Hollywood Won't Grok Grokster

And so it ends. Just four months after the U.S. Supreme Court determined that file-sharing networks could be held liable for 16-year-olds' illegal file-swapping, Grokster has decided to call it quits.

In a settlement announced yesterday, Grokster agreed to shut down its peer-to-peer network, which allowed users to download and share music and videos illegally. Its owners will also be forced to pay $50 million in damages to movie studios, record labels, and music publishers, according to News.com.

Grokster's not the only one. Just two weeks ago, a federal court said that website MP3DownloadCity.com can no longer suggest that its free downloads of music and video games are, well, free. The Federal Trade Commission has also gotten involved, and there could be refunds for consumers who feel they were duped into downloading hot digital goodies.

It's tempting to call this a victory for Hollywood. Perhaps it is. But I think it's a much bigger victory for Steve Jobs, CEO of Apple Computer (Nasdaq: AAPL  ) . Think about it. The news comes just days after a devastating report from Nielsen Soundscan, which says that digital audio sales reached 6.8 million last week. That's only 3% higher than the 6.6 million songs bought during the last week of May. The implication, reports trade magazine Red Herring, is that digital music sales are finally slowing.

Enter the Feds. With illegal downloading all but shut down by the Supremes, you're likely to get your next batch of music through iTunes or a competing legal store, unless you're old-school enough to still like CDs. Don't think that there isn't pent-up demand, either. Sure, Hollywood has been saying for years that illegal downloading was going the way of the dodo. But as late as June, TheRegister.com quoted Yankee Group analyst Michael Goodman as saying there were 5 billion illegal downloads during 2004, or 16 for each legal download.

How many of those downloads will go legal with this ruling? I've no idea, but certainly some will -- maybe even a majority. All Apple needs is a fraction of those downloads to keep a stranglehold on the digital music market and sow fertile ground for an iMovie video store. Oh don't look at me that way. You know it's coming. It's simply a question of the implications it'll have on revenue and margins.

Sounds like a pretty good reason for Steve to keep smiling.

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Fool contributor Tim Beyers still can't believe he passed up Apple in February of 2004. I mean, really, what good is calling it if you don't profit from the gain? Sigh. Tim didn't own shares in any of the companies mentioned in this story at the time of publication. You can find out what's in his portfolio by checking Tim's Fool profile. The Motley Fool has an ironclad disclosure policy.


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