By Monika Ermert for Intellectual Property Watch

CANNES – Napster went down, Grokster went down, yet as both digital music services drew millions of people to their sites, industry is eager to make them stay there as law-abiding music download-services. Now the question has become, what must a legal peer-to-peer (P2P) service look like, and is legal P2P possible after the recent Grokster decision of the US Supreme Court. The topic was discussed at the Music Industry fest Midem and Midemnet in Cannes last week.

Both Napster and Grokster were popular models for downloading content from the Internet, but both had to shut down in their original form. Napster, after it lost in court against rightsholders in 2001 and was bought by Bertelsmann, today is competing with Apple’s iTunes music store, that last year dominated the market with 60-70 percent market share in the online music market. Grokster, declared illegal by the US Supreme court last year, did not use a central server, but still was held liable for massive infringement of copyrighted content.

Now industry is looking for the next model, one that will meet demand within the confines of the legal and policy environment which itself is changing.

There is a whole array of P2P services in the making, as British music consultancy MusicAlly found out in a study presented at Midem. “Most of these services have been around for several years already preparing for a start,” says Paul Brindley, managing director of MusicAlly. “If they do not start this year, it is over.”

Several of the services had announced plans to launch this year, but after the Grokster debate companies are trying to make their systems foolproof against legal complaints. They have to solve the problem of making as much licensed music available to their users, while at the same time filtering what could not been licensed.

The first to start, according to Brindley, could be US-based Mashboxx. In order to have a legal service, Mashboxx allows rights owners to replace original music files with versions that are protected by digital rights management (DRM). For filtering, Mashboxx uses the digital fingerprinting of Snocap, a company established by Napster founder Shawn Fanning. Snocap has partnered with Universal Music Group, Sony BMG Music Entertainment, EMI, Warner Music Group and other labels and according to Snocap’s own information can offer the largest catalogue of authorized content to the P2P services.

“Mashboxx users can listen to sample files that are of lower quality or have a little voice underlying the music that tells you ‘click to download for 99 cents’,”said Brindley. “The issue is, will this be scalable with not only a few but a lot of content files shared over Mashboxx,” says Brindley.

Mashboxx will be connected to other P2P networks, which according to experts is an advantage compared to closed new P2P networks, such as PeerImpact. According to Brindley, Mashboxx might be launched under the name of Grokster, a name former Grokster boss Wayne Russo wants to buy for Mashboxx.

Another well-known P2P service, Imesh, which was stopped by legal complaints in 2003, also announced it would launch a new service very soon. It will combine a music store and a P2P network based on Gnutella protocol that is filtered for unlicensed tracks based on search terms and on fingerprint technology from Audible Magic, according to Brindley. But the system might be confusing because of the mixture, he said.

The most innovative option according think Music Ally’s researchers might be the Internet service provider-based P2P version that Playlouder might bring along. Music fans who want to use this service have to subscribe to Playlouder as their ISP and then can share music with other Playlouder users. A part of the higher subscription fee goes to the labels for licencing their content, pirated content is filtered out with Audible Magic, too.

Will the Grokster Ruling Stick Internationally?

At the end of the day, all the legal P2P or P2P-like versions still risk “that either the service or the customers are sued,” says Brindley. Avoiding illegal filesharing one hundred percent is not possible, say most experts.

Subscription services like Napster 2.0 or Real’s Rhapsody might be a better alternative, said Brindley, who still encourages companies to not fight P2P but use it. “Why waste an opportunity, and not sell them at least something,” he said. “Do not forget, filesharers are music fans.”

“The Supreme Court decision was a victory for copyright owners, and the fact that it was nine to nothing spoke in a good way for copyright holders,” said Peter Felcher, partner at Paul Weiss, one of the law firms acting for rightsholders in the Grokster case, at a session of the International Association of Entertainment Lawyers (IAEL) on the post-Grokster situation.

But future decisions might not fall in line with this, especially because the court’s decision, according to Felcher very much concentrated on the promotion of infringement Grokster was engaged in, and found guilty of, by the court. The decision also might make future P2P providers more careful “to sanitise their internal email and communication,” said Felcher, in order to hide intentions with regard to allowing infringement.

Moreover, it is unclear how courts in other countries would have decided on the case, said lawyers from Germany, Brazil and Belgium.

What could make complaints like the Grokster complaint more difficult are new copyright laws currently debated by several European parliaments. In France, for example, the parliament included the legalisation of P2P for private use in a draft law on 22 December.

French Minister of Culture and Communication Renaud Donnedieu de Vabres said at a press conference at Midem: “Yes, I will protect the rights of authors and artists, and I hope that they adapt to the reality and constraints of the information society, but there is also the continued concern for the general interest that has to be granted by the state.”

A flat rate fee for Internet users as a compensation for P2P usage as now proposed by two French collecting societies, Spedidam and Adami, could mean the end of the music industry, warn observers like Paul Woog from the Pop Bureau Stuttgart, a regional organisation for the promotion of musicians.

In Germany, intense current debates are about a de minimis rule that would exempt private filesharing in small numbers from punishment. Even politicians of the ruling Christian Democratic Party call the draft law presented by their ministry, “a wrong signal.”

Industry Sees Future in Mobile Music

The music industry, on the other hand, seems to place its hope on a different technology. The Midemnet in Cannes devoted a whole day of discussion to mobile music. “Mobile music may solve the piracy problem,” said Brazilian lawyer Marcelo Goyanes. “Mobile might be the saviour of the music industry in China,” added Richard Robinson, co-founder of Shanghai ISP and mobile content provider Linktone.

While the CD and Internet music market was 90 percent pirated, this was yet no problem with mobile phones. The combination of fast-growing numbers of handsets in countries like China (400 million), India (over 80 million) and Brazil (86 million) and a nearly piracy-free technology makes mobile very attractive.

At Sony BMG, Thomas Hesse, president of the global digital business group, also expects mobile music to be the one channel on which to concentrate during 2006, despite the fact that Sony BMG has signed on to the new P2P services like Playlouder and Mashboxx.

“P2P is interesting and we talk to all providers in the US who are coming to us for the purpose of converting to a legal service in the wake of the Grokster decision of last year,” Hesse said. But major growth at Sony BMG, whose digital distribution last year already rose to 11 percent of total revenues in the US, 25 percent in Korea, and 3 to 4 percent in Europe, is expected from the mobile sector.