After years of costly litigation, the music and movie industries hammered what looked like the last nail in the coffin of online file-sharing service Grokster. It has shut its Web site, halted downloads of its file-sharing software, and agreed to pay $50 million to settle a lawsuit that accused Grokster of helping users illegally share copyrighted songs and movies.
Under terms of the agreement announced Nov. 7, Grokster could resume business once it comes up with an alternate strategy that compensates copyright owners. For now, Grokster's site contains only a curt message: "There are legal services for downloading music and movies. This service is not one of them." A lawyer for Grokster declined to comment.
The settlement caps the victory won by film and recording industries on June 27, when the U.S. Supreme Court ruled unanimously that Grokster and another file-sharing service, StreamCast, showed a clear intent to facilitate illegal activity. The decision by the high court paved the way for media heavyweights to sue in a bid to halt piracy (see BW Online, 6/26/05, "A Supreme Slap at Grokster & Co.").
ACQUISITION TALKS. Grokster's shutdown also serves as a stern warning to other file-sharing services whose businesses were put in jeopardy by the Supreme Court decision. At least one other company hopes it can assuage record labels by striking partnerships with legitimate services. Market leader eDonkey is in serious acquisition talks with two music services, both of which have the blessing of the recording industry, says Sam Yagan, CEO of eDonkey (see BW 10/24/05 "A Hard Ride for eDonkey"). Those are iMesh, which uses filtering technology to identify copyrighted songs so it can charge users for them, and "an established" music subscription service that he declined to name.
Grokster also raced to form a partnership that would mollify the recording industry. According to a press report on Sept. 19, Grokster was in talks to be acquired by Mashboxx, another file-sharing service that plans to use filtering technology as a way to compensate copyright holders. Mashboxx CEO Mike Bebel says the acquisition was not finalized as of Grokster's shutdown, and declined to comment on the status of negotiations.
A partnership with a legitimate service doesn't necessarily put a file-sharing business in the clear, says David Israelite, president and CEO of the National Music Publishers Assn. (NMPA). Israelite says he and his counterparts at other industry groups were pleased by Grokster's decision to partner with Mashboxx but that it didn't have any bearing on whether a settlement was reached.
SHARING CONTINUES. "The [primary] thing they had to do was cease any behavior that we thought was illegal.... Going forward they don't have to do anything," says Israelite. "We're very interested in seeing legal services populate the market, but whether Grokster is one of them is not important." Still, file-sharing services are seeking partnerships as a way of securing future business, while demonstrating to the record labels that they're sincere in their effort to go legitimate.
And even with the Supreme Court decision and subsequent settlement, illegal file-sharing activity will by no means cease. While Grokster is one of the most well-known services, it accounts for only a fraction of all file-sharing on the Internet. Meanwhile, all existing versions of the Grokster software that are sitting on users' hard drives will continue to work as before, and free, open-source file-sharing programs (which are developed underground and unaffiliated to any company) are still widely available.
Israelite acknowledges that shutting down Grokster's site will do little to curb file-sharing in the near term. "There's no way to stamp out the software that enables people to steal," he says. "But there are a lot of people who won't do it anymore if we can show that this is clear-cut wrong."
"CONTINUE TO LITIGATE." Chances are next to nil that Grokster will end up paying any of the $50 million, according to three sources familiar with the matter. After years of legal fees, and paltry revenues associated with ad-supported file-sharing, Grokster has nowhere near that kind of money. While Israelite declined to comment specifically on whether he expected Grokster to pay up, he did say "That [$50 million] number is very important.... Other services engaged in illegal behavior should take note of the tremendous amount of liability involved."
However, the other plaintiff in the case, Streamcast, doesn't appear to be budging. The Web site for Morpheus, Streamcast's file-sharing service, was up and running on Nov. 7 and still offering downloads of its software. Streamcast attorney Charles Baker released the following statement: "StreamCast is not engaged in settlement discussions. We will continue to litigate this matter." Laurie Jakobsen, a spokesperson for the NMPA, would say only that "discussions are ongoing," and wouldn't elaborate.
Others, like eDonkey, reckon a partnership with an industry-sanctioned company is better than getting shut down or paying potentially crippling legal fees. Indeed, eDonkey's Yagan says his company may reach such a deal by the end of the week.
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Helm is a reporter for BusinessWeek Online in New York
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