AEC 810, Fall, 2003

Instructor: A. Allan Schmid

Peer to Peer Technology and Copyright

by Sungjoong (Paul) Kim

revised May 7. 2004

Recently, there has been a series of copyright infringement litigations against Internet businesses that are involved with unauthorized distribution of music files. The US recording industry claims to lose three million dollars per year because of piracy. A report predicted an estimated 16 percent of all US music sales, or 985 million dollars would be lost due to online piracy by 2002 (Foege, 2000; cited from McCourt & Burkart, 2003) Even though this claim has to be taken with caution, as it is based on false assumption that if copyright laws were strictly enforced, audio pirates would become buyers, it is apparent that audio piracy grew to a worrisome level for the record industry. (Gayer & Shy, 2003)

It is not unusual to find hostile response of audio-visual industry against a new copying technology. Every time when a new copying technology was invented and introduced into the market, the industry responded argued that the new technology would cause significant damage to them by promoting piracy; It was true with the cases of Xerox, audio tape recorder, video tape recorder, compact disc (CD), and finally with the online file sharing through Peer-to-Peer (P2P) service. Usually, introduction of new copying technology led to series of legal disputes just like what we are witnessing in the current case of the Record Industry Association of America’s (RIAA) lawsuits against KaZaA and its individual members. Quite contrary to the industry’s usual arguments, however, new technologies eventually have proved additional revenues of profit for them so far. (Bettig, 1996)

Will we find a replication of this history in P2P technology? Even though we will have to wait quite some time before we can answer this question, there are several reasons to make us expect for a different story. First, digital commodity is different from traditional commodity; it is non- depletable, its consumption is non-competitive and non-exclusive and so on. (Gallaway & Kinnear, 2002). Thus, it is being argued that copyright law designed for traditional intellectual and artistic property does not work well in digital environment. Second, we are witnessing increasing difficulties for the effective enforcement of copyright law; the outcome of the most current copyright litigation against a P2P service provider, KaZaA is said to be in doubt. Third, the scale of audio piracy is happening in such a large scale by anonymous P2P users that chasing down each copyright infringement activity looks next to impossible. Nowadays, not only whether copyright is compatible with digital environment is in doubt, but also whether effective enforcement of copyright law is possible is in question.

This paper aims to look at the changes brought by technology innovations and understand meaning of them. This paper, however, does not seek an answer for the basic questions about copyright; whether it is the best to way to promote artistic and intellectual creation while serving public interest at the same time or not. Instead, I will focus on the question if effective enforcement of the law is possible in current situation, even if present copyright law is well-designed and well-balanced so that it could achieve the goal it seeks if it could be enforced effectively.

Promoting Intellectual and Artistic Creation through Copyright

“Today, copyright is justified as either as author’s moral right to his or her property or as an economic incentive to promote the progress of science and the useful arts.” (Jackson, 2002, p. 428)

Intellectual property is said to be a public good “since no current user possesses any less when new users are added to the set of customers.” (Watt, 2000, p.3) It means that someone’s consumption does not have negative effect on other’s consumption. Thomas Jefferson compared it to one person lighting his candle from the flame of another, in that first candle suffers no loss in light or heat. (Watt, 2000) Another characteristic of Intellectual work is that it is hard to exclude non-paying consumer from the access to the good. This characteristic causes “free rider” problem. That is, there is a great possibility of non-paying consumers attempting to gain access to the good, causing cost to other paying consumers.

According to Ku (2002), copyright in U.S. was invented and has existed because of the characteristic as a public good of intellectual works. Copyright is to give incentive to the creator by giving him an exclusive right for certain period of time to the work he created. Copyright also tries to protect distributor. What is created should be distributed for consumption, and this process is costly. The inherent characteristic of intellectual work is that it needs a large fixed cost of initial production, while the marginal cost of reproduction is very low. It is especially the case nowadays when the firms are both creator and distributor of the information with huge investment on R&D, production, promotion, storage and distribution. If there is no institution to prevent free copy of intellectual works, competitors could sell copies of same work at lower prices, even though in inferior quality. The competition from unauthorized copiers would force the first distributor to lower the price below adequate level. This would mean an insufficient compensation, which would result in discouragement of the potential first distributor. In turn, it would decrease creation and distribution of the content.

However, the term ‘public good’ can be misleading. First, it actually refers to a private good with unique characteristics. Second, as Schmid (1989) indicates, the term itself implies that such good should be provided in the public sector. In this paper, I will use high exclusion cost good (HEC) / low exclusion good (LEC), and incompatible usage good (IUG) and non-rival good for clearer definition. Schmid (1989; 2004) defines HEC as a certain type of good that the owner of rights cannot exclude non-paying consumers easily from the access to the good. Thus, how to deal with free riders is critical to this kind of good. Non-rival good refers to particular type of goods that marginal cost of another user is zero; one person’s use does have negative effect on other’s use of the same good.

It is necessary to distinguish between the intangible expression of intellectual or artistic creativity and their materialized form. Watt (2000) points out that intellectual property needs to attached to some tangible mode of delivery before it can be consumed. He calls this form of delivery as “delivery good.” According to him, a delivery good is not a public good, and it is perishable. Likewise, relying on distinction made by Stanley Besen, Bettig (1996) maintains that only the intangible expression is a public good, while their materialized form is a private good and exclusive in terms of ownership and use.

The fact that intellectual works has to be fixed for consumption makes it an IUG. In addition, the copyright guarantees the ownership of exclusive rights to reproduce and distribute to the copyright holder so that he can impose cost upon the consumers. Thus, the copyright is to make the public to internalize cost of creation and distribution by sales. In other words, the copyright creates artificial scarcity of intellectual and artistic goods as HEC to protect the artist and the distributor and motivate them for further creation and distribution; the intellectual work is made low exclusion good (LEC)[1].

The rationale behind copyright is that with right incentives both creator and distributor will be motivated more for the production and distribution, which will eventually serve the interest of the public for greater diversity and availability, and higher quality of content. (Kwon et al., 2002; Ku, 2002; Nam, 2003) The purpose of copyright, however, is not limited to protecting rights of creators and distributors. In fact, the ultimate purpose of copyright law is to serve public interest through promoting creation of intellectual works. Thus, copyright act should seek a balance between private interests (of creators and distributors) and public interest. (Hakfoort, 2002) Too strong protection may suffocate innovation as each new innovation has to rely on accumulated stock of knowledge. In addition, high protection means high cost for users.

Some (Bettig, 1996; Jackson, 2002), however, criticized that copyright law has been developing towards stronger protection. Recent legislations regarding copyright protection of digital works show this tendency clearly. Jackson (2002) argues that Digital Millennium Copyright Act of 1998 (DMCA) is “a significant step towards the reprivatization of copyright.”

Even with the copyright law, there have always been piracy activities. It, however, has not been a matter of great concern as nowadays. As Lagendefer & Cook (2001) indicated, “before the digital age, music piracy was typically characterized by the sale of inferior recordings through flea markets or other unconventional sales outlets. Profits were limited because large sales volume could attract law enforcement attention that resulted in substantial criminal penalties.” (Lagendefer & Cook, 2001. p ?? ) The same applies the other cultural industries like film, book and magazine, and the art. (Kwon et al.., 2002; Ku, 2002)

Institutions that contributed towards audio piracy

Before the Internet, monitoring costs were relatively low as the illegal copies also appeared fixed to a certain physical containers. In the case of piracy from broadcasters, the monitoring was also easy because the mass media cannot differentiate the customers so that it could block monitoring; it couldn’t do it secretly. In addition, the fact that copied works were inferior in quality to the original gave further advantage for the first distributors. If we set aside the issue of whether the profits were distributed properly between the artists and the industry, we can argue that the old system worked well at least for the producers and distributors.

Recent technology developments, however, seem to impose the most serious challenge to copyright system. It makes us question if copyright is the best way to promote intellectual and artistic creation in the digital age. In the first places, digital technology eliminated difference in quality between the original and the copy. Second, copyright infringements by individual Internet users are happening in unprecedented scale[2], which implies tremendous increase in monitoring cost. Third, because of the fast technology development, it is becoming more and more difficult to discourage Internet business involved in music file distribution through lawsuits. Even though RIAA has successfully defeated Internet businesses in the courts, it is doubtful that it will continue to be. Even if RIAA continues to win, there still remains the question whether the legal victory would mean real solution to the problem. It looks as if RIAA is trying to kill a hydra by cutting its ever-re-spawning heads.

Current situation was not created with a single invention, it needed successive technological innovations before large scale online audio piracy become possible: digital technology, the Internet, MP3, and P2P technology.

In the first place, digital technology made the quality of reproduced material exactly same as the original; unlike analog, there is no loss of information in the process. Secondly, digital technology lowered reproduction cost significantly. Reproduction of information itself does not cost anything once necessary equipments are purchased; Fixing information to a portable physical container and distributing it does. However, even though digital technology made it possible for audio-visual content to be freed from physical container, it needed an alternative costless distribution channel before it could be distributed widely, because there remained the costs of transportation and transmission. In addition, the fact that audio-visual content had to be distributed in a physical container meant that piracy in large scale was as risky as before. Thirdly, loss of information during transmission is virtually nothing; meanwhile analog data is limited in its reach because of the loss of data proportionate to the distance it travels. Lastly but most importantly, the consumption is made non exclusive and non competitive with digital goods. Thus, it ceased to be an IUG and LEC when it is consumed not fixed to a physical container like a CD (Kwon et al., 2002; Ku, 2002; Lagendefer & Cook, 2001)

However, when it comes to the matter of distribution, as long as it has to be fixed in physical container, it is still an IUG and LEC. It was changed with the coming of the Internet. The fact that the industry had not been as much concerned as nowadays over digital privacy before the coming of the Internet testifies this.

Digital good has a potential to become a HEC in every respect if it can find a cost-free way to be distributed. The Internet provided a solution by enabling exchanging data without need of any physical container. In addition, the Internet enabled a direct and costless transaction between owner of copy and want-to-be owner. There are costs of access and storage hardware actually; however, access cost is for entire activity on the Internet and storage hardware cost, hard disk, is included in total cost of PC. High-speed Internet, namely the broadband, further reduced the cost. The transportation was made faster and easier. Thus, there came many Internet businesses to exploit this possibility through either bulletin board or P2P service. Napster, Audiogalaxy, KaZaA, and MP3.com, to name a few. However, using the Internet to exchange copyrighted materials without permission from the copyright holders naturally resulted in legal disputed with main stakeholders like the RIAA, and the industry has been victorious so far.

Even with the Internet, however, downloading a music file was time-consuming, let alone the fact it also involved extensive search and quite high level of computer skill and experience. Downloading a five minute WAV file through P2P service usually requires more than half an hour. MP3 technology significantly reduced downloading time and storage space. MP3 stands for Motion Picture Expert Group, Audio Layer 3. It is a file format that stores digital audio data. MP3 enable compress and reduce the size of audio file to 1/10 ~ 1/12 of the original data without significant loss of the quality[3]. (Cooper & Harrison, 2001)

P2P service reduced another two difficulties – extensive search and high skill and knowledge - dramatically. P2P service enables direct communication between two or more of independent PCs by giving each client PC the IP address of each other. It needs the server only in the initial establishment of connection between the clients. After the connection is established, the clients directly exchange information between them. ICQ is an exemplar P2P service. The difference between server centered network and P2P network is that the latter does not need a central server if it uses a pure P2P program like Gnutella. The speed of a P2P system is not dependent on the capacity of central server; the number of users connected determines the speed and the quality of the service. There are two kinds of P2P programs; hybrid P2P that needs central server in the initial stage of connection establishment and pure P2p that does not need any central server. (Alexander, 2002) Napster used a hybrid P2P program, while most recent P2P services like KaZaa and Morpheus use pure P2P programs[4].

P2P technology has following impacts: first, it provided economy of scale and increasing returns for the P2P service subscribers. Kim and Lee (2001) indicate that there is network externality[5] to the P2P service. That is, the more users are, more easier and faster downloading file becomes. Before the coming of P2P, locating a MP3 file in the Internet was not easy, nowadays you only need to connect to a P2P network and do a keyword search; second, it enabled online file sharing to change from a relatively exclusive culture belong to small circle of ‘experts’ and manias to another popular Internet culture; third, it gave P2P service providers better chances to escape charges of copyright infringements from the industry; I will discuss this further later. Last, it increased monitoring costs tremendously for the industry to a level that it is almost out of the hand. (Kwon et al., 2002)

All those innovations in technology mentioned above resulted in converting the structure of good from an IUG and LEC to an HEC and non IUG. Audio-visual content became a HEC as all the P2P users now can own exactly same commodity in the exactly same quality only with one click of mouth. It ceased to be an IUG the moment it is freed from physical container.

To gain profits from the ownership of the digital good, the owner of copyright has to keep a strict control of usage; “the degree of piracy heavily depends on the enforcement of copyright laws to eliminate markets for pirated entertainment media and computer software.” (Gayer & Shy, 2003, pp. 467-8) The problem with digital technology and P2P service is that the enforcement of the law became very difficult because it became next to impossible to monitor piracy. Once a copy is available on the P2P network, it multiplies in thousands within minutes. Efficient and strict monitoring is virtually impossible as file swapping through a pure P2P service does not require a central server. To chase down audio pirates, a lookout has to chase down each file swapping activity and establish the identity of the user. KaZaA alone has about four million members connected on average. Each of members would be downloading one more of files, a significant portion, if not the majority, of which would be copyrighted materials.

Another institution that contributed further to proliferation of file swapping is the Internet culture. The Internet had born out of a network of researchers, and it became a network of networks for everybody. It had started as a non-commercial entity and the users had maintained the culture of free sharing of the resources before the commercialization of the Internet took place. This culture is still strong in cyberspace. Even with the rapid commercialization, free sharing culture still lingers. A survey result of South Korean Internet users (Kwon et al., 2002) reports that users still have negative perceptions towards commercialization of the Internet. Thus, it is also a case of path dependency. This culture makes the Internet users relatively immune to the guilty feeling of theft involved with file sharing.

Considering the impacts of technology development, there comes a question whether existing institutions are still relevant to address copyright issue adequately when the situation has changed so radically or we need to find alternatives. In order to answer this, we have to look at the current institutional regime of copyright in detail and analyze it.

Difficulties of Enforcing Copyright Law

To handle the potential massive copyright infringement through the Internet, the Congress legislated DMCA in 1998. The DMCA aims to continue to protect copyright in digital environment, at the same time it also seek to be flexible enough to allow Internet technologies and business to flourish. (Heidmiler, 2002) The DMCA has ‘safe harbor’ provision that allows online service providers to be free from liability of copyright infringement that occurs through their networks. Section 512 states the following four categories of conduct by a service provider in which the service provider are free from copyright infringement liability.

1. Transitory communications; under this section, a service provide must be merely a passive data conduit for the infringing material being transferred through the service provider’s network

2. System caching; the service provider must not select, modify, or otherwise interfere with the information being stored temporarily on its server by a copyright infringer.

3. Storage of information on systems or networks at direction of users; the service provider should not have direct or indirect knowledge of the infringing activity and does not benefit financially from infringing activity.

4. Information location tools; as long as third condition is met, the service provider will not be liable for money damages or for injunctive sanctions for referring or linking to Internet locations that contain infringing material by way of information location tools. (Heidmiler, 2002)

In Sony Corp. of America v. Universal City Studios, the Supreme Court created the copyright version of the so-called “staple of article of commerce doctrine.”, a principle in judging copyright infringement issue concerning new technology. The doctrine stated by the Court is that protecting copyright should not mean interfering with the sale of technologies that may be used in infringement, but also have “substantial non-infringing uses.” This doctrine served as a principle in copyright infringement cases after on. (Dogan, 2000)

A&M Records v. Napster was a case that tested how far the doctrine established in Sony is. (Dogan, 2000) It also showed us how difficult and complex task is to prove a P2P service provider liable for copyright infringement.

It would be extremely rare case to find a P2P service provider liable for direct copyright infringement, as their usual role confines to establishing direct connection among its users. Instead, a P2P service provider may be found liable for contributory infringement and/or vicarious infringement of copyrighted materials. (Blanke, 2002; Das; 2000; Jacover, 2002; Langendefer & Cook, 2001) Traditionally, vicarious liability is imposed "when the right and ability to supervise the [infringing conduct of another] coalesce with an obvious and direct financial interest in the exploitation of copyrighted materials" (Shapiro, Bernstein & Co. v. H.L. Green Company 1963, p. 307; cited from Langendefer & Cook, 2001). Napster was charged for both contributory and vicarious infringement. The court stated that because the availability of copyrighted materials accessed through the Napster system "acts as a 'draw' for customers" and "since Napster's future revenue is directly dependent upon 'increases in userbase,' . . . Napster financially benefits from the availability of protected works on its system" (A&M Records v. Napster 2001a, cited Lagendefer & Cook, 2001). In addition, as Napster has a central server therefore able to block access to its service, it supervises the conduct of the users who are the infringers. Those two combined made Napster liable for vicarious contribution.

If Napster were a pure P2P system, one of the conditions could not have been met. Thus, for a pure service like KaZaA, it became hard to apply the vicarious liability in that a pure P2P service does not have any control over user activities. A pure P2P service provider cannot have any responsibility more than a telephone service provider. A telephone company cannot be responsible for whatever communication that is carried through its line. In addition, in the two cases that followed Napster, even though they were not cases involving P2P services, the court made somewhat different judgments. In CoStar v. LoopNet, the court held that if the Internet service provider to be liable for copyright infringement, mere knowledge of the infringement is not enough, but also actual encouragement of infringement has to be proved as well. In CoStar v. eBay, the court made similar decision. (Heidmiler, 2002) Thus, even under DMCA – which provides stronger protection for copyright holders than copyright law for non-digital content (Jackson, 2002) -, discouraging piracy through litigations against P2P service providers became not an effective strategy.

Another problem that RIAA faces is multi-nationality of P2P service providers. In the case of KaZaA, the program developers are Estonians presumed to be in Netherlands, while the headquarter of server provider is in a pacific island. Thus, even if KaZaA is found liable for the charge, the U.S. has to ask governments of other countries for cooperation. To make matters more complicated, a Dutch court found P2P services like KaZaA is not liable for copyright infringement; the individual users who committed infringements are. (The Washington Post, Dec 21. 2002) A similar judgment was made with Soribada, a South Korean P2P service provider. (Nam, 2003) Thus, given the differences in the interpretations, the cooperation looks difficult at best. In addition, the U.S. courts have shown reluctance to apply their law beyond its territory. (Dalling, 2001)

The only alternative to suing P2P services is to go after individual user, which RIAA is doing now. This approach, however, accompanies increasing monitoring costs and transactions costs. With the reluctance of Internet service provider to cooperate, it is not clear that RIAA’s approach will have great effect even after paying high cost. Thus, moving target to individual users does not look smart decision as it should accompany increased monitoring cost. Moreover, how many users will the RIAA have to sue before it can have chilling effect?

Alternative Institutions

It seems that nobody is satisfies with current situation. The industry wants to have complete control over any online traffic that involves the use of audio/visual contents, while the P2P service providers want to be safe from copyright infringement suits. The customers seem to want lower price, the freedom from guilty feeling, and also may want to be free from threats of lawsuits, and the artists may want bigger share of profits. However, there is no single solution that can satisfy every party as somebody’s gain means cost for somebody else in the world of interdependence. (Schmid, 2004) Thus, it is a matter of who bears the bigger part of cost and who will get the greater slice of the profits. There can be three directions that the future many enfold. The first is to expand the scope of copyright protection and increase the penalty of infringement. Second is to maintain the status quo and let it be solved by power games among stakeholders. Third is to redefine copyright and implement a very different institution from the existing one.

A popular argument is that if “the cost of copying declines down, copyright should expand.” (Landes and Posner, cited from Ku, 2002) According to this argument, because of the declining cost, there will be more competition from the (illegally) copied works. Thus, copyright should be expanded to protect from the greater damage. If this alternative is chosen, there will likely be fewer infringements, as the cost of getting caught increases. To be effective, however, it should accompany a greater ability to monitor than that of today. Chilling effect cannot be cold enough to reduce piracy if the possibility of being caught is like a chance to be struck dead by lightning. Thus, there will be tremendous increase in monitoring costs, and the outcome won’t be predictable. In addition, increasing level of copyright protection only in U.S. won’t achieve much without international cooperation; thus, there is transaction cost of international cooperation, which is very likely to be huge if not insurmountable. If successful, it will benefit the industry one-sidedly without a reform for a more even distribution system of profits between the artists and the firms.[6]

If current copyright regime is maintained without any significant legislative reform, then the future will be dependent of the politics: that is, it will be decided by who has the power to sway the opinion of the court. In fact, it is a highly probable scenario in that because of too many conflicting interests, we could be locked up in current situation. Under current law, the outcome of KaZaA case is unforeseeable, as KaZaA has other excuses that Napster didn’t have. The effectiveness of suing individual users are also in doubt as the ISPs are denying to cooperate in protection of privacy interference. It is clear from the responses of Verizon and SBC that it is not in ISP’s interest to cooperate with RIAA[7]. Thus, this option will result in high monitoring costs, repetition of lawsuits against P2P service provider and its members and the resulting high costs of lawsuits and increased negative attitudes against the industry from the customers[8], high transaction costs of getting ISPs to cooperate.

In addition, there is again the problem of international cooperation. If the international negotiation fails because of the too much transaction costs to persuade other countries to raise protection to the level U.S., and if the argument of RIAA that file sharing has negative effect on sales is true, the future will be a gradual demise of income revenues for the industry as well as the artists belonged to them. In addition, the customers will be loser too, unless the artists act collectively to find alternative source to reach customers and gain enough for cost of living and production. The outcomes of lawsuits against of KaZaA and individual users won’t have much impact outside of U.S. territory without international cooperation. If the U.S. to succeed, it will have to pay for a huge transaction costs, which could surpass the benefits gained from it as it can only be done through dozens of bilateral and multilateral negotiations.

The industry may seek to reduce piracy by instilling a sense of guilty in file sharer’s heart through education and campaign, while trying to chill piracy off through lawsuits – actually, this also could be another way of ‘education’ - at the same time. We, however, cannot help but skeptical of this approach in front of a strong free file sharing culture of the Internet. In addition, file sharer’s conscience could be eased with the criticism against market behavior of oligopolistic firms.

There are several ways to change current system. First, as it was done in AHRA, a statutory levy can be imposed upon the equipments needed for the copy of audio/visual media contents like CD/DVD-Writer, PC, blank CD/DVD, and the Internet service subscription fee and be distributed to the artists according to the popularity of their works. (Copley, 2001, cited from Lagendefer & Cook, 2001; Ku, 2002) According to Ku (2002), it is possible to keep the record of the download frequency of a file without interfering privacy of the users; for examples, the Billboard magazine is publishing the ranking of most frequent downloaded songs. Some countries have already implemented hardware taxes. France imposes small amount surcharges on each recordable medium, while Germany imposes a levy on manufacturers and importers of recording equipment. (Gayer & Shy, 2003) This approach, however, is not easy to implement in the first place, nor is it free from weaknesses. First of all, media industry, PC industry, and ISPs won’t likely welcome it. Content producers would oppose it because it means giving up a possible additional, and expected to be lucrative income resource. The PC industry and ISPs would fear that the increased price would only discourage sales, without adding anything to their income. In addition, there remains the problem of deciding how much the levy will be. Gayer & Shy (2003) argues that while a tax on hardware do reduces the illegal use of software, it also reduces the entire demand for using software in general. The same can be true to the audio market. It is hard, if not impossible, to calculate what the right level of compensation is. Thus, there will be much dispute over the level of compensation. In addition, who has the right to decide? What is more, imposing levy to eliminate the problem of free riders creates unwilling riders and frustrated would-be riders at the same time.

Second, music downloading can be combined with advertisement; that is to make it necessary to watch or listen to an advertisement in order to download a file and do not charge any price for the file itself. Adopting this system means a transition to the business model of U.S. broadcasting. This, however, has many problems to solve as well. To mention a few; as this will mean significant decrease in income, record industry is not likely to pursue it while the transition will require collective action from audio industry; because of increased competition for advertising revenue, there will be resistance from other media industries like TV and magazine.

Third alternative is to limit the available downloadable files to that are encrypted or ephemeral and receive the small amount fee for each usage. Relying on encryption technology is, at best, risky. In fact, since 1998, a consortium of record companies, hard /software manufacturers, and distribution companies to develop a universal Digital Rights Management (DRM) system formed the Secure Digital Music Initiative (SDMI). Using watermarking technology, SDMI’s system would work as a gate for through which content must pass. The development, however, has not been going as planned, lagging far behind the original schedule due to diverse and sometimes antagonistic interests of the members. In addition, DRM technologies have resulted in products that is more complicated to use, and watermarks may have negative effect on sound quality. (McCourt & Burkart, 2003) The most critical problem with this approach is that there is no protection scheme that cannot be broken. History tells us that there has been no security system that is perfectly safe. Just one decrypted copy in cyber network is enough to make encryption meaningless as there will be millions of copies immediately. The history of Internet is full with the legends of hacking once state-of-art encryption technologies. For both formats, they won’t attract customers as long as free mp3 files are available online.

Last, a collective boycott from customers, P2P service providers and artists of any payment systems that involve a third party and establish a direct payment system[9] between customers and creators of contents, for example tipping. The artist can form or hire a representative entity that collects payments in place of them. This will only happen when the P2P users and artists recognize that they can achieve it through their collective action and reach the threshold number necessary for the change. This can happen gradually, first by relatively small number of artists and consumers. This alternative, however, has to deal with the free rider problem.

Conclusion

In all of the alternatives, there is a common problem of digital divide; however, it is an issue beyond scope of this paper. However, because of the technological innovations that changed the situation, it is clear that current institutional copyright regime cannot provide effective solutions to audio piracy through P2P networks. As Ku (2002) argues, P2P technology may benefit the whole society – excluding large record companies as a matter of fact - in that now it became possible to connect artist and consumer directly. It may allow us to reduce social cost involved with distribution of artistic and intellectual works.

We, however, cannot be sure what the future will look like. The choice of rules for making rules is a political and economic issue at the same time. We know of many cases new technology failed to establish itself in society not because of technological weakness but because of economic, political and cultural factors. The history of humankind is replete with the stories the necessary institutional changes did not take place.

References

Alexander, Peter J. (2002). Peer-to-Peer File Sharing: The case of the Music Recording Industry, Review of Industrial Organization, 20, 151-161.

Bettig, Ronald V. (1996). Copyrighting Culture: The Political Economy of Intellectual Property, Boulder, WestviewPress.

Blanke, Jordan M. (2002). Vincent Van Gogh, "sweat of the brow," and database protection, American Business Law Journal, 39 (4), 645-682.

Cooper, Jon and Daniel M. Harrison (2001). The social organization of audio piracy on the Internet, Media, Culture & Society, 23 (1), 71-89.

Dalling, Bradon (2001). Protecting against international infringements in the digital age using United States Copyright Law: A Critical Analysis of the Current State of the Law, Birmingham Young Unviersity Law Review, 2001 (3), 279-1311.

Das, Sonia (2000). The availability of the fair use defense in music piracy and Internet technology, Federal Communications Law Journal. 52(3), 727-747.

Dogan, Stacey L. (2000). Is Napster a VCR? The Implications of Sony for Napster and Other Internet Technologies, Hastings Law Journal, 52, 939-959.

Gayer, Amit and Oz Shy (2003). Copyright protection and hardware taxation, Information Economics and Policy, 15, 467-483.

Hakfoort, Jacco (2002). Copyright in the digital age: the economic rationale, In Ruth Towse (Eds.), Copyright in the Cultural Industries (pp. 63-84), Cheltenham, UK ; Northampton, MA : E. Elgar.

Heidmiler, Sheila M. (2002). Digital Copyring and File Sharing on Trial, Intellectual Property & Technology Law Journal, 14 (4), 1-8.

Jackson, Matt (2002). From Private to Public: Reexamining the Technological Basis for Copyright. Journal of Communication, 52 (2), 416-433.

Jacover, Aric (2002). I want my MP3! Creating a legal and practical scheme to combat copyright infringement on Peer-to-Peer Internet Applications, Georgetown Law Journal, 90 (6), 2207-2254.

Kim, Jung-Ho & Lee, Wan-Jae (2003). P2P KiSool-gwa Eun-Ak JeoJakKwon (P2P Technology and Music Copyright. http://cc.kangwon.ac.kr/~kimoon/mi/mi-012/sori.hwp

Ku, Raymond Shih Ray (2002). The Creative Desturction of Copyright: Napster and the New Economics of Digitial Technology, The University of Chicago Law Review, 69(1), pp 263-324.

McCourt, Tom and Patrick Burkart (2003). When creators, corporations and consumers collide: Napster and the development of on-line music distribution, Media, Culture & Society, 25 (3), 333-350.

Kwon, Nam-Hoon, Lee, Kyung-Won, Lee, In-Chan, Yu, Sun-Shil and Jung-Sook Oh (2002). Contents-ui San-Up-Hwa-e ta-run SiJang ByunHwa mit PalJeon Jeollyak Yeon-gu (A Study on Market Change and Development Strategy of Contents Industry). KISDI Research Report, Korea Information Strategy Development Institute, Seoul

Schmid, A. Allan (1989). Benefit-Cost Analysis: A Political Economy Approch, Boulder, Westview Press.

Schmid, A. Allan (2004). Conflict and Cooperation, Oxford: Basil Blackwell.

Watt, Richard (2000), Copyright and economic theory : friends or foes?, Cheltenham, UK ; Northampton, MA : E. Elgar.

---

[1] The fact that an intellectual good is distributed and consumed fixed to a physical container makes it LEC in the first place because it is easy to monitor the infringement. It is more precise to say that by giving the exclusive right to reproduce and distribute to the distributor, the copyright strengthened the characteristic of LEC by making it even scarcer.

[2] Napster, the most popular P2P service provider that existed, had 75 million members at its peak. It was reported that there were 10,000 downloads of music files per second through Napster at that time. (Ku, 2002)

[3] For example, the size of MP3 file that is sampled with 128 kbps is about 1/10 of WAV file, meaning that downloading time is also reduced proportionally.

[4] “Music-Swapping Service Gains Stature in New Deal” Matt Richtel, The New York Times, Sept., 23, 2002.

[5] The concept of Network externality refers to the phenomenon of increasing incremental benefits for each user without any cost, because of increased number of users connected through the network.

[6] Quoting remarks from a member of once famous band Grateful Dead, Ku (2002) indicates that most of artists do not earn any income from record sales. Instead, they usually have relied on concerts or other sources of income. According to him, a musician have to sell more than two million copies before she could earn a single penny.

[7] “Verizon, SBC ask Congress to protect customers' privacy”, Kevin Fitchard, Primedia Insight, Sept. 17. 2003; “Pac Bell's Internet arm sues music industry over file-sharer Ids”, Ron Harris, The Associated Press, July 31, 2003.

[8] When the RIAA filed the first lawsuit against the individual customers, the file sharers responded in following way: "Don't listen to their music. Don't buy it, don't share it, don't talk about it," read one message.
"The record companies have made billions off the consumers," read another post. "They have overcharged us for years. Why not boycott all new music and watch their attitude change?" (RIAA to sue individual file sharers, Benny Evangelista, The San Francisco Chronicle, June 26, 2003)

[9] IUMA (Internet Underground Music Archive) is a pioneering site that established direct meetings between the artists and the customers. Born in 1993, this site introduced new artists and distributed their works, who could not distribute their works thru conventional market. The band pay annual fees the operator and the users download songs for free. With a thousand registered bands, it attracted a quarter million users a day earning a million dollars per year within 3 years after the launch. (Bloom, 1997, cited from Nam, 2003).