Building a Web Business on Copyright Infringement

In this 1999 piece, which predicted the problem the yet-to-appear Napster would pose, I explain the different Internet content models from a copyright perspective, and analyze some of the implications for the future of the media/new media business. This piece was first published in the Silicon Alley Reporter, and then a revised version was published in Digital Mogul.

Infringement, the silent business partner on the Web
On just about any New York street corner, you can find CDs or videos you could buy in any store spread out on a blanket on the sidewalk–for a much better price. Some passersby ignore these vendors, either because they mistrust the merchandise, because they don’t know where it comes from, or because they have moral scruples about buying what appears to be stolen merchandise.
The street merchant metaphor is how most people think about counterfeiting. Piracy has always been a business for a few on the fringe, but has rarely been associated with highly valued companies in a U.S. government-regulated market. The Web has changed all that. Often indirectly, infringement has fueled the growth of web businesses, from home page aggregators like Geocities and Tripod, to tool creators like Real and Nullsoft. Here’s a quick look at the role of infringement in some of these web businesses, and some thoughts about how powerful copyright owners might react toward infringement in the future.

First, it’s important to put some context in place. Tradition and law dictate that copyright protects original works of authorship fixed in tangible medium, as long as there is some element of creativity to the work to be protected. This includes literary, dramatic, musical and other artistic works. As a copyright holder you have a variety of rights associated with each of your protected original works. So if you own, say,¨the copyright to Star Wars, that would include: the right to reproduce the work and all of its copyrighted characters; create associated derivative works (such as “The Phantom Menace”); distribute the copyrighted work through any medium; perform any copyrighted work publicly; and display the copyrighted work publicly. If you own a copyright or a trademark, you can also choose not to have it copied or associated with something you don’t like. In other words, you have a right to control the way it’s used. This legal structure forms the basis of what I’ll call the Vault model, which vertically-integrated media companies follow. The major film studios, publishing companies, and record labels have spent years understanding how to create or acquire libraries of copyrights and obtain value from them over the life of those works. A media company would take something out of the Vault only under its own auspices, and only for satisfactory compensation. Ensuring that someone does not profit from these kinds of intangible assets in an unauthorized fashion is more difficult than, say, GM protecting its cars from theft. The business models of established media companies are focused as much on capitalizing on long-term rights libraries as they are on creating the next hit.

The Web, however, is in its infancy. It is driven in its early days by the ironic combination of short-term financial opportunism and forward-looking infrastructure plays. These infrastructure businesses, focusing on creation tool and hosting, often implicitly rely on the easy illegally copying and distribution of protected digital content. A variety of web plays have ¨benefitted from online piracy through a number of ways: direct aggregation, distributed aggregation, distributed serving, and tools.

Direct Aggregation
There is garden-variety direct piracy online, just as there is on a New York street corner. It mostly shows up in the form of Direct Aggregation: a site hosting unauthorized copies of files, such as an MP3 version of Ricky Martin’s Livin’ La Vida Loca, or a pirated copy of “The Matrix.” The Recording Industry Association of America, or RIAA, represents all of the major music labels, and works to enforce the copyrights of these Vault companies. The trade association has been shutting down around one hundred sites a week, and those who directly copy and host unauthorized music on their sites have been the easiest target. RIAA President Hilary Rosen says that a Cease and Desist letter from the association usually accomplishes the task of getting the unlicensed files removed. Some uncooperative sites, including an Arizona-based ISP and Washington state-based music archive, were sued. This sort of pirated Direct Aggregation benefits a company only until it gets caught. They take advantage from the Free Ride period that the speed of the web has created for its denizens.

Distributed Aggregation
The International Lyric Server was one of the earliest users of the distributed aggregation technique, as it collected content through the submissions of thousands of different loyal users over time. There was something exciting about the way it came together and grew, but the Harry Fox agency sued it and the site was shut down in 1998. It appears the site may relaunch through a partnership with If so, it appears someone recognized the site’s brand recognition is worth something to a web business.

Community sites like Geocities also follow the distributed aggregation model. They create a place online where people with various interests can make their own web sites. These community sites are loaded with infringing content, from photos of celebrities to pirated songs and movies. President of Warner Brothers Online, Jim Moloshok, put out the call to fellow media companies to pay attention to the value they were losing online. As reported in Variety this past March, Moloshok told attendees at Variety’s Interactive Marketing Summit in Rancho Mirage, Calif. that the Web is “being used to build other people’s brands.” Moloshok stated that bootlegged Warner Bros. material represents 4.2 percent of the content in GeoCities’ total community. If Warner Bros. were compensated on a dollar for dollar basis for the unauthorized use of its material it would be worth $147 million,¨Moloshok said. Warner Bros. has no intention of filing suit against GeoCities or its members over the postings, since to do so would mean alienating loyal fans, Moloshok said. Warner Brothers decided that the best route was to join ’em instead of shut them down. So far, 250,000 people have signed up for, the studio’s own online community. Moloshok was not available to comment further.

Nick Edgar, Manager of Communications for Geocities says Geocities takes the violation of intellectual property very seriously. “If it is brought to our attention, we will take it under review and at the appropriate time notify¨the web page owner, Edgar said. “We don’t just shut down their site unless it’s a clear violation. Given that major media companies now applaud these fan sites, community sites have been able to build massive numbers of page views on what is technically infringing content, without yet paying any licensing fee to major copyright holders.

Aggregation sites like Lycos, Tripod, Angelfire and Geocities have developed proprietary tools to help monitor the subject matter on their servers to insure that they remain, as much as possible, clean, well-lighted places.¨This means filtering and taking down hate speech, obscenity, and pornography. These types of content are more likely to disturb the user base and advertisers far more quickly than the notice of an inappropriate use of a copyright is likely to come to the attention of a copyright holder.

Geocities is the grand old lady of online community and free home pages. By Internet standards, it’s old and established. Its popularity Yet, Edgar cautions, “You still have to remember that the web is still the wild wild west.” Like all web companies, it tips its hat to the legal vagaries of its actions and the future in its prospectus when it filed to go public: “The Company could also be exposed to liability with respect to the offering of third-party content that may be accessible through the Company’s Web site,” the prospectus states.

The Web needs content to grow. The tools that enable people to build web pages or web businesses for either personal use or legal commercial use, are the same tools that can be used to quickly and anonymously infringe copyrights. Marc Andreessen, one of the creators of the Netscape browser (née Mosaic), says that the team included the ability to easily save images ¨from web pages because it “just seemed like a good idea,” especially when they saw some of the uses people came up with for embedded images. “I’m not aware that image libraries or content companies ever got upset over it,” Andreessen said.

Web tools, especially consumer browsers, search engines, directories and players all benefit when they become a favored way to pirate content. People need clay to sculpt with these tools, and in the beginning, the most exciting stuff to play with, indeed most readily available, was music, pictures, and even movie clips that belong to someone else. To the RIAA, there may be a perception that tools like RealNetworks Real Jukebox, Nullsoft’s SHOUTcast, and are being released at least in part to further ease the pirating process. (This infringement helps the labels to a degree–it woke them up to the fact that the web is a serious market opportunity, not just a threat).

The law is pretty clear, according to Larry Iser of Greenberg, Glusker, Fildes, Claymond & Machtinger in Los Angeles: Any technology can be sold or distributed as long as it has non-infringing uses. In other words, almost anything besides little executable files that do nothing but allow you unauthorized access to a piece of software, for example, are perfectly¨legal. The RIAA found that out when it failed in its attempt to permanently stop the sale of the first commercially available MP3 portable player in the U.S.: The Diamond Rio.

New tools that make it easy to spread piracy crop up all the time. Real Networks’ Real Jukebox makes it simple to compress and store music files on your PC, but a security feature that ties your files to your own PC is an option that can be simply disconnected by clicking a box. Steve Haworth, vice president of communications for Real, said “We make every reasonable effort to get our users to act legally. We inform them of what their rights are.” Rosen said Real’s actions haven’t matched their publicly stated intentions. “I don’ t have any objection to people ripping CDs off to their hard drives. It’s when you can pass that music from the hard drive to a bulletin board that the sense of fair play ends. Some of their product actions haven’t matched their publicly stated intentions,” she said. has become one of the most popular parts of Lycos, because it helps people find pirated MP3 files, most of which are the RIAA says are infringing copyrights. Soon after, the RIAA contacted Lycos, and since then, they have worked together in an example of a new cooperative era between the RIAA and major web sites. Like other tools oriented companies, Lycos says it can’t control what people do with the tool, similar to the way gun makers
say “Guns don’t kill people; people kill people.” The RIAA is trying to shift the focus of its efforts from stemming piracy to enabling new ways of listening to music. “It’s not about people down, it’s about trying to expand the opportunities and collect on them,” says Rosen.

Distributed Serving
Another way for tool companies is to profit is when a community or content uses the tool. Some of the coolest companies on the Web–Hotline and Nullsoft, for example, are pushing the self-publishing and community models to a new level, allowing anyone to stream high-quality audio, or easy host their own community and file sharing system.

Hotline, a Canadian company, has created a communication system used by 2.3 million users which works through custom protocols independently of the World Wide Web. People use it to chat and swap files–anything from songs to software products to movies. “I don’t think that commercial software is going to be around much longer, says Jason Roks, vice president of business development. It’s becoming [like] shareware. People want to try it before they buy it. Roks, like many other technology and web businesspeople, suggest that traditional media face the same need to create a “workaround” to find profit in the future Internet economy.

Similar to other Web apps that spread virally, Hotline gained thousands of users before any thought was ever given to a business plan. Like the pre-VC, it has lived within its slight means, and with only 12 employees in its Toronto home, it is profitable. Now the plan is to build market share, and try to figure out a way to make money from the people using the software.

Nullsoft is the Sedona, Ariz.-based maker or Winamp and SHOUTcast, a music player and serving system that are beloved by their young and tech-savvy fans. Winamp was not originally created to support a business, but as a challenge to teenage programmer Justin Frankel. The player chalked up about 5 million downloads before it got a business model behind it. Winamp is probably being “pirated” as much as the music that’s out there, but because the company wants to give away the product, rather than sell it, it does not concern itself with infringement. Besides, enough users like the product and the community enough that they choose to pay for it.

Getting Clean
The genie is out of the bottle, and piracy is rampant. So when does the average web business worry about “getting clean,” or need it ever? Traditional media companies think long and hard about how to protect the intellectual property they create and purchase. But that hasn’t really applied to the Web, for many reasons. Even the most careful companies that envision themselves as entertainment or media companies, as opposed to technology companies, operate in unknown territory. Now that the Digital Millennium Copyright Act has passed, web casting companies like, have to pay a license retroactively for content they offered from the beginning. And Web companies and ISPs may want to think more proactively about considering their practices in filtering content and copyright infringement.

With the release of The Phantom Menace, Lucasfilm made a preemptive strike, notifying 170 ISPs that if their users hosted pirate copies of the film, they’d face prosecution, as well as risk Lucasfilm halting development of further Star Wars sequels. If you publish infringing material, you are a contributory infringer under plain old copyright principles, Iser said. “If a recalcitrant server refuses to take an infringing movie file down, if I were [the MPAA], I’d try to interest a local DA to bring criminal charges as a test case. All you have to do is put someone in jail and you’ll deter pirating big time.

Will the hens ever come home to roost? Well, it depends whom you ask. The RIAA, MPAA and other enforcement agencies certainly have gained something close to job security for the moment. “We have to remember that a lot of hot growth companies [in the technology sector] had their comeuppance in the market based on intellectual property litigation. Lotus and Borland stock prices were immensely affected by that look and feel copyright litigation. I can still remember the CEO of a top software company telling me in the old days that we were all friends: “Nobody sues anybody in this industry.”
Especially as consolidation continues web companies themselves will find themselves spending a greater percentage of their time enforcing their intellectual property right, and ensuring that they can profit from their brands, trademarks, and hard-won relationships and customers. The concept behind practices like “framing” will be questioned as a fundamental building block of web ventures like Zinezone. “Framing” takes a framed site one step further by ensuring that any site that a user links gets framed by the previous site’s branding, name, advertising, and navigational elements. This means that Zinezone can gain revenue from banner impressions while users are exploring the content of direct competitors like Geocities and Tripod. Don’t you think that VCs or investment banks or attorneys would catch that in an IP audit of a company filing for IPO? Hank Jones, a partner at Arnold, White & Durkee in Austin, has represented software and web companies venturing into he public markets. “Most smart companies do self-scrutiny in anticipation of savvy investors and their counsel or adverse third parties.” “It’s unclear that the marketplace or internal management are forcing hot growth companies to prove they really own all their assets.”

As quickly as the Web business moves, the legal system grinds at a conversely slow pace. “There’s such a desire for places to put money these days, that people are turning a blind spot to it, says Rosen. If someone of Wall Street found out that GM wasn’t legitimately paying for the steel that held their cars together, they might pay attention to the potential liabilities.

These digital times make it necessary for the meaning of intangible concepts like stock options and intellectual property to be viscerally felt by the¨business community and consumers alike. It’s no small coincidence that the abstractions of the market capitalization are the strongest force propelling the infrastructure over which the infringing actions are taking place. The RIAA now seems as concerned with spreading values as much as enforcing law standards. To the consumer force driving online piracy, the choice isn’t as much about deciding whether to buy from the street vendor, it’s more like finding money on the ground and deciding whether or not to keep it. This will be a battle to shape beliefs or to build a market in response to them.