Grokster Ltd., whose popular software let consumers trade music online for free, all but shut down yesterday under legal pressure from the entertainment industry, which viewed the song-sharing as theft.
In a settlement with the Recording Industry Association of America and the National Music Publishers' Association, Grokster agreed to stop offering downloads of its software and to no longer support the system.
"There are legal services for downloading music and movies," according to a statement on the firm's main Web page. "This service is not one of them." The page also directed users to industry-backed Web sites warning that file-sharing of copyrighted songs or videos of without paying for them is stealing.
Entertainment industry executives called the settlement a milestone in their ongoing legal battles to contain file-sharing, which is used by hundreds of millions of people around the world. The executives hope other services, such as Kazaa, Morpheus and LimeWire, will follow Grokster's lead.
But whether that will happen is unclear. An attorney for StreamCast Networks Inc., which operates Morpheus, vowed yesterday to continue its legal fight with the entertainment industry. Some services, such as Kazaa, are based overseas and less susceptible to legal pressure in the United States.
And even though Grokster essentially is ending operations, that will not prevent its customers from using the software if they have already downloaded it.
Legal services such as Apple Computer Inc.'s iTunes have become popular recently, charging users a fee to download music or videos, but far more people trade files for free. Music legally purchased over the Internet makes up less than 10 percent of all songs obtained online, said Eric Garland, chief executive of BigChampagne LLC, a Los Angeles Web monitoring system.
The paid numbers look impressive at first glance. Last month, RealNetworks, with its online music store and Rhapsody player, claimed 1.3 million music subscribers. Last week, Napster chimed in with 448,000 paid subscribers.
Apple has sold more than 600 million songs at 99 cents each since iTunes launched in 2003, an average of more than 20 million songs per month.
By comparison, conservative estimates place the number of illegally obtained songs at more than 1 billion per month, Garland said. The RIAA puts the number at 3 billion. At any given moment in September, according to BigChampagne, 9.3 million users worldwide were logged on to such sites, which are known as "peer-to-peer," or P2P, because they enable individuals to trade files instead of getting them from a centralized site. That is more than double the September 2003 average of 4.3 million. About 70 percent of P2P activity is song-swapping, Web monitors say.
While P2P activity continues to climb, U.S. digital music sales have flattened out in recent months, worrying record company executives who have hailed online music sales as the salvation for their flagging industry, which has lost more than 30 percent of its business over the past three years.
Nielsen SoundScan recorded an average of 6.6 million song purchases per week through May of this year. By late October, that number had ticked up to 6.7 million downloads per week.
The news is worse when compared against rising sales of iPods and other music-playing devices over the same period, Garland said.
"Per capita, there's been a decline in song sales," he said.
Grokster's capitulation comes four months after it lost a critical case in the U.S. Supreme Court, which ruled that such services could be held responsible for the actions of their users if they encourage them to swap files illegally.
Grokster and Morpheus had argued that they were simply enablers of sharing, whether the files were legal or illegal, in the same way that telephone companies provide the conduit for communication that occasionally might be illegal.
In the wake of the court ruling, the music industry sent letters to the seven major services ordering them to halt operations or face continued litigation.
Mitch Bainwol, chief executive of the RIAA, acknowledged in an interview that piracy of digital entertainment will never end. "We can't jam the genie entirely back in the bottle," he said. "But we can get to a point where the legal services will dominate." He added that a new generation of teenagers is growing up respecting copyrights more.
Garland said the Grokster settlement is equivalent to benching "a ball boy," rather than a sports team's superstar, because Grokster is a last-generation P2P service with a fraction of the users of newcomers such as eDonkey and BitTorrent.
"The headlines really are the win here: 'Here's another rogue P2P player that's found its judgment day,' " he said. "Practically speaking, I don't expect it to have an impact on the larger P2P phenomenon."
Fred von Lohmann, senior staff counsel for the Electronic Frontier Foundation, a digital rights advocacy group, said the music industry cannot win by seeking to lock down its offerings through lawsuits or technology.
"There's no way you can protect music in a way that is going to stop the free trading of it," said von Lohmann, who represented StreamCast in the Supreme Court case. "All of the mechanisms so far have been almost laughably weak."
Instead, he said, the industry needs to compete with free services by lowering prices, expanding the availability of titles, and easing restrictions on the ability to transfer files among various devices and locations.
Marty Lafferty, head of the Distributed Computing Industry Association, a trade group that represents some file-sharing services and related technology companies, said the industry already is moving toward making itself legal.
EDonkey, for example, told a Senate hearing in September that later this year it would begin charging for songs and would distribute royalties to songwriters, entertainers or others who hold rights.
The settlement by Grokster is "part of the conversion from open peer-to-peers to industry-acceptable, sanctioned business models," Lafferty said. "It would be great if this could all move along more quickly."
Lafferty said that with content-protection technology and aggressive filtering, illegal sharing could be significantly reduced. "It's complicated," he said, "and it's going to take time."
In the meantime, entertainment industry executives vowed to keep up the pressure.
"It's like the drug war," said David Israelite, head of the music publishers association. "Your goal is not to get to zero, but to keep fighting for more and more reductions. . . . You go after everybody."