The Digital Media Losers of 2005

By Richard Menta 12/30/05

We have released last year's winners list. Now for the Digital Media Losers of 2005:

1. Sony BMG

Despite the rousing success of the Sony PSP this was not Sony's year. It was a year of payola scandals and shrinking television sales. The release of several interesting new MP3 portables barely made a dent in the iPod's dominance. The merger with BMG designed to increase total market share in record sales instead saw an erosion of market share from 28.46% to 25.61% - in a year when total record industry sales were down 7.1%. Much of this erosion can be attributed to the fact that Sony BMG had to pull its records from stores at the height of the holiday season. The reason was rooted in the angry reaction by consumers upon the discovery of a malicious code called a rootkit that Sony placed on dozens of new CDs as part of its copy protection architecture. The Sony rootkit debacle led to several state lawsuits, an admonishment from the Bush administration, and a loss of consumer trust. Sony's self-inflicted misfortunes damaged its once fashionable image in the eyes of consumers

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2. Grokster, eDonkey, and other established commercial P2P applications

In a unanimous decision, the Supreme Court ruled that P2P services are liable if they "actively encourage" and profit from copyright infringement. While the Court did not define exactly what constitutes active encouragement, it made it easier for the content industries to establish culpability. Needless to say, the commercial P2P entities were hardly innocents. Many, like Grokster, realized that even their most minor promotion efforts might now open them up to damage awards and in the words of eDonkey President Sam Yagan it was time to "throw in the towel". Both Grokster and eDonkey look to move into the Pay P2P arena, but no one knows if Pay P2P can succeed. Morpheus has vowed to fight on so we may get to see a more concrete standard established.

3. Sharman Networks/Kazaa

They lost big in Australian court. FastTrack still holds on as the second largest P2P network, but not for long as users continue to move on to other networks, most notably to the revitalized Gnutella.

4. Rio MP3 Players


5. The CD Format

CD sales are down to 1996 levels and the Sony rootkit scandal will only accelerate the exodus to digital formats. The industry thought copy-protected CDs would save it, but we predicted back in an October 2001 essay that it would do just the opposite. Our prediction is coming true.

6. OverPeer

The company, notorious for polluting P2P networks with phony files to frustrate file sharers, made a curiously quick exit from that business. In the wake of the Sony rootkit scandal rumors appeared that suggested Overpeer may have been putting more in those fake MP3 files than garbled sounds. There was no evidence that this was true. Nonetheless, file traders who were baited into downloading these fake music files are now even more concerned and distrustful.

7. I2Hub

Shut down this past November, the Internet2 P2P network was forced to close through intense pressure from the entertainment industry. I2Hub founder Wayne Chang simply did not have the resources to defend his network against the content industry, particularly since the RIAA and MPAA joined the Internet2 consortium this year as full corporate members.

8. The Record Industry

Earlier this year the Record Industry would have topped our winners list with its win in the MGM v Grokster case. As the months passed by it became apparent - no way!

Other than help to pressure some of the commercial P2P applications into closure the ruling has done nothing to abate file sharing, which increased for the umpteenth time this past November. As pundits began to contemplate the potential fallout of the ruling it became apparent that the supposed win in that case can have just the opposite effect of what the content industries expect. It can be used to PROTECT new P2P schemes.

How? According to the Supreme Court services are only liable if they commit "active encouragement" an act that the likes of eDonkey, Grokster and others probably committed in various measures. Here's where it gets interesting. Theoretically, if the creators of any new P2P application never make any statements or take any actions that promote anything other than a legal use of their product, they do not violate this standard. All they have to do is be quiet, knowing - wink wink - that file-sharers will use their product in the same manner they use any other file sharing application. This is critical, because historically whenever a file sharing service closes, users simply migrate to new P2P applications. As long as these new services stay well within the bounds of the Active Encouragment test - bounds that have yet to be defined by the courts - they are not liable for infringing activities.

Other reasons that place the Record Industry on the losers list include:

Other MP3 stories:
The Digital Media Winners of 2005


The 30GB iPod Video is available on Amazon


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