So the major news yesterday was that Grokster lost.

This puts the industry into a bit of a quandary.

The Justices said that Morpheous and Grokster crossed the line as they were (effectively) promoting their networks as ways to pirate software.

Good news is that the Justices didn’t negate the Betamax defense (referring to the 1984 decision in which the movie industry tried to stop sales of home video recorders as they were potential vehicles for copyright infringement).

However, while Betamax might still be a valid defense, this is still chilling for technology. Would a brilliant inventor such as Bram Cohen of Bittorrent have started his project in the first place? Would VCs put money into a company in the p2p space, because of the specter of litigation might tie up the company’s resources for the future?

Dow Jones Venture Wire this morning had this to say:

Timberline Venture Partners, which has invested a rather risky $10 million in Streamcast, believes it’s too early to tell the fate of companies like Streamcast. “We have to wait and see,” said William Killman, general partner with Timberline Venture Partners. “I wouldn’t jump to a conclusion. To me, it doesn’t seem to clarify much of anything. A new more confusing inducement test has been added.” Still, experts said the decision could affect product development at technology companies, and seriously affect how the companies market their technology.

That last sentence pretty much sums up the issue.

I can’t blame the Justices. These p2p companies DID promote their networks as ways to pirate music, and that was definitely wrong. I wish the industry had just gone after that fact, rather than effectively indict the whole p2p space.

However, p2p is a very powerful technology, that has the reality of completely overhauling the dynamics of sharing data on the net. Remember that many of the great technologies we have today come from some shady past. Heck, the popular internet of today was practically built on porn, as was the VHS industry.

The idiocy is that back in ’84, the movie companies were suing Sony because a VCR could be used to record. Then they proceeded to go into a sales hyperdrive simply because of the VCR. Who actually used the VCRs to record? Plenty of people, but not enough to offset the huge boom in VCR sales.

They are, simply, idiots. I grew up in Hollywood. The entertainment industry is full of people who have spent too much time mingling with beautiful people and networking at Spago to actually realize the digital revolution that hit them.

(Ok, ok, I know there’s lots of smart, technology hip people in the entertainment business, but I’m trying to make a point here, people.)

Borland, where I worked in the 80s, started a revolution by blowing out copyright protection, and charging a fair deal for their software. Until Borland, there was copy protection and you couldn’t buy a copy of Pascal for less than $500. Borland changed all that. They opened up new markets — whole new publics that could never have afforded the technology before.

Look what’s happened to the DVD market. My wife and I just buy DVDs rather than rent them. Why bother renting anymore? For $20 you can get the DVD and it becomes part of your library. It’s a great value.

So the luddites in the entertainment industry, so intent on protecting their shrinking domain, have actually won something. Good for them. They can all go celebrate at Spago.

Alex Eckelberry