Skip to main content

Big Media's Supreme Victories

Big media just swept a double header.

In two separate decisions last week, the Supreme Court set ground rules
for two of the most important new communications technologies.

The first ruling upheld FCC rules allowing cable companies to bar
competing Internet service providers (ISPs) from their high-speed Web

In the second decision, the justices ruled that Grokster and other
peer-to-peer (P2P) networks that allow unrestricted swapping of audio and video
files can be held liable for copyright infringement if they encourage users to
make illegal downloads.

The Grokster ruling will likely shut down the most popular use of P2P
networks: downloading the latest music, movies and TV shows for free. Going
forward, P2P networks must charge for downloads and pay royalties to copyright
holders. The ruling also takes the pressure off music labels and film studios
to lower prices and offer content online. The cable ruling gives cable
operators more incentive to invest the billions necessary to expand their fiber
broadband networks but could also give them power to exercise monopoly control
over high-speed networks.

The Grokster decision reversed a lower-court ruling that P2P networks
face no liability as long as a network has some potential for legitimate use,
such as distributing public-domain content.

Movie studios and broadcasters cheered the decision after arguing that
more than 90% of the digital-file sharing over P2P networks is illegal and
threatens their industries' survival. Motion Picture Association of America
President Dan Glickman called the ruling “a reaffirmation of common law in
the digital age.”

Ian Ballon, co-chair of the intellectual property and internet practice
at law firm Manatt, Phelps and Phillips, predicts networks like Grokster will
be forced to pay billions of dollars in potential damages and will go out of
business unless they implement digital-rights management software that requires
users to pay for copyrighted content the way Apple's iTunes and the
resurrected Napster do.

Whether Grokster itself faces any potential damages must now be decided
in a federal appeals court, where judges will determine whether the network
operators “induced” users to make illegal downloads.

“Peer-to-peer users will have to start paying for content,” Ballon
says. “Grokster's model of earning advertising revenue based on the number
of eyeballs seeing the site is dead.”

In the cable-modem case, the justices ruled that cable operators, at
least for the foreseeable future, are free to bar competing Internet providers
from their broadband networks. ISPs like Earthlink have been trying since 1998
to win government-mandated access to cable lines, a delivery platform that can
be 50 times faster than dial-up phone access.

The ruling preserves a 2002 FCC decision to keep cable broadband free of
access rules while the business is still in development. The agency has
reserved the right to impose access mandates later if cable abuses its network
control by, for instance, restricting access to content that competes with
cable TV programming or Web sites that vie with cable-owned sites.

The federal appeals court in San Francisco rejected the FCC's
“hands-off-for-now” approach and declared that the 1996 Telecommunications
Act binds cable broadband to the same access obligations that require phone
companies to lease their DSL capacity to others.

But Justice Clarence Thomas, writing for the majority, said the FCC
should have been given deference to interpret the 1996 law as it saw fit. He
also noted that the FCC is reviewing whether to eliminate access mandates
imposed on telephone DSL. “The commission is in a far better position to
address these questions than we are,” Thomas wrote.

The Bell companies are hoping the court's ruling will finally give the
FCC enough legal certainty to end DSL access obligations. “The commission can
now craft rules for all broadband providers that will allow them to invest in
and compete against one another in a way that benefits consumers,” says Jim
Olson, general counsel for the U.S. Telecom Association.

FCC Chairman Kevin Martin has insisted that the commission has dragged
its feet in providing level competition between cable and telephone broadband.
He said, “This decision provides much-needed regulatory clarity and a
framework for broadband.”