Picture this: starving pop-artists barely scraping by in a world that has cruelly deprived them of their gaudy chains, private Leer jets, limousine caravans and designer outfits. The heartless Internet and its multitude of music sharing programs have put stars like Metallica and Dr. Dre back on the streets with Styrofoam cups in hand and open guitar cases on the sidewalk.
While this picture may not be a reality, this is what the Record Industry Association of America (RIAA) would like the American public to believe. First filing lawsuits against Internet companies last December, RIAA has struggled to take down music-sharing programs with copyright violations, alleging that both recording artists and record labels are not being given the royalties they deserve.
These lawsuits seem to be having an effect not only on the music industry, but also on venture capital firms and their propensity to invest in new dot-com start-ups. With file-swapping programs getting axed in the legal arena, firms that might have thrown money at exciting online opportunities are now straying away from prospects that might be a little sketchy when it comes to copyright law.
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Napster, the most renowned of music-swapping companies, recently was granted a stay as it works its way through the appeals process, having lost a case in early August before a federal court. But with such a resounding defeat in its first legal battle, most believe Napster will be forced to remove the illicit material from its servers. If this happens, Napster probably will not be the only suffering party.
Hummer Winblad, the venture capital firm that fronted the initial funds for the Napster program and its distribution, is also in some serious legal trouble. A certain provision, known in law books as "vicarious infringement," places Hummer Winblad under the same legal penalty as Napster itself, even though the investment firm didn't violate any copyright laws.
"Vicarious infringement involves those who actively collaborated with the party in question," said law professor Robert O'Neil. Because the seriousness of the law often is measured by the extent to which collaborators will financially benefit from copyright infringement, venture capital firms that sponsor illicit programs can be in some pretty hot water.
Yet, even now, investors are becoming increasingly aware of the legalities of their investments, and many are pulling out of shaky copyright ventures. One such venture is Scour, an online company that shares not only mp3s but also electronic pictures and video clips.
The entertainment industry recently sued Scour, which had to lay off 52 of its 70 employees last week. The company's investors were scared off by the threat of legal action, and the projected lack of funds forced the company to downsize.
In one sense, venture capital firms have every right to be skeptical when it comes to online investment opportunities. The risk vicarious infringement imposes is indeed great, and if found guilty, many firms could not only lose money but also their ability to be competitive in the financial arena.
However, if it becomes harder and harder for entrepreneurs to start up new ideas because investors are scared of the legalities, there could be some dramatic consequences when it comes to investment and innovation. Fewer people will be willing to throw money at exciting ideas, and in the long run, overall investment in the economy may be deterred.
Sherjeel Khan, a Banc of America Securities analyst and a 2000 Commerce School graduate, said he believes some of these consequences already have been taking effect, not necessarily because investors are concerned with legal issues, but mostly because profits are becoming hard to forecast.
"Investors are dumping tech stocks left and right, and the market has already been through a correction," Khan said. Because of legal threats and questions of profitability, investors are pulling out of dot-com start-ups, and this type of market poses obstacles to would-be businessmen.
No longer will it be the starving rap artist on the street, desperately trying to make a buck; now it seems we will see the disheveled, broken entrepreneur, trying to get funds for his great idea as he sleeps in a ditch on the side of the road.
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