What price innovation?

March 30, 2005

IN 1984, the entertainment industry and Sony came before the U.S. Supreme Court to argue a critical question for technological innovation. The issue was whether Sony's Betamax, an early VCR, was illegal because it could be used to copy copyrighted movies and TV broadcasts. The court found that VCRs were legal because they also had substantial legitimate uses, and manufacturers could not be held liable if the technology was used illegally.

That landmark ruling opened the way for the unchallenged rise of VCRs and many other copying technologies - including CD burners, MP3 players, TiVo machines and the software-enabling Internet communications and Web searches. Looking back, it's hard to imagine the chokehold on innovation if the Betamax decision had gone the other way. Nevertheless, yesterday, much the very same argument was right back before the Supreme Court.

This time, the technology in question is much different but the stakes are just as high for innovation on one side and property rights on the other.

Hollywood (led by MGM studios) is arguing for the closing of the Grokster and Morpheus online services that employ peer-to-peer software allowing users to freely share music, video and data files.

Hardware and software firms, some public interest groups and certain musicians, who say they benefit from the alternate channel of file-sharing, argue that such "P2P" software shouldn't be banned because, after all, it can be used for legal file-sharing - following the very same rationale as the Betamax decision.

This is a battle that's been brewing for years, and it's gotten harder to find a solution. The big film and recording studios call file-sharing networks "breeding grounds for copyright infringement," and there seems no doubt that most peer-to-peer sharing is piracy involving copyrighted products, whose creators should be compensated. At the same time, Hollywood has twice lost the Grokster case in lower federal courts, which invoked the Betamax standard and refused to give content owners the power to stifle piracy and innovation.

A rebalancing may be needed - between the interests of artists and technologists - but not one found by rolling back the clock two decades with a wholesale reversal of the Betamax ruling. This nation can ill afford to impede technological development.

In questioning yesterday, justices possibly suggested what may be a finer legal standard, one that would hinge on technologies' stages of development or the actual degree to which they are legitimately used. But the most promising solutions may not be found in court but in new business models enabling music and film studios to profit from - not fight the emergence of - new hardware and software. The content industry has a very long history of overcoming technological shifts, dating back to radio or even player pianos. And no matter the court case, it will eventually have to find ways to do what it has always done: turn thieves into paying customers.

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