total digital album sales of 76.4 million; total physical CD single sales of 0.9 million; total physical album sales of 292.0 million).

[FN41]. See Jeff Leeds, With CD Sales Falling, Labels Seek New Deals with Apple, N.Y. TIMES, Mar. 26, 2007, at C1 [hereinafter Leeds, CD Sales Falling].

[FN42]. RIAA 2006, supra note 21.

[FN43]. Id.

[FN44]. Id.

[FN45]. Id.

[FN46]. See John Tehranian, All Rights Reversed? Reassessing Copyright and Patent Enforcement in the Digital Age, 72 U. CIN. L. REV. 45, 77-78 (2003).

[FN47]. See Nicola F. Sharpe & Olufunmilayo B. Arewa, Is Apple Playing Fair? Navigating the iPod Fairplay DRM Controversy, 5 NW. J. TECH. & INTELL. PROP. 332, 337-38 (2007), http:// www.law.northwestern.edu/journals/njtip/v5/n2/5/.

[FN48]. 17 U.S.C. §§ 501, 506(a) (2006) (copyright infringement); 18 U.S.C. § 545 (2006) (smuggling).

[FN49]. See generally STEVE KNOPPER, APPETITE FOR SELF-DESTRUCTION: THE SPECTACULAR CRASH OF THE RECORD INDUSTRY IN THE DIGITAL AGE (2009) (describing specific instances in which established music industry tried to block, rather than adapting to, new ways of making and distributing popular music).

[FN50]. See Sharpe & Arewa, supra note 47, at 337-38.

[FN51]. See UMG Recordings, Inc. v. MySpace, Inc., 526 F. Supp. 2d 1046, 1053-54 (C.D. Cal. 2007). The complaint alleges widespread infringement by MySpace subscribers. Complaint for Direct, Contributory, and Vicarious Copyright Infringement, for Inducement of Copyright Infringement, and for Violations of California Business and Professions Code § 17200 ¶¶ 19-20, UMG Recordings, Inc. v. MySpace, Inc., 526 F. Supp. 2d 1046 (C.D. Cal. 2007) (No. CV 06-07361 AHM (AJWx)).

[FN52]. See DONALD STEVENSON WATSON & MALCOLM GETZ, PRICE THEORY AND ITS USES 219-29 (5th ed. 1981) (1963) (deriving short-term equilibrium price).

[FN53]. Sprigman, supra note 38, at 88-89.

[FN54]. See Robert J. Delchin, Musical Copyright Law: Past, Present and Future of Online Music Distribution, 22 CARDOZO ARTS & ENT. L.J. 343, 395 (2004).

[FN55]. See 17 U.S.C. § 512(d) (2006).

[FN56]. See Schultz, supra note 39, at 689.

[FN57]. See Delchin, supra note 54, at 350.

[FN58]. Id. at 350-51.

[FN59]. See id. at 350-52.

[FN60]. Perritt, Jr., supra note 20, at 313-14.

[FN61]. See Ankur Srivastava, The Anti-Competitive Music Industry and the Case for Compulsory Licensing in the Digital Distribution of Music, 22 TOURO L. REV. 375, 395-97, 399 (2006).

[FN62]. See id. at 394-95.

[FN63]. See Jon Pareles, 2006, Brought To You By You, N.Y. TIMES, Dec. 10, 2006, § 2, at 1 (reporting that the Internet has become an “incessant public audition,” diluting the winnowing down once performed by record label A & R departments, but multiplying choices “promise ever more diversity, ever more possibility for innovation and unexpected delight”).

Metro-Goldwyn-Mayer Studios v. Grokster

125 S.Ct. 2764 (2005)
Justice SOUTER delivered the opinion of the Court.
The question is under what circumstances the distributor of a product capable of both lawful and unlawful use is liable for acts of copyright infringement by third parties using the product. We hold that one who distributes a device with the object of promoting its use to infringe copyright, as shown by clear expression or other affirmative steps taken to foster infringement, is liable for the resulting acts of infringement by third parties.
I
A
Respondents, Grokster, Ltd., and StreamCast Networks, Inc., defendants in the trial court, distribute free software products that allow computer users to share electronic files through peer-to-peer networks, so called because users' computers communicate directly with each other, not through central servers. The advantage of peer-to-peer networks over information networks of other types shows up in their substantial and growing popularity. Because they need no central computer server to mediate the exchange of information or files among users, the high-bandwidth communications capacity for a server may be dispensed with, and the need for costly server storage space is eliminated. Since copies of a file (particularly a popular one) are available on many users' computers, file requests and retrievals may be faster than on other types of networks, and since file exchanges do not travel through a server, communications can take place between any computers that remain connected to the network without risk that a glitch in the server will disable the network in its entirety. Given these benefits in security, cost, and efficiency, peer-to-peer networks are employed to store and distribute electronic files by universities, government agencies, corporations, and libraries, among others.¹³
Other users of peer-to-peer networks include individual recipients of Grokster's and StreamCast's software, and although the networks that they enjoy through using the software can be used to share any type of digital file, they have prominently employed those networks in sharing copyrighted music and video files without authorization. A group of copyright holders (MGM for short, but including motion picture studios, recording companies, songwriters, and music publishers) sued Grokster and StreamCast for their users' copyright infringements, alleging that they knowingly and intentionally distributed their software to enable users to reproduce and distribute the copyrighted works in violation of the Copyright Act. . . . MGM sought damages and an injunction.
Discovery during the litigation revealed the way the software worked, the business aims of each defendant company, and the predilections of the users. Grokster's eponymous software employs what is known as FastTrack technology, a protocol developed by others and licensed to Grokster. StreamCast distributes a very similar product except that its software, called Morpheus, relies on what is known as Gnutella technology. A user who downloads and installs either software possesses the protocol to send requests for files directly to the computers of others using software compatible with FastTrack or Gnutella. On the FastTrack network opened by the Grokster software, the user's request goes to a computer given an indexing capacity by the software and designated a supernode, or to some other computer with comparable power and capacity to collect temporary indexes of the files available on the computers of users connected to it. The supernode (or indexing computer) searches its own index and may communicate the search request to other supernodes. If the file is found, the supernode discloses its location to the computer requesting it, and the requesting user can download the file directly from the computer located. The copied file is placed in a designated sharing folder on the requesting user's computer, where it is available for other users to download in turn, along with any other file in that folder.
In the Gnutella network made available by Morpheus, the process is mostly the same, except that in some versions of the Gnutella protocol there are no supernodes. In these versions, peer computers using the protocol communicate directly with each other. When a user enters a search request into the Morpheus software, it sends the request to computers connected with it, which in turn pass the request along to other connected peers. The search results are communicated to the requesting computer, and the user can download desired files directly from peers’ computers. As this description indicates, Grokster and StreamCast use no servers to intercept the content of the search requests or to mediate the file transfers conducted by users of the software, there being no central point through which the substance of the communications passes in either direction.
Although Grokster and StreamCast do not therefore know when particular files are copied, a few searches using their software would show what is available on the networks the software reaches. MGM commissioned a statistician to conduct a systematic search, and his study showed that nearly 90% of the files available for download on the FastTrack system were copyrighted works. Grokster and StreamCast dispute this figure, raising methodological problems and arguing that free copying even of copyrighted works may be authorized by the rightholders. They also argue that potential noninfringing uses of their software are significant in kind, even if infrequent in practice. Some musical performers, for example, have gained new audiences by distributing their copyrighted works for free across peer-to-peer networks, and some distributors of unprotected content have used peer-to-peer networks to disseminate files, Shakespeare being an example. Indeed, StreamCast has given Morpheus users the opportunity to download the briefs in this very case, though their popularity has not been quantified.
As for quantification, the parties' anecdotal and statistical evidence entered thus far to show the content available on the FastTrack and Gnutella networks does not say much about which files are actually downloaded by users, and no one can say how often the software is used to obtain copies of unprotected material. But MGM's evidence gives reason to think that the vast majority of users' downloads are acts of infringement, and because well over 100 million copies of the software in question are known to have been downloaded, and billions of files are shared across the FastTrack and Gnutella networks each month, the probable scope of copyright infringement is staggering.
Grokster and StreamCast concede the infringement in most downloads, and it is uncontested that they are aware that users employ their software primarily to download copyrighted files, even if the decentralized FastTrack and Gnutella networks fail to reveal which files are being copied, and when. From time to time, moreover, the companies have learned about their users' infringement directly, as from users who have sent e-mail to each company with questions about playing copyrighted movies they had downloaded, to whom the companies have responded with guidance. And MGM notified the companies of 8 million copyrighted files that could be obtained using their software.
Grokster and StreamCast are not, however, merely passive recipients of information about infringing use. The record is replete with evidence that from the moment Grokster and StreamCast began to distribute their free software, each one clearly voiced the objective that recipients use it to download copyrighted works, and each took active steps to encourage infringement