Many reports are circulating about the RIAA’s use of instant-messaging features of Kazaa and Grokster to send warning messsages yesterday to users of those systems.

Conventional wisdom in blogland seems to be that this will have little if any impact on users’ behavior. I disagree. Consider this excerpt from Amy Harmon’s New York Times story:

“People feel invincible when they’re doing this in the privacy of their homes,” said Cary Sherman, president of the Recording Industry Association of America. “This is a way of letting them know that what they’re doing is illegal.”

It’s all too easy for those who understand the technology to dismiss Sherman’s assertion that users feel invincible. After all, file-sharing systems don’t actually do much to protect the anonymity of their users.

But based on my conversations with file-sharers, I think Sherman has a point. File-sharers do seem to believe that they won’t be identified, even though, when pressed to explain why they feel that way, they can’t come up with a good reason. It may just be the false feeling of privacy that comes from sitting alone (or with close friends or family) in a room with a computer that doesn’t look like a portal to the rest of the world.

I think Sherman is wrong, though, when he implies that illegal file-sharers don’t know that they are breaking the law. Many of them see it as a small, harmless infraction that doesn’t merit more than a slap on the wrist. They tend to get very uncomfortable at the mention of $150,000 statutory damages.

My guess is that the RIAA’s message came as a nasty shock to quite a few people, who will now reconsider their use of Kazaa or Grokster. [Update (4:00 PM): Jim Tyre points out that the RIAA’s message to file-sharers included a pointer to instructions for disabling or uninstalling the file-sharing program.]

Interestingly, though, while one hand of the RIAA is sending out these warning messages, the other hand seems to be trying to minimize their effect. An AP story by Alex Veiga quotes Cary Sherman as saying that “there’s no enforcement connected to this.”

This seems like an extraordinarily counterproductive thing for Sherman to say. One reason users feel invulnerable is that they don’t think the RIAA would ever actually sue an ordinary user. (Sure, the RIAA sued four college students, but they made a big point of accusing those students of singling themselves out by running “Napster-clones”.) By announcing that they can identify individual users but have chosen not to sue them, the RIAA will only bolster the impresssion that they will never sue ordinary users. The RIAA may try to counter this problem by saber-rattling, but that will only work for a short while. Eventually the RIAA will be forced either to accept widespread file-sharing as reality or to sue their own customers. I’m glad I’m not in their shoes.

Orin Kerr at the Volokh Conspiracy points to Terry Fisher’s data on where the $18 paid for a typical music CD goes: $7.00 to the retailer, $1.50 to the distributor, $9.31 for record company expenses (including performer and composer royalties of $2.85), and $0.19 for record company profit. Kerr comments:

I understand that the record companies have done some pretty bad stuff in the past, and of course they are the industry that every one loves to hate. If I understand Fisher’s figures correctly, however, record company profit makes up only about one percent of the price of a compact disc. If record companies decided to operate on a not-for-profit basis, the average price of CDs would drop from $18 to $17.81. This is certainly news to me. Am I missing something, or does downloading hurt local retailers the most– with artists, record companies, and manufacturers all taking their share of the hit as well?

The $7.00 cut for retailers is surprising. If a download replaces an in-store sale, there is a big hit for the retailer to absorb. In the long run, though, it looks like in-store sales of music will not recover from the impact of the Net, as illegal downloads will be replaced by legitimate on-line downloads (if they are replaced at all). Most of today’s in-store retailer revenue will be swept away by technology, one way or another.

Nineteen cents of record-company profit is surprisingly low, but on further reflection, I don’t think the profit numbers, by themselves, rebut the proposition that record companies are parasites. Even if the record companies made zero profit, their expenses and overhead would still account for a sizable share of a CD’s cost. According to Fisher’s data, record company overhead, A&R expenses [i.e. talent scouting and artist relations], and marketing add up to about $5 per CD. This is what pays for executives’ salaries, parties, big shiny buildings, and so on.

All of this expense is reasonable if the record companies add enough value to the process, for example by developing artists’ talent and packaging the product attractively for listeners. Whether the record companies add this much value is open to debate. The answer to that question will someday be clear to us in hindsight, but I’m not sure we know it now. In any case, record companies consume much more than nineteen cents per CD.

In all this quibbling about numbers, we mustn’t lose sight of the big picture, which Kerr sees clearly. If the revenue per song is zero, it doesn’t matter what share of that zero goes to the artist. No matter what future you hope for, if you want to enjoy recorded music it had better involve some kind of payment.

Judge Wilson’s opinion, dismissing the music industry suit against Grokster and Morpheus, contains few surprises beyond the result itself.

Judge Wilson ruled, essentially, that although some users of the defendants’ P2P software used the software to infringe copyrights, this infringing activity was beyond the control of the defendants. Unlike Napster, these defendants had no active, ongoing involvement in the infringing activity, and hence had no ability to stop it. Simply creating a product that was capable of infringing uses was not enough to support either contributory or vicarious liability. To hold otherwise, the judge said, would be contrary to established precedent and would make common products like photocopiers illegal.

For example, here is the judge’s reasoning in disposing of the vicarious infringement claim:

While the parties dispute what Defendants feasibly could do to alter their software, unlike in Napster, there is no admissible evidence before the Court indicating that Defendants have the ability to supervise and control the infringing conduct (all of which occurs after the product has passed to end users). The doctrine of vicarious infringement does not contemplate liability based upon the fact that a product could be made such that it is less susceptible to unlawful use, where no control over the user of the product exists.

The most important part of the opinion is at the end:

The Court is not blind to the possibility that Defendants may have intentionally structured their businesses to avoid secondary liability for copyright infringement, while benefitting financially from the illicit draw of their wares. While the Court need not decide whether steps could be taken to reduce the susceptibility of such software to unlawful use, assuming such steps could be taken, additional legislative guidance may be well-counseled.

To justify a judicial remedy, however, Plaintiffs invite this Court to expand existing copyright law beyond its well-drawn boundaries. As the Supreme Court has observed, courts must tread lightly in circumstances such as these:

The judiciary’s reluctance to expand the protections afforded by the copyright without explicit legislative guidance is a recurring theme. [Citations.] Sound policy, as well as history, supports our consistent deference to Congress when major technological innovations alter the market for copyrighted materials. Congress has the constitutional authority and the institutional ability to accomodate fully the raised permutations of competing interests that are inevitably implicated by such new technology.

In a case like this, in which Congress has not plainly marked our course, we must be circumspect in contruing the scope of rights created by a legislative enactment which never calculated such a calculus of interests.

Unless this decision is overturned quickly on appeal, the P2P policy battle will now move to Washington. Having lost in the Courts, the content industry will take the judge’s hint and lobby Congress to pass legislation changing the rules. My prediction is that we’ll see a bill circulated that creates an affirmative responsiblity to design products that make infringement as difficult as possible.

A Federal court has granted summary judgment in favor of Grokster et al., ruling that it is legal to distribute these peer-to-peer file sharing tools.

More later, after I have had a chance to read the ruling.