June 28, 2005, 12:00 AM

Supreme Court’s Grokster ruling puts new focus on digital media sales

Following the U.S. Supreme Court’s ruling that free-file-sharing network Grokster can be sued for infringement of copyrights, legitimate content providers should move beyond piracy concerns to promote sales of digital media, Forrester Research says.

Following the U.S. Supreme Court’s ruling yesterday that free-file-sharing network Grokster can be sued for infringement of digital media copyrights, legitimate content providers should move beyond piracy concerns to more aggressively promote sales of digital media in multiple forms, say Forrester Research analysts Josh Bernoff and Ted Schadler.

“Because the media companies won a battle here, they may be less likely to exploit this new digital channel,” Schadler says. “But we tell them, ‘Don’t hold back, exploit the time you have here to make money on the Internet.”

The high court’s unanimous ruling in MGM v. Grokster overturned an appeals court ruling that had said that providers of technology are immune from liability related to piracy acts by its users. The high court ruled Grokster was liable because its business model encourages users to make and share unauthorized copies of digital media products. The ruling opens the door for pending lawsuits against Grokster, Streamcast and other file-sharing networks to proceed.

The ruling indirectly supports the rise in recent years of legitimate digital media companies, such as Napster, the one-time leader of unauthorized digital music file sharing that re-emerged in 2003 as a legitimate, commercial music service.

Piracy of digital media is likely to continue at least in part, especially by overseas-based file-sharing networks, Forrester says. But that’s all the more reason to develop new digital media revenue streams, such as providing music clips over the web to consumers’ cell phones, Schadler says.

“Entertainment companies should move beyond a quixotic quest to end piracy and concentrate on new ways to make money with digital media – music download services, ringtones, video-on-demand and Internet delivery of movies and video,” Bernoff said in a report on the ruling’s impact.

Others warn that the court ruling conflicts with other market forces. A report by Solutions Research Group, for instance, notes that more than half of U.S. consumers under the age of 30 believe that free person-to-person file-sharing services should be allowed.

Doris Long, a copyright expert and professor at the John Marshall Law School, says that the recording industry itself opened the door to consumer expectations of free file sharing when it failed to sue the first networks that appeared three years ago. “They let the problem go, and now they’re filing lawsuits against people who believed, mistakenly, that everything on the Internet was free.”

Long adds that she expects a debate over Internet services will continue. “Ultimately, we`re going to see a lot more public discussion of the intersection between privacy and Internet service provider liability,” she says.

The Consumer Electronics Association, a trade group for consumer electronics manufacturers, says the court ruling could serve to stifle innovation in digital media technology. “Innovators must now consider new murky legal rules and potentially overwhelming legal costs before bringing their products to market, or even moving forward with an innovative idea,” said CEO Gary Shapiro.

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