BUS 70: Principles of E-commerce fall 2008

Case Study

1. How can P2P file-sharing networks make money if they do not

sell music?

One method of making money that the textbook mentions on page 46

is Kazaa’s example of including spyware with the Fast Track software used to
connect users to super nodes for downloading files. In this case, vendors who
use this spyware to display pop-up ads and deliver unsolicited e-mails to the
users would pay Kazaa to distribute the spyware. Because of the large
number of users, those who use the Fast Track software loaded with spyware
would provide an advertising network that vendors are willing to pay for.
According to a 2001 article on ZDNet Australia,1 some P2P networks
like Kazaa and iMesh tried advertising that involved a software add-on that
would overlay advertising links on Web pages, though this was not well-
received by users. The article, besides also supporting the textbook in stating
P2P networks’ use of adware in an attempt to make profits, additionally
mentions that in the case of the now-defunct Morpheus (MusiCity.com),
advertising was sold for display on the P2P file-sharing network’s website, as
well as on the Morpheus software.
Moreover, judging from the fact that some P2P file-sharing networks
collected information about users for targeted advertising purposes, these
networks could also make money through selling consumer information to
marketing agencies, provided that the information is legally gathered and
sold.
Another article, an interview with Harvard business professor and P2P
researcher Ramon Casadesus-Masanell,2 further suggests that P2P file-
sharing networks may be able to make money through monetizing “products

1
Stefanie Olsen & Gwendolyn Mariano, “Seeking profits in P2P networks,” ZDNet Australia, available at
http://www.zdnet.com.au/news/communications/soa/Seeking-profits-in-P2P-
networks/0,130061791,120252445,00.htm (Aug. 3, 2001).
2
Sean Silverthorne, “Delivering the Digital Goods: iTunes v. Peer-to-Peer,” HBS Working Knowledge,
available at http://hbswk.hbs.edu/item/5594.html (Apr. 16, 2007).

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not subject to costless replication and distribution,” using the examples of
live concerts, merchandising, and product placement.

2. Into which category or categories of e-commerce do P2P file-

sharing networks fall?

Of the types of e-commerce mentioned in the textbook (Business-to-

Consumer, Business-to-Business, Consumer-to-Consumer, Peer-to-Peer, and
M-commerce), P2P file-sharing networks would most obviously and by
definition fall under the category of Peer-to-Peer (P2P), which allows
consumers to share files directly with one another, without the intervention of
a market maker. Early P2P file-sharing networks, as described in the
textbook, worked this way; however, I believe that P2P file-sharing networks
could be adapted to fit Business-to-Consumer (B2C, “online businesses selling
to individual consumers”), Business-to-Business (B2B, “online businesses
selling to other businesses”), Consumer-to-Consumer (C2C “consumers
selling to other consumers”), and M-commerce (“use of wireless digital
devices to enable transactions on the Web”).
I base this hypothesis on the assumption that digital goods placed on
the P2P file-sharing networks can be uploaded (offered) by anyone—either
businesses or consumers—and they can also be downloaded (consumed) by
anyone—either business or consumers. I also assume that, based on the P2P
file-sharing networks’ capabilities to monitor user activity and files available
or downloaded would enable them to keep track of which digital goods are
exchanging hands, even if the goods themselves do not pass through a
central Web server. Moreover, digital rights management (DRM) measures
could further increase control over the digital goods. Given these
assumptions, it would be possible to create a commerce scheme in which
users pay a subscription fee, and the offering parties would be paid a portion
of the fees received by the P2P file-sharing network based on, for instance,
the number of times that the offered digital good was downloaded. Under
these circumstances, I think digital goods offered by a business over a P2P
file-sharing network and consumed by a consumer, for example, could be

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considered B2C e-commerce. Similarly, under appropriate circumstances, I
think B2B and C2C e-commerce could also apply.
I also found a more refined e-commerce scheme that adapts P2P file-
sharing networks to B2C, B2B, and C2C described in an article titled “A Fair
Micro-Payment Scheme for Profit Sharing in P2P Networks.”3 In this article,
the authors present a P2P profit sharing system in which the network checks
whether a digital good has already been previously submitted, requiring the
user to prove originality of an item in case of dispute, so that ownership of
the digital good can be determined. Under the proposed system, authors are
guaranteed to be paid, abuses are tracked, and legal actions are provable to
a third party through the use of a central authority capable of verifying
identities.
Finally, because mobile devices are gradually shifting toward Internet
connectivity, mobile device users should be able to engage in the same types
of activities as PC users, including P2P file-sharing, so I believe that P2P file-
sharing networks could also fall under the category of M-commerce.

3. What social issues do P2P file-sharing networks such as

Grokster and Kazaa raise? Is the record industry justified in
attempting to shut them down? Why or why not?

Perhaps the most contentious social issue raised by P2P file-sharing

networks is the violation of intellectual property rights—specifically,
copyrights—when files (such as copyrighted music and movies) are illegally
shared over these networks. Besides raising this legal social issue, however,
P2P file-sharing networks may also raise a cultural social issue because users
may become accustomed to obtaining goods for free at the cost of the
copyright holders, who often also invested in the creation of the goods. Both
social issues could become problematic because a society that encourages
freeloading would probably discourage creators and industry investors from
3
Dario Catalano & Giancarlo Ruffo, “A Fair Micro-Payment Scheme for Profit Sharing in P2P Networks,”
Proceedings of the 2004 International Workshop on Hot Topics in Peer-to-Peer Systems (HOT-P2P’04)
(Oct. 8, 2004). The abstract is available online at http://ieeexplore.ieee.org/xpl/freeabs_all.jsp?
tp=&arnumber=1376613&isnumber=30046.

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spending the time, energy, and money to produce works such as music or
films for others to enjoy.
Whether the record industry is justified in attempting to shut down P2P
file-sharing networks is debatable, as evidenced by the arguments brought
up in the 2005 Grokster case. On one hand, the record industry can clearly
show the continued violation of their copyrights by users of the networks.
They can argue that the P2P file-sharing networks themselves are indirectly
liable for the illegal actions of their users, that the P2P file-sharing networks
may be held contributorily liable because they arguably knew of the illegal
activity and, further, contributed materially to the copyright infringement by
enabling the illegal activity. On the other hand, the Sony Betamax decision as
mentioned in the book provided that distributors of technologies with
substantial non-infringing uses would not be held liable for users’ infringing
uses, and P2P file-sharing networks could certainly be used for substantial
non-infringing uses.
Ultimately, however, the Supreme Court in Grokster held that “[o]ne
who distributes a device with the object of promoting its use to infringe
copyright, as shown by clear expression or other affirmative steps taken to
foster infringement, going beyond mere distribution with knowledge of third-
party action, is liable for the resulting acts of infringement by third parties
using the device, regardless of the device’s lawful uses.”4 In other words, the
Supreme Court held the P2P file-sharing networks to be secondarily liable for
the infringing activity because the P2P file-sharing networks involved in the
case “encouraged infringement” for the sake of increasing their profits,
whereas the Court maintained that Sony had not encouraged infringement to
increase its profits in the Sony Betamax case. It seems that this was the main
distinguishing factor.
In conclusion, I do not necessarily believe that the record industry is
justified in shutting down all P2P file-sharing networks, but under the
circumstances as outlined by the Supreme Court above, because of the social
harms I mentioned previously, it seems reasonable to find certain P2P file-
sharing networks liable for the infringing activities of their users, therefore

4
See Metro-Goldwyn-Mayer Studios v. Grokster, Ltd., 545 U.S. 913 (2005), available at
http://www.law.cornell.edu/supct/html/04-480.ZS.html.

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discouraging the socially harmful activity and possibly causing the networks
to shut down.

4. Will the Supreme Court’s decision inhibit the development of

P2P technology or the Internet itself, as proponents of P2P
services have claimed?

I do not believe that the Supreme Court’s decision will necessarily

inhibit the development of P2P technology or the Internet itself. This is
because, as I mentioned in my answer to the second question above, I
believe that there are ways that P2P file-sharing networks can be used
advantageously and within lawful bounds. For instance, as described in the
Catalano & Ruffo paper cited earlier, P2P systems could be designed that
guarantee payment to authors and prevent user abuse while taking
advantage of the P2P distribution technology. In my opinion, the Supreme
Court decision in Grokster merely sets some ground rules in holding
specifically that P2P file-sharing networks that encourage infringement—
especially while profiting from the infringement—will be held liable for their
users’ infringing activity.
Perhaps the Internet’s initial atmosphere of freedom will be inhibited
by the Supreme Court decision because government regulation necessarily
restricts certain actions. Moreover, it’s perhaps possible that P2P and other
valuable technologies that may be potentially used for infringing uses (but
that have substantial non-infringing uses) will develop more slowly if 1)
developers are afraid of potential liability, and 2) developers no longer have
the lure of easy money obtained through enticing users to use their
technology for illegal activities. Nevertheless, because both P2P technology
and the Internet have substantial and significant uses outside of supporting
illegal activity, I do not believe that the Grokster decision will stop these
technologies from continuing to flourish.

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 5. Will illegal downloading sites disappear altogether over time?
Why or why not?

I do not think that illegal downloading sites will disappear altogether

over time, especially because the sheer volume of activity over the Internet is
so high that it may be nearly impossible to catch every perpetrator. After all,
copyright infringement via illegal download is only one of many activities
deemed to be illegal, and, throughout history, despite these laws and
corresponding consequences for breaking them, illegal activity of all kinds
continues occurring on a regular basis.
In fact, despite the 2005 Grokster case and Grokster’s subsequent
shutdown, P2P file-sharing networks (e.g. various BitTorrent sites) over which
illegal downloads occur still crop up. CableLabs reported in 2006 that 18% of
all broadband traffic carried BitTorrent torrents,5 and judging from the fact
that the FBI cracked down on some of these BitTorrent trackers in 2006, 6 at
least some of these torrents comprised illegal downloads. And, considering
that this activity continues today even despite continued legal action taken
against BitTorrent trackers, it is probably a safe guess that illegal
downloading sites will persist. Part of the difficulty seems to come from the
simple consideration that distributing data (including illegal downloads) over
the Internet costs next to nothing, while the cost of law enforcement,
especially against many infringing parties, seems likely to be high.
Based on the success of iTunes in turning many away from
downloading illegal music files, however, I would predict that the rate of
illegal downloads would decrease sharply over time if legal options for
obtaining the same digital goods become more attractive to consumers than
the illegal alternatives.

5
Leslie Ellis, “BitTorrent’s Swarms Have a Deadly Bite on Broadband Nets,” Multichannel News,
available at http://www.multichannel.com/article/CA6332098.html (May 8, 2006).
6
See, e.g., News Release, United States Attorney’s Office, Western District of Virginia, “Wise, Virginia
Man Sentenced in Peer-to-Peer Piracy Crackdown,” available at
http://www.usdoj.gov/usao/vaw/press_releases/stanley_17oct2006.html (Oct. 17, 2006).