Copyright law's effort to balance private incentives to produce and distribute creative works with the benefits to society that arise from widespread access to those works is evident in the constitutional language that authorizes the Congress to establish copyrights and patents. Article 1, section 8, of the U.S. Constitution grants the Congress the "Power . . . to Promote the progress of Science and useful Arts, by securing for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries." The rights that copyright owners can claim over creative works are not always well-defined, however, and some areas of copyright law remain unsettled.
 

The Rights of Copyright Holders

The U.S. Copyright Act states that a copyright exists once an "original work of authorship [is] fixed in any tangible medium of expression . . . from which [it] can be perceived, reproduced or otherwise communicated."⁽¹⁾ However, a copyright applies only to the expression of an idea in a creative work and not to the idea itself (see Box 2-1).⁽²⁾
 

Box 2-1. Protection Afforded to Collections of Facts The courts have held that the terms under which the Constitution grants the power of copyright to the Congress prevent facts or collections of facts from receiving copyright protection. One exception to this ruling is a collection of facts that embodies a sufficient component of originality and creativity in the selection, coordination, or arrangement of those facts. Even then, only those original and creative components--not the facts to which they are attached--can be copyrighted. One such case--Feist Publications v. Rural Telephone Service, Inc.--concerned whether phone books could be copyrighted.(1) Databases that do not contain an original or creative component, therefore, do not qualify for any protection under copyright law. Currently such databases are protected by state-level prohibitions against misappropriation and unfair business practices.(2) Database suppliers argue that the investment needed to generate databases may be compromised in the digital era by unauthorized copying and redistribution. They assert that stronger protection is needed to preempt state laws and thereby ensure uniformity of application. As an alternative to copyright protection, the Database and Collections of Information Misappropriation Act (H.R. 3261) was introduced in the 108th Congress. H.R. 3261 establishes the conditions necessary for invoking misappropriation under the Commerce Clause to enforce property rights over certain types of databases and collections of information. 1.  499 U.S. 340 (1991). 2.  However, some observers have voiced concern that the inclusion of a minimal amount of copyrighted material may enable database suppliers to claim copyright protection under 17 U.S.C. 1201(a)(1). See discussion preceding Final Rule on "Exemption to Prohibition on Circumvention of Copyright Protection Systems for Access Control Technologies," 65 Fed. Reg. 64556, 64566 (2000).

Reflecting the property rights regime embodied in copyright law, the U.S. Supreme Court, in Dowling v. United States, recognized a distinction between copyright infringement and theft.⁽³⁾ The Court pointed out that "the copyright owner . . . holds no ordinary chattel. A copyright, like other intellectual property, comprises a series of carefully defined and carefully delimited interests to which the law affords correspondingly exact protections" by specifying the penalties for infringement. In that particular case, although the infringing parties caused pecuniary damage to the copyright owner, they were not guilty of theft by their unauthorized pressing and sale of vinyl albums of Elvis Presley's recordings because they did not "assume physical control over the copyright nor wholly deprive its owner of its use."

Private incentives to create are supported by the exclusive rights that owners of copyright enjoy. Copyright owners (or their assignees) have the right to carry out or authorize reproduction and distribution of their work; preparation of derivative works; and, for literary, musical, and various visually based works, the public performance or display of their work.⁽⁴⁾ Among other advantages for creators--for example, ensuring attribution for, and the integrity of, their original work in authorized uses--those exclusive rights enable copyright owners to realize economic returns from their creative efforts.
 

Limitations on the Rights of Copyright Holders

In keeping with the constitutional goal of promoting science and the arts, however, several constraints are placed on the rights of copyright owners. First, copyright is granted for only a limited time. On works of individual authorship, copyright extends for the life of the author plus 70 years. On works for hire, copyright runs for 95 years from first publication or 120 years from creation, whichever expires first.⁽⁵⁾ After copyright protection has ended, the work enters the public domain and may be used without authorization of the copyright owner.

Copyright law also imposes limitations on the exclusive rights that copyright owners enjoy during the life of a copyright. Some of those limitations apply to the use of a particular product, such as consumers' ability to make an archival copy of a computer program without authorization of the copyright owner.⁽⁶⁾ Others are much broader in scope and apply to copyrighted works generally. The two most prominent examples of comprehensive limitations on the exclusive rights of copyright owners are the "first sale" doctrine and exemptions from copyright infringement as determined by "fair use" criteria.

The first sale doctrine stipulates that the owner of a legally obtained copy of a copyrighted work may "sell or otherwise dispose of the possession of that copy" without the authorization of the copyright owner. Thus, this doctrine concerns rights to distribute--not to reproduce--copyrighted material.⁽⁷⁾

Certain unauthorized uses of copyrighted material may also be exempt from copyright infringement if they satisfy fair use criteria. As examples of the types of uses of copyrighted material that typically qualify as fair use, copyright law lists "criticism, comment, news reporting, teaching (including multiple copies for classroom use), scholarship, or research." Determination of fair use is a legal judgment made on a case-by-case basis.⁽⁸⁾
 

Unsettled Areas of Copyright Law

Fair use is a relatively indeterminate area of copyright law that can quickly become contentious when a new technology changes how creative works are produced and used. Consumers of copyrighted works, for example, may believe that they can legally make a copy of creative material for personal use without authorization from the copyright owner. However, such activity has not been recognized as fair use. Consumers' belief to the contrary may reflect, in part, a lack of legal precedent.

For the legality of any type of personal copying to be established--that is, for either the Congress to modify copyright law or the courts to be called upon to make a fair use determination--copyright owners or consumers must have sufficient incentive to force the issue legislatively or judicially. Forcing the issue presupposes that copyright owners in particular not only feel sufficient economic injury from the unauthorized copying but also believe that an eventual prohibition against it can be implemented successfully. Both those conditions have not always been present.

Consequently, the legality of making personal copies under the fair use provision of copyright law may be unclear or misunderstood by creators and consumers of copyrighted material. Digital technologies available today allow consumers to enjoy copyrighted works in a variety of new ways and, at the same time, enable copyright owners to exercise greater control over subsequent uses of their works. As a result of technological progress, the unsettled area of fair use has become quite contentious.

The 1984 case of Sony v. Universal Studios is a prominent example of how a new technology for consuming creative works prompted a legal clarification of fair use.⁽⁹⁾ Universal Studios argued that individuals' use of videocassette recorders (VCRs) to make copies of television broadcasts would lead to a loss of advertising and other revenues and, furthermore, that the production or import of VCRs should be banned on the grounds that they contributed to copyright infringement.

The U.S. Supreme Court held that making television broadcasts for later viewing--a practice known as "time-shifting"--constituted fair use. Surveys of VCR owners also found that videocassette recorders were primarily used for that purpose and that TV viewing overall--and hence the economic health of the broadcasting industry--had not declined. On that basis, the Court held that the sale of VCRs did not constitute contributory infringement of copyright despite the potential use of that equipment for infringing uses, such as making and selling multiple unauthorized videocassette copies to the economic detriment of the copyright owner.

Advances in information technology--particularly the digitization of a growing volume of creative works and the increasingly rapid processing and distribution of digital content--are forcing a reassessment of how well copyright law defines the rights of copyright owners while recognizing the interests of consumers. Judicial and legislative efforts to address copyright issues arising from digital technology are examined below.
 

Copyright Law Modifications for Digital Media

Legislative and judicial attempts to retool copyright law for digital media (see Box 2-2) have attempted to balance the rights of copyright owners (and hence private incentives to engage in creative activity) with the interests of consumers (and the benefits to society). With the advent of the Internet, however, copyright disputes have intensified. Copyright owners, concerned about losing control over their works in digital form, fear that their economic returns will be reduced. At the same time, users of copyrighted material argue that copyright owners may exploit digitization to expand control over those works, thereby restricting consumers' ability to enjoy them without obtaining prior consent from the copyright owner. As a result, several features of copyright law--in particular, fair use--are increasingly being contested.
 

Box 2-2. Recent Legislative and Judicial Responses to Copyright Issues Arising from the Digitization of Creative Works Legislative Revisions Computer Software Rental Amendments Act of 1990 (Pub. L. No. 101-650). Prohibits the leasing of software products. Audio Home Recording Act of 1992 (Pub. L. No. 102-563). Exempts from copyright infringement the making of copies for personal use of music files in digital form, provided that those copies are made with approved equipment. No Electronic Theft Act of 1997 (Pub. L. No. 105-147). Establishes penalties for unauthorized sharing and redistribution of copyrighted material over the Internet. Digital Millennium Copyright Act of 1998 (Pub. L. No. 105-304). Creates several protection and enforcement mechanisms for copyrighted works in digital form. Technology, Education, and Copyright Harmonization Act of 2002 (Pub. L. No. 107-276). Provides an exemption from infringement for some uses of digital copyrighted materials used in distance learning. Small Webcaster Settlement Act of 2002(Pub. L. No. 107-321). Establishes guidelines and requirements for the payment, collection, and distribution of fees paid by small commercial entities for the use of copyrighted works in certain Internet transmissions. Judicial Interpretations Recording Industry Ass'n of America, Inc. v. Diamond Multimedia Systems, Inc., 180 F.3d 1072 (9th Cir. 1999). Found that MP3 players are not in violation of the Audio Home Recording Act. Metro-Goldwyn-Mayer Studios, Inc. v. Grokster, Ltd.,259 F. Supp. 2d 1029 (C.D. Cal. 2003). Determined that the Grokster file-sharing service has substantial noninfringing uses and, hence, is not liable for contributory infringement. Recording Industry Ass'n of America, Inc. v. Verizon Internet Services, Inc.,351 F.3d 1229 (D.C. Cir. 2003). Ruled against the RIAA in its use of the Digital Millennium Copyright Act's subpoena provision to obtain identifying information about individual Internet users suspected of infringing copyright.

Early Legislation

The earliest copyright legislation concerning digital content applied to software and represented an effort to balance the interests of copyright owners and consumers. In 1980, the Congress amended the copyright law to allow, for archival purposes, copies of computer software programs to be made without infringing copyright.⁽¹⁰⁾ In the Computer Software Rental Amendments Act of 1990, the Congress revised copyright law to protect the interests of copyright owners by prohibiting software purchasers from renting their copies of that software.⁽¹¹⁾

The first major legislative act devoted exclusively to digital copyright law was the Audio Home Recording Act (AHRA) of 1992.⁽¹²⁾ An attempt to balance the rights of copyright owners and consumers is evident in that law. Prompted by the emergence of digital equipment capable of making flawless reproductions of musical recordings, the AHRA prohibited the manufacture or import of "digital audio recording devices" unless such equipment incorporated a mandated technology (or its equivalent) to prevent serial copying. It also imposed a levy on the sale of that equipment and on the digital recording media, such as digital audiotapes, associated with it, with receipts from that levy going to copyright owners. In exchange, the AHRA explicitly granted consumers an exemption from copyright infringement for their use of either an approved digital audio recording device or analog equipment to make personal copies of musical recordings.

Subsequent digital copyright legislation has focused on emerging Internet-based activities. For example, the No Electronic Theft (NET) Act of 1997 established penalties for certain types of sharing or distribution of copyrighted materials over the Internet regardless of whether that exchange is commercial or personal in nature.⁽¹³⁾ Unlike the NET Act, which emphasized enforcement, the Technology, Education, and Copyright Harmonization (TEACH) Act of 2002 expanded the provisions for exemptions from copyright infringement. In particular, TEACH specified the conditions for extending an earlier exemption that applied to certain performances and displays for educational purposes to the use of copyrighted materials in distance learning.⁽¹⁴⁾

The Digital Millennium Copyright Act

The digital copyright legislation featured most prominently in current disputes is the Digital Millennium Copyright Act (DMCA) of 1998.⁽¹⁵⁾ The DMCA modified the details of copyright law in a variety of ways, including instituting a royalty-setting process for Internet music broadcasts (Webcasts) and specifying exemptions for library and archival copying. It also established two major provisions of current digital copyright law--the anticircumvention prohibitions and the safe-harbor requirements for Internet Service Providers (ISPs)--that are intended to enhance the ability of copyright owners to protect their work from infringing uses and to identify and prosecute those users found to be infringing copyright.

Anticircumvention Clause and Antitrafficking Provisions. The DMCA makes it illegal to circumvent a technology that controls access to copyrighted materials--for example, an encryption program that prevents unauthorized viewing of a movie on the Internet.⁽¹⁶⁾ Like the purchaser of a movie ticket, an Internet consumer would have to obtain the copyright owner's authorization to view the movie by paying for the decryption key needed to view the digitized video file. The DMCA further prohibits manufacturing or trafficking in products "primarily designed or produced for the purpose of circumventing" technologies that are designed either to control access to copyrighted material (as in the previous example of a movie distributed via the Internet) or to prevent the use of such material in an infringing way.⁽¹⁷⁾

In contrast, the DMCA does permit some circumvention activities or products that do not infringe copyright. For example, copyright law explicitly recognizes copying a computer program for archival purposes as a limitation on the exclusive rights of owners of copyright on computer programs. Hence, if a manufacturer of computer programs applied a copy-control technology to prevent unauthorized copying of its product, a lawful purchaser could legally circumvent that technology to make an archival copy.

The example of software copying illustrates a central principle of copyright law: copyright owners have no legal obligation to facilitate any activity that qualifies either as a limitation on their exclusive rights or as fair use generally. At the same time, if the DMCA's prohibitions are to be effective legal instruments for deterring infringement, copyright owners must take measures to protect their intellectual property from unauthorized access and use.

The DMCA details a number of activities that are exempt from the circumvention prohibition.⁽¹⁸⁾ Beyond those specific exemptions, the DMCA requires the Register of Copyrights to conduct a triennial rulemaking to determine whether additional activities should be exempt from the prohibitions.⁽¹⁹⁾

Safe-Harbor and Notify-and-Takedown Provisions. The safe-harbor provision of the DMCA reflects an early attempt to clarify an ISP's potential liability for contributory copyright infringement. It stipulates that ISPs cannot be held liable for copyright infringement for either the transmission or the storage of copyright-infringing materials on their networks or for supplying links to infringing material, provided that the ISP fulfills certain obligations. To benefit from the safe-harbor provision, for example, the ISP must not have had prior knowledge of the copyright infringement. Further, in the event that copyright-infringing material "resides" on its network, the ISP must comply with the notify-and-takedown terms of the DMCA. The DMCA spells out the measures that an ISP must take to ensure that it will be promptly informed about the presence of copyright-infringing material on its network. Once alerted to such copyright infringement, the ISP must remove (or "take down") from its network the copyright-infringing materials and notify the responsible party of their removal. Finally, upon receiving a subpoena issued by a court clerk, the ISP must disclose to the copyright owner the identity of the parties suspected of copyright infringement on its network.⁽²⁰⁾
 

Technology's Continuing Challenge to Copyright Law

The tension between copyright owners and consumers brought about by the digitization of creative content continues to grow as computing equipment becomes more pervasive and the means of reproducing and distributing copyrighted materials in digital form become more powerful and accessible.

Technological advance is outpacing existing digital copyright legislation in two important dimensions. First, because it enables consumers to enjoy creative works in new ways while expanding the potential scope of copyright owners' control over their work, technological advance increasingly calls into question both the privileges of consumers and the exclusive rights of copyright owners. Second, it raises new obstacles to the efforts of copyright owners to limit and penalize copyright infringement. The Congress attempted to accommodate fair use and other consumer concerns, such as personal privacy on the Internet, in crafting the anticircumvention and notify-and-takedown provisions of the DMCA. However, technological progress is placing growing strains on whatever balance had previously been achieved between the rights of copyright owners and the interests of consumers.

Diminished Control over Copyrighted Works

As computer technology that allows music tracks to be "ripped" from a compact disc (CD) and transferred to a computer or other digital device has become widely available, making copies of digital music files without authorization from the copyright owner has become quite popular. However, copyright law does not explicitly exempt that particular type of copying--or any type of digital copying--from copyright infringement (see Box 2-3).
 

Box 2-3. Is It Legal to Use a Computer to Make a Copy of a Music CD? Although the courts have not yet determined whether copying a digital music file for personal use is a copyright infringement, they have ruled that a commercial entity's copying of a digital music file to facilitate personal use does constitute copyright infringement. Copying for Personal Use The Audio Home Recording Act (AHRA) of 1992 grants an exemption from copyright-infringement suits for the use of an approved digital audio recording device to make personal copies of musical recordings. Many observers invoke the decision in the Recording Industry Association of America's (RIAA's) case against Diamond Multimedia Systems to support their view that using a computer to make personal copies of digital music files is not copyright infringement. In that case, the U.S. Court of Appeals for the Ninth Circuit considered allegations that Diamond Multimedia Systems had violated the AHRA in its manufacture of portable (Diamond Rio) MP3 players, which make copies of digital audio files from a computer hard drive and store them for replay. The Court found that, since the MP3 player in question could only make reproductions of a digital music file through an attached computer and a computer did not qualify as a "digital audio recording device" under the AHRA, the manufacturer was not required by the AHRA to incorporate technology to prevent serial copying or to pay royalties.(1) However, the Court only addressed whether the MP3 player was covered by the AHRA; it did not explicitly address whether copying from computers for personal use constitutes a general limitation--as an element of fair use--on the exclusive rights of copyright owners. Hence, that case did not establish a general precedent for personal copying but interpreted a specific clause of copyright law in the context of a particular type of digital copying.(2) Copying for Commercial Use The courts have, however, found that third-party copying for commercial use--in this case, to facilitate personal use by individual consumers--does not qualify as fair use. In UMG Recordings v. MP3.COM, the U.S. District Court for the Southern District of New York found MP3.COM guilty of infringement for making unlicensed digital copies of music files for storage on Internet servers so that the company could provide owners of legally purchased compact discs remote access to music from those CDs.(3) 1.  Recording Industry Ass'n of America, Inc. v. Diamond Multimedia Systems, Inc., 180 F.3d 1072 (9th Cir. 1999). 2.  However, the ruling did point out that "the Rio's operation is entirely consistent with the [AHRA's] main purpose--the facilitation of personal use," and cited the Senate report accompanying the AHRA, which stated that "[t]he purpose of [the Act] is to ensure the right of consumers to make analog or digital audio recordings of copyrighted music for their private, noncommercial use." See S. Rep. 102-294. 3.  109 F. Supp. 2d 223 (S.D.N.Y. 2000).

Indeed, copyright owners, concerned about losing control over subsequent uses of their works, increasingly envision the use of copy-control techniques for distribution of digital content. Copy-control techniques are already applied to CDs and DVDs distributed in Europe and to DVDs distributed in the United States. Copyright owners favor using those techniques for music distributed on CDs in the United States, but consumers accustomed to ripping audio files from the CDs they purchase are contesting such measures. In an effort to make it difficult or disadvantageous to thwart copy-control measures, owners of copyright on music and movies advocate maintaining, if not strengthening, the DMCA's prohibition against the circumvention of technologies that either control access to, or prevent infringing uses of, copyrighted works.⁽²¹⁾

Copyright owners' concerns about control of subsequent uses of their work are not limited to the Internet. Advances in networking technologies and electronic media devices allow consumers today to enjoy the prospect of attractive new applications for digital content. Localized networking, for example, may allow movies to be transferred from room to room within a single household, an apartment building, or a college dormitory. Digital video recorders may change how television content is paid for and marketed (see Box 2-4). If copyright owners cannot maintain control over their works in digital form, they may not be able to charge for such uses and, in some scenarios, could face economic worries similar to those generated by the illicit file-swapping of audio files on the Internet.⁽²²⁾
 

Box 2-4. A Particular Technology's Challenge to Fair Use In Sony v. Universal Studios, the Supreme Court held that time-shifting of television viewing through videotape is fair use and, therefore, devices for recording television broadcasts do not contribute to copyright infringement.(1) Some digital equipment used for time-shifting, such as SonicBlue's ReplayTV units, enables consumers to automatically skip or remove commercials and to send copies of a recorded program over the Internet. That capability poses a serious economic threat to copyright owners of televised content, who initiated litigation against SonicBlue, which has since declared bankruptcy. Even though other digital video recorder (DVR) models do not currently promote the contested features of ReplayTV units, the technology that enabled those and other potentially copyright-infringing functions remains available to DVR manufacturers, and some have recently announced plans to offer those features in the near future.(2) In addition, forthcoming DVR models will offer larger hard drives and remote, virtually real-time programming, further weakening broadcasters' ability to shape their programming schedule to attract particular types of viewers and, hence, to earn advertising revenues.(3) 1.  464 U.S. 417 (1984). 2.  See Jonathan Krim, "TiVo's Plans Lead to Fight on Copyrights," Washington Post, July 22, 2004. 3.  See "A Farewell to Ads," The Economist, April 17, 2004, pp. 61-62; and Julia Angwin, Peter Grant, and Nick Wingfield, "In Embracing Digital Recorders, Cable Companies Take Big Risk," Wall Street Journal, April 26, 2004.

The first sale clause, which permits distribution but not reproduction of previously sold copyrighted works, provides another example of how digitization has changed the way consumers and copyright owners make use of creative works.⁽²³⁾ Consumers exercise their first sale rights when, for example, they sell, loan, or give away a lawfully acquired printed book or music CD. When copyrighted material is transferred over the Internet, however, an electronic copy is created; consequently, that transfer constitutes infringement unless it is authorized by the copyright owner. The first sale clause, therefore, has limited application for creative works in digital form.⁽²⁴⁾

Copyright owners have also tried to avoid the first sale clause altogether by licensing rather than selling physical products containing digital works. Although a legally effective license can avoid creation of rights under the first sale clause, mass market licenses--for example, those on widely distributed software products--are not traditional "offer-and-acceptance" licensing agreements. The courts have not yet ruled on the viability of mass market licensing practices intended to avoid the first sale clause.⁽²⁵⁾

The increasing use of the Internet to distribute copyrighted materials will probably lead to new licensing practices as copyright owners respond to consumers' frustration with legal constraints on their ability to transfer copyrighted material in digital form and as creators experiment with new product-licensing practices. As a consequence, additional legislative or judicial scrutiny may be required. For example, efforts to standardize licenses for software acquired across states through the Internet, embodied in the Uniform Computer Technology Information Act in 1999, have proven contentious, and only a few states have ratified it so far.

A related challenge to copyright law stems from the growing incorporation of computer chips, and the software that regulates them, into a variety of products. To the extent that such software is protected by copyright, an original equipment manufacturer may try to use the access-circumvention prohibition of the DMCA to prevent rivals from making their components interoperable with those of the original product. Intentionally or not, such efforts could stifle the innovation that emerges from broad experimentation by users.⁽²⁶⁾

For example, in Lexmark International v. Static Control Components, currently before the U.S. District Court, Eastern District of Kentucky, Lexmark charged that Static Control Components violated the DMCA by circumventing the authentication feature that controls access to the copyrighted software that regulates interaction between the printer and the print cartridge.⁽²⁷⁾ That circumvention enabled Static Control Components to offer replacement cartridges that competed with those of Lexmark, the original equipment manufacturer. Some observers have suggested that such an application of the DMCA is contrary to the law's intention and threatens competition in numerous component markets, such as parts for automobiles, as well as technological innovation that relies on the ability to reverse engineer new products.⁽²⁸⁾

New Obstacles to Copyright Enforcement

Perhaps the most well-known illustration of information technology's current challenge to copyright enforcement is the unauthorized sharing of digital music files on the Internet through peer-to-peer (P2P) networks. Since the late 1990s, software has been readily available from retailers and over the Internet to rip audio files from CDs and then store them, typically in compressed digital versions (MP3 format) on personal computers. During that period, both the computer processing power available for audio file conversion and the amount of storage space available on personal computers have expanded significantly. Those years also witnessed a sizable increase in individual access to broadband Internet connections and the emergence of P2P networks, which allow individual computer users to make files on their hard drive available to others through the Internet. As a result, unauthorized copying, storing, and sharing of digital files has become inexpensive and easy.

P2P file-sharing has grown dramatically in recent years (see Box 2-5). According to one estimate, an average of 8 million users were online and sharing 10 million gigabytes of data on those networks at any given time during June 2004.⁽²⁹⁾
 

Box 2-5. Peer-to-Peer File-Sharing Networks Peer-to-peer (P2P) networks allow individual computers to share files on the Internet. The original P2P networks were administered by a central server, which managed access to the files available on the network. Users who sent a search request to the central server for a particular file, such as a music track, would receive a list of available files and their location on the P2P network. The user would then download the file directly from one of the individual computers connected to the network. Current P2P networks, in contrast, operate in a decentralized fashion--that is, without a central server. The software that connects each computer on the network conducts the search-and-retrieval process. When a user searches for a file, the request is transmitted sequentially to individual computers connected to the P2P network. The responses from each computer are then sent to the requester, who receives a list of files and locations available for downloading.(1) Because P2P networks enable unauthorized file-sharing, they are currently a significant source of copyright-infringement concerns. Eventually, however, P2P technology is expected to make the Internet less vulnerable to disruption and to allow greater efficiency in transferring data and information online--for example, by facilitating collaboration among a company's geographically dispersed workers or by reducing the cost of voice calling.(2) 1.  See Appendix II, "Description of File-Sharing and Peer-to-Peer Networks," in General Accounting Office, File-Sharing: Selected Universities Report Taking Action to Reduce Copyright Infringement, GAO-04-503 (May 2004), pp. 24-29. 2.  See Simson Garfinkel, "Pushing Peer-to-Peer," Technology Review, October 3, 2003.

In contrast, the value of music sales in the United States fell approximately 4 percent in 2001, 8 percent in 2002, and 6 percent in 2003 (see Figure 2-1). The persistence and magnitude of those revenue declines are exceptional in recent history and are regularly attributed to unauthorized file-sharing across P2P systems.

Figure 2-1.

Source: Recording Industry Association of America.

However, some people argue that the impact of P2P sharing on music sales is overstated. They emphasize that the growth in music sales during the mid-1980s and early 1990s was unsustainable for several reasons: the introduction of the CD format; high CD prices; a reduction in the number of music titles available for purchase; and competition from other entertainment, such as DVDs and electronic games. Indeed, even music industry executives have recently begun to acknowledge that file-sharing may not be the entire cause of declining sales.⁽³⁰⁾

The popularity of music file-swapping shows the ease with which copyrighted material can be obtained and redistributed on the Internet today. The rate of data transfer that the Internet allows currently makes the distribution of movie-length video files much more time-consuming than that of audio files; hence, illicit sharing is less common for video content than for audio files.

Nevertheless, movie and software companies (especially computer-game makers) are increasingly worried that technological advances in digital compression, transmission, and file-sharing will soon lead to piracy of their copyrighted content.⁽³¹⁾ According to the Motion Picture Association of America, the number of Web sites offering pirated movies increased from 143,000 in 2002 to approximately 200,000 by the end of 2003. In March 2004, video files accounted for 31.9 percent of bytes transmitted over P2P networks, up from 16.4 percent in March 2003.⁽³²⁾

Although the DMCA explicitly provided copyright owners with the means to enforce their intellectual property rights on the Internet, the law was promulgated in an era of server-based rather than P2P network distribution. As a result, copyright owners' ability to prosecute unauthorized reproduction and distribution of copyrighted materials on the Internet by suing the enabling file-sharing services has come into question. Such measures were successful against the Napster service, which used its own computer servers to direct file requests to available content on individual computers; however, newer P2P services do not rely on centralized servers but rather on enabling software that is not administered by a single entity. Further, in the recent case of MGM Studios v. Grokster, the U.S. District Court for the Central District of California held that because the Grokster file-sharing service had substantial noninfringing uses, it was not liable for contributory copyright infringement.⁽³³⁾ That ruling is currently being appealed.

As a result of the proliferation of P2P file-sharing, individuals rather than larger, Web-hosted entities have become the target of the subpoena provisions of the DMCA. Until recently, the courts have upheld the ability of copyright owners to obtain from ISPs identifying information about individuals suspected of infringing copyright. Beginning in September 2003, the Recording Industry Association of America (RIAA) used that information to file 382 lawsuits. However, that subpoena power was checked--at least temporarily--by a December 19, 2003, decision by the U.S. Court of Appeals for the District of Columbia Circuit.⁽³⁴⁾ The Court ruled in favor of Verizon Internet Services, Inc., which was contesting the application of the DMCA's subpoena provisions to cases of copyright infringement in which the infringing material resided not on an ISP's server but, rather, on an individual's PC.

In response, the RIAA initiated "John Doe" lawsuits, which target groups of suspected copyright infringers. As of June 22, 2004, the RIAA had filed 3,047 such lawsuits. Only after considering the merits of each lawsuit will the courts issue a collective subpoena for identifying information on individuals in the group. This contrasts sharply with the options for legal action thus far afforded by the DMCA's subpoena provisions, under which identifying information was obtained first and individual lawsuits filed thereafter.

Copyright owners may attempt to obtain subpoenas under the DMCA from other courts, or they may petition the Congress to revise copyright law to allow explicitly for subpoenas in the context of P2P networks. Given concerns for individual privacy, the subpoena provisions of the DMCA are likely to remain controversial.

Finally, enforcement abroad is becoming increasingly important for U.S. copyright owners. Manufacturing advances are enabling even small-scale piracy operations to produce large numbers of unauthorized CDs and DVDs. Such illicit activity is particularly common in Asia, where it is often connected to organized crime.

Piracy abroad has become increasingly harmful to copyright owners of movies as well as music. For example, the Motion Picture Association of America claims that global piracy of DVDs cost it $3.5 billion in revenues during 2003. Another concern of U.S. copyright owners is increasing Internet penetration in Europe and Asia, where copyright laws are in some ways less stringent than those in the United States.⁽³⁵⁾ As a consequence of those developments, the protection of intellectual property has become prominent in both multilateral and bilateral trade negotiations between the United States and other nations, most notably China and other developing countries.

To better understand the economic rationale for copyright law and the economic interests of copyright owners and users of copyrighted materials, the next chapter addresses the role of property rights in the economy. In particular, it examines why creative works, such as those covered by copyright law, call for a different system of property rights than those applied to most other types of property. It also considers, from an economic perspective, how markets for copyrighted works in digital form might evolve to provide broad benefits to society.