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Does YouTube Deal Signal a Change for File Sharing?

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Monday October 16, 2006

Appeared in the Toronto Star on October 16, 2006 as Why YouTube Won't Be Napster Redux

Two companies launched by twentysomethings burst onto the public scene and provide instant access to a seemingly unlimited array of popular content. Within months, they become household names with tens of millions of devoted followers. Emboldened by dreams of striking deals with entertainment companies that will assure future growth, investors quickly rush in, setting aside lingering copyright concerns to offer financial backing.

The similarities between Napster and YouTube seemingly end there.  Napster, the poster-child for online music file sharing, failed to convince the record industry to license its content after taking the Internet by storm in 1999.  It was soon after sued out of existence, resurfacing as a struggling fee-based music service. YouTube, the site that in 2006 became synonymous with online video sharing, was purchased last week by Google for US$1.65 billion.

Lost amid discussion of YouTube's staggering price tag was the fact that hours before confirming the sale, Google and YouTube signed a series of licensing agreements with some of their harshest critics.  Companies such as Universal, who only weeks earlier had mused publicly about suing YouTube, agreed to the very revenue sharing arrangements that eluded Napster.

While some media companies, including Time Warner, speculated publicly late last week about possible lawsuits, it is worth examining why YouTube appears to be succeeding where Napster failed.  At least three possibilities come to mind.

First, the differences in legal status of Napster and YouTube may have contributed to the different approach.  Napster's peer-to-peer model raised the spectre of contributory copyright infringement (a legal concept absent from Canadian copyright law), whereas YouTube's Web-based distribution of user-generated content - much of which does not infringe copyright - likely qualifies for legal protection under U.S. copyright law.

Legal status is unlikely to provide the complete explanation, however.  Though the legal risk associated with the two services may differ, viewed from the perspective of a content owner whose work is being infringed, there are clear parallels given that both services represent new distribution models not easily subject to copyright owner control.

Second, some may argue that YouTube complements existing copyright owner business models since it provides a torrent of free publicity without cannibalizing other revenue streams. In contrast, the recording industry maintains that P2P file sharing is directly competitive with its own online offerings.

This argument also falters under closer examination.  There are a growing number of online services that sell episodes or clips of television programs, placing YouTube in a competitive position for at least some of the content found on the site. 

Moreover, there is reason to doubt that P2P is a significant competitive threat - in addition to the lengthy list of alternative explanations for the downturn of some record labels (retail price pressures, declining catalogue sales due to lack of availability, competition from DVD sales), a Canadian Heritage profile of the Canadian music industry released this summer found that Canadian artists have seen their sales grow steadily since 2001 with their share of the Canadian market increasing from 16 percent in 2001 to 25 percent in 2004.

The best explanation may well be that seven years after Napster's debut, the world views the value of Internet-based distribution through a much different lens.  In 1999, Internet distribution focused on the use of law and technology to control content and dictate terms of use.  That control has proven notoriously elusive with consumer backlash against technological and legal controls and emergence of highly efficient user-based distribution models.

Furthermore, it is Internet advertising revenues - not Internet controls - that today hold the promise of billions of dollars in revenue.  Indeed, the Internet economics of 2006 have shifted so dramatically that later this fall the recording industry is planning to launch SpiralFrog, an ad-supported music download service that offers free music downloads (albeit with restrictive technological limitations).

Given these changes, what is the likelihood that a new licensed P2P model will come to the fore in the near future?  Better than you might think. 

There are several such initiatives currently underway, the most advanced of which appears to be Noank. The brainchild of Terry Fisher, a Harvard law professor, the system is billed as a "digital media exchange" and is expected to launch in China sometime next year. 

Once operational, it will enable ten million Chinese university students to freely download music and movies with no technological restrictions.  The service will be funded by a mandatory student fee (similar to a student activity fee), with 85 percent of the proceeds distributed to participating artists and content owners.  Fisher estimates that the service will generate US$200 million per year from these fees alone, with additional advertising revenue possibly doubling that figure.

Having made significant progress in China, Fisher has identified Canada as the project's next target with private discussions already underway with rights holders, telecommunications companies, and record labels.

During the height of Napster, experts estimated that even a five-dollar monthly fee would have generated billions in additional revenue for the content industries, yet those companies chose instead to sue the P2P services along with thousands of their users.  The YouTube deal may foreshadow a reversal, with the industry at long last ready to embrace the remarkable commercial potential of the Internet. 

Michael Geist holds the Canada Research Chair in Internet and E-commerce Law at the University of Ottawa, Faculty of Law. He can reached at mgeist@uottawa.ca or online at www.michaelgeist.ca.


Comments (2)add comment

Marty Avery said:

Chief Catalyst
Michael,
Thanks for this. Sobering numbers on Noank. Canadian content producers and distributors should take note.
What effect do you think the Great Firewall of China will have on the effectiveness of Noank? Will this model be as sustainable in "free" Canada?
Marty
October 17, 2006

stationery said:

stationery
Cool!stationery holder
December 24, 2006

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