Speech by John Malcolm.
Re: online copyright piracy.
Date: August 20, 2002.
Event: Progress and Freedom Foundation's Aspen Summit 2002.

Editor's Notes:
  • John Malcolm kindly facilitated the delivery of an MS Word version of this speech to Tech Law Journal.
  • TLJ converted the MS Word document into HTML.
  • Malcolm is the Deputy Assistant Attorney General in charge of the Computer Crimes and Intellectual Property Section (CCIPS).
  • He spoke on a panel titled "The Market for Online Content: What Government Can Do".
  • This is a copy his speech as prepared for delivery, not as read.

Importance of IP to American Economy

I would like to talk today about the growing problem of copyright piracy in the on-line environment, and of the important role that law enforcement can play in protecting intellectual property rights. This, in turn, helps promote important sectors of our economy, and will lead to the rapid dissemination of ideas and even greater innovation by researchers and entrepreneurs throughout the world.

As we have already heard, the rapid development of e-commerce is truly astonishing, and the future, particularly as broadband expands and a new generation of Internet-based services is introduced, looks even brighter.

Evidence of the huge worldwide demand for Online content is everywhere. All you have to do is consider Napster. Founded by a 19-year-old in November, 1999, at its peak, in early 2001, Napster had over 70 million participants swapping nearly three billion files per month. The demise of Napster has done nothing to dampen the demand for on-line content, and Napster has been replaced by even more sophisticated peer-to-peer services such as Morpheus, Kazaa, and Grokster.

Although, as I shall discuss, this demand creates problems, because there are lots of sophisticated pirates who are prepared to fulfill that demand, it also creates opportunities. It will not come as a surprise to any of you to learn that IP industries now represent the single largest sector of the American economy – approximately 5% of the Gross Domestic Product – and employ well over 5 million people, who, on average, earn twice what other private sector employees earn. Copyright industries alone are creating jobs at three times the rate of the rest of the U.S. economy.

Much of this growth is due to overseas demand for the products produced by IP industries. The Business Software Alliance estimates that the United States software industry supplies 70% of the world's demand for legitimate software products. In 2000, the software industry had a positive trade balance of $22.7 billion, at the same time the hardware, consumer electronics, communications and electronic component sectors were showing negative trade balances.

The Motion Picture Association recently reported that the American movie industry has a surplus trade balance with every single nation in the world. Clearly, when it comes to an engine that is driving our economy, one need look no further than companies and individuals associated with the IP industry.

Piracy Problems: Scope of the Problem

It should come as a surprise to no one that intellectual property piracy is increasing in the on-line environment. The deleterious effects of digital piracy are already being felt by our industries. Last year, U.S. copyright industries reported losses of nearly $22 billion due to overseas piracy. After 10 years of growth, global music sales declined in 2001 by 5%, and are down even more this year, largely due to software piracy.

Viant, a research company that tracks Internet piracy, estimates that between 400,000 and 600,000 films are illegally copied daily. When “Star Wars” and “Spiderman” made their black-market Web debut last May, over 9 million file-swappers went on-line to get a copy, and 4 million actually succeeded, a staggering total when you stop to consider how cumbersome it still is to download a pirated movie. While it now may take several hours to download a movie, in the not-too-distant future, with the development of broadband, the download time may be reduced to a matter of minutes. This is an alarming prospect, which, I am sure, causes many movie executives to have sleepless nights.

Although clearly the greatest communications medium of our time, the Internet is also the world's largest copy machine. But unlike traditional copy machines, the Internet, coupled with digital technology, makes near-perfect copies every time and allows a software pirate to send as many copies as he or she wishes by simply pressing a few buttons.

Moreover, unlike in the past, when law enforcement would shut down the initial distribution source and in effect ended the piracy operation, in the digital age, cutting off the initial source does not end the threat, as each and every copy distributed prior to law enforcement intervention continues to exist on the Internet and can be reproduced and distributed indefinitely by others.

As you can imagine, this poses significant challenges to law enforcement. Moreover, many, if not most, of the major software pirates are highly-skilled, covering their tracks, operating in relative anonymity, moving from location to location to conduct their activities, and many times hijacking the computers of innocent users to perpetrate their crimes.

Piracy Problems: Public Education

Part of the problem is the public perception’s about this type of activity. There are a lot of people out there who simply don’t believe that software piracy is, or should be, a crime. In a recent survey of 1,000 U.S. Internet users conducted by BSA, nearly 50% indicated that they have downloaded commercial software from the Internet. A substantial majority (81%) of those who had downloaded commercial software from the Internet indicated that they did not pay for each copy, and an amazing 57% indicated that they “seldom or never” pay for the applications. However, only 12% of these respondents believed they had committed “software piracy.”

Most parents who would walk into their child’s room to discover that the child had walked out of Tower Records with 100 CDs without paying for them would be horrified.  Moreover, I don’t think that those parents would be any less horrified if the child’s response was not to worry because several kids in the store were doing it and that the odds of getting caught are slim. These same parents, however, think nothing about having their kids spend hours on-line downloading copyrighted material without paying so much as a dime to the artists and producers who created the music in the first place and who are entitled to be paid for their efforts.

This has got to change before any serious headway can be made towards stopping this problem. The message needs to be sent out that stealing is stealing, whether it is done by sleight of hand or with a few clicks of a computer mouse.

Alternative Remedies

Understandably, Congress and the IP industry itself has leapt into this breach. There are several proposals currently being debated by Congress to address this problem. They range from a proposal offered by Senator Fritz Hollings which would prohibit firms from making or selling digital media devices that did not incorporate so-called “standard security technologies” to a proposal offered recently by Congressman Howard Berman which would permit copyright holders to disrupt file-sharing systems when they suspect that copyrighted material is being distributed without authorization. Not surprisingly, each of these measures has their proponents and detractors.

The IP industry has also undertaken various self-help remedies. For instance, in addition to its successful lawsuit against Napster, the Recording Industry Association of America is currently contemplating filing civil lawsuits against individuals who allow mass copying of copyrighted music from their computers. Both the recording and movie industries have experimented with various technological measures in their products designed to protect copyrighted material and are considering other aggressive measures such as “spoofing” to make illegal on-line copying less attractive to consumers of pirated material.

Advantages of Federal Law Enforcement

While these ideas are all worthy of debate and consideration, none of them can completely replace the role of effective law enforcement when it comes to protecting intellectual property rights. Unfortunately, most anti-copying technological measures are not user-friendly to most consumers and are eventually defeated by skilled and patient techno-pirates.

Civil remedies are simply inadequate against those who are judgment-proof or who are adept at hiding their money or who may be engaging in massive IP theft for non-economic reasons or who may simply move their illegal operations to another venue and set up shop again. Moreover, the tools available to civil litigators are usually not as effective as the tools available to law enforcement authorities. Further, federal law enforcement authorities have the ability to conduct multi-jurisdictional and international investigations, which is of particular importance since many of the criminal organizations that engage in massive infringement operate overseas and since the Internet knows no geographic boundaries.

As an illustration of the type of federal law enforcement activity that I am describing, I would like to discuss one recent successful and ongoing investigation called Operation Buccaneer. On December 11th, over 70 search warrants were executed simultaneously in the United States, Australia, Norway, Sweden, the United Kingdom and Finland. Operation Buccaneer directly affected multiple top-tier international Internet software piracy groups, including one particularly notorious group known as DrinkOrDie.

These groups engaged in the illegal “cracking” and distribution of tens of thousands of copyrighted software, games, music titles, and movies over the Internet, and specialized in being the first to release high-end software applications and utilities, often before their official public release dates. These organizations were highly-structured, and their members rarely met in person, often knowing each other only through screen names. The members communicated only in closed, invite-only IRC channels, and the group’s Internet file transfer and storage sites were password-protected and secured by a combination of user ID and IP address authentication mechanisms.

To date, 17 people have been convicted and have received sentences ranging from 31 to 46 months. Moreover, as I previously stated, this investigation is ongoing and additional charges are expected. The organizations targeted in Operation Buccaneer caused millions of dollars in losses to copyright holders in the United States.

Although Operation Buccaneer has been highly successful, the Department of Justice is fully aware that there are other warez groups, and other less formal piracy networks, that are currently engaging in this type of criminal activity, with new groups forming each day. Clearly there is a lot more work to be done.

Need for Holistic Approach

Intellectual property protection can be a powerful instrument for economic development, export growth, and the development and diffusion of new ideas, products, and technologies. In addition to being a big problem, this is a global problem, and will require global cooperation. Domestic law enforcement will not be able to provide all the answers.

There is going to have to be extensive cooperation by other countries through, among other things, compliance with the World Trade Organization’s TRIPS (Trade-Related Aspects of Intellectual Property Rights) agreements. Pressure is going to have to be brought to bear through trade negotiations by the U.S. Trade Representative, and through the annual Special 301 IP Compliance Process conducted by the U.S. Patent & Trademark Office. Private industry, which, after all, is producing the goods and services that the rest of the world wants, can also exert pressure on international business partners to protect intellectual property rights.

As everybody in this room knows, the Internet is a still-largely-untapped resource in terms of reaching new and ever expanding worldwide demographic markets. The IP community is going to have to be creative when it comes to developing viable on-line business models that will deal with piracy and will give them a competitive advantage.

Of course, this may be easier said than done. For many IP-based companies, the competition has priced its products at the low, low cost of “free.” It is hard to compete with “free” regardless of how good your product might be.

High quality content cannot be guaranteed unless and until industry, society as a whole, and the government find ways to protect those products against piracy. To quote a recent statement by Jack Valenti: “No legitimate business can succeed in an environment of unbridled lawlessness. ... [P]irated content drives out legitimate content, particularly where digital technology renders the two substantial equivalents.” He is, of course, absolutely correct. At some point, if the Internet becomes little more than a lawless community where traditional notions of property rights are not respected, the risk is that the material will simply not be made available.

Protecting the intellectual property rights of domestic inventors, writers, researchers and entrepreneurs is going to require a creative and holistic approach by both the private sector and the public sector. Effective law enforcement is obviously going to be a critical part of that equation. The Department of Justice stands ready to do its part.