Progress on Point - SSRN papers

Progress on Point Release 9.14 April 2002

Periodic Commentaries on the Policy Debate

The Debate Over Digital Online Content: Understanding the Issues

by

William F. Adkinson, Jr. and Jeffrey A. Eisenach*

Electronic copy available at: http://ssrn.com/abstract=1260377

CONTENTS I. Introduction…………………………………………………………………………………..1 II. Copyright Law: Why We Have It and What It Says.………………………….....…….3 Why We Have Copyright Laws……………………………………………………...3 What the Copyright Laws Say……………………………………………………….6 III. Digital Technologies, Broadband, and the Emerging Market for Online Content………………………………………………………………….…………..8 The Digital Revolution and Online Content……………………………………….9 The Broadband Revolution and the “Virtuous Circle”…………………...……10 IV. The Digital Challenge to Copyright…………………………..……………………….14 Contributory Infringement, Napster and the ISPs……………………………...14 Napster………………………………………………………………………....15 ISPs and the DMCA…………………………………………………………..19 The Promise and the Perils of Technological Protection……………………..23 Technological Controls and the Importance of Standards…………...24 Hackers, Hacking and the Law……………………..……………………...25 Digital Rights Management and “Fair Use”…….……………………….28 The ABC’s of Licensing Digital Content…………………………………………32 Licenses for Downloading………………………………………………….33 Licenses for Webcasting……………………………………………………34 V. Dynamic Markets, Changing Policies…………………………………………………36 The State of the Marketplace……………………………………………………….37 The Policy Options…………………………………………………………………..40 The Music Online Competition Act………………………………………..40 The Consumer Broadband and Digital Television Promotion Act…………………………………………………………….….41 Where To From Here?……………………………………………………………….44

*

*

Jeffrey A. Eisenach, Ph.D. is President and William F. Adkinson, Jr., is Senior Policy Counsel at The Progress & Freedom Foundation. This version of the paper reflects slight revisions from the original.


I. Introduction The information technology (IT) sector of the U.S. economy has had a rough couple of years. Since peaking in March 2000, the NASDAQ stock index has lost more than 60 percent of its value, and IT companies have laid off more employees than any other major sector of the U.S. economy. What will it take for the IT sector to recover from its current woes and re-emerge as a major force for prosperity and growth? The answer lies in a new generation of Internet-based services enabled by broadband communications. As TechNet, an association of high-technology companies like Cisco, Intel and Microsoft, put it in a recent policy paper: The widespread adoption of true broadband will increase the efficiency and productivity of Americans at work and at home – with a potential $500 billion impact on the United States economy. The benefits to quality of life are immeasurable.1 Broadband-enabled products and services now emerging in the marketplace include business-focused applications like teleconferencing, consumer products like interactive video games, and services likely to affect everyone such as Voice-over-IP telephony. At least in the near-term, however, the single most powerful application – broadband’s Killer-App, if you like – appears to be online music and (close behind) video. The power of online music distribution is symbolized by Napster, which grew from a 19-year-old’s clever idea to an international phenomenon in less than two years. At its peak, Napster boasted over 70 million users who used it to swap nearly three billion music files each month, and while the precise figure is difficult to know, it is commonly said that Napster use by itself accounted for five percent or more of all Internet traffic. There was only one problem with Napster: It, and its users, violated U.S. and international copyright law every time a copyrighted file was “swapped.” Call it what you will – “piracy,” “theft” or (more innocuously) “file sharing” – what Napster was doing broke the law, and in June 2001 it had to shut down to comply with a District Court injunction.

1

TechNet, “A National Imperative: Universal Availability of Broadband by 2010,” (2001): 4 (available at www.technet.org/news/newsreleases/2002-01-15.64.pdf) (hereinafter “TechNet Report’); See also Randolph J. May, “The Tech Community Fashions a Deregulatory Broadband Policy,” Progress on Point 9.3 (February 2002) (Washington, D.C.: The Progress & Freedom Foundation).


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Progress on Point 9.14

Napster’s (possibly temporary) demise was clearly only the beginning of the digital music saga. Here are just a few of the major developments in the ten months since Napster shut down: Several second-generation “file swapping” services have cropped up, and the volume of material being swapped has exceeded the level at Napster’s peak; Napster has received a major infusion of financing from Bertelsmann Music Group and begun “re-launching” as a licensed service; several new online music services have been launched that offer licensed content, some backed by the record companies and some independent of them; content owners have filed new lawsuits against the second-generation swapping services; and, several members of Congress have introduced legislation aimed at promoting distribution of online music. What all these developments tell us is that there is a tremendous demand for online music and a dynamic market (and political) response to that demand. From college campuses to the offices of the Congressional leadership, consumers want access to music over the Internet, and one way or another they will have it. Indeed, the question is not whether such access will be provided, but how, by whom, under what institutional arrangements and to what economic effect. This paper is not designed so much to answer these questions as to illuminate them. As the debate heats up over the proper legal and institutional framework for online music (and, by implication, other content such as video), our goal here is to provide background information that will be useful to everyone involved in thinking about, talking about, and deciding what steps, if any, Congress and other policymakers ought to take. We begin with a very brief treatment of the basic purposes and principles of copyright law. Next we discuss the interrelationships between digital technologies and broadband communications, on the one hand, and the market for music and similar content, on the other.2 Third, we describe some particularly relevant aspects of the current legal framework, including the Napster case and the Digital Millennium Copyright Act. Finally, we review the state of the marketplace and examine some of the policy proposals being advanced. While our goal is not to arrive at any final conclusions or policy recommendations, one inescapable implication of our review is that the market for digital online content is a dynamic one in a very early stage of development. In such an environment, policymakers need to exercise caution, since policy choices based on “the way things are” are likely to be obsolete by the time they are implemented. Secondly, the development of an efficient market depends crucially on the existence of clear, enforceable property rights. Recent developments suggest the 2

While much of the discussion here applies to video and other online content, we focus primarily on online music, which one report colorfully compared to the proverbial “canary in the coal mine” for intellectual property in the online environment. See, Computer Science and Telecommunications Board National Research Council. “Music: Intellectual Property’s Canary in the Digital Coal Mine.” The Digital Dilemma: Intellectual Property in the Information Age (Washington, D.C.: National Academy Press, 2000), 76. (hereinafter “The Digital Dilemma”).


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current framework of copyright laws is falling short of this goal. At one level, it appears the impact of digital technology thus far has been to disrupt the balance between “piracy“ and “enforcement,” making it more difficult for owners of content to be compensated for their efforts. At a deeper level, the lack of a robust framework of property rights disrupts and distorts the marketplace and thus prevents all participants, including consumers, creators, producers and distributors, from enjoying the full benefits of these new technologies. Third, we believe a robust and growing market for online music and other rich digital content is crucial not only to the producers and consumers of such services, but to the restoration of growth in the IT sector overall. Creating the conditions for a market that works should therefore rank near the top of the list of priorities for those concerned about the future health of the digital economy. II. Copyright Law: Why We Have It and What It Says Article One, Section Eight of the Constitution empowers Congress to "promote the Progress of Science and useful Arts, by securing for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries."3 The first U.S. copyright law implementing this section was passed in 1790, and broad revisions have been passed on four occasions since.4 New technologies have often challenged copyright principles, and technological progress has been a driving force behind many of the major revisions. But the overall framework has proven remarkably robust. As intellectual property scholar Robert Merges puts it, while “each new technology has produced cries of alarm over our ‘outdated’ copyright system …. the copyright system has – so far, at least – been up to the job at every turn.”5 Thus, for example, the most recent major revision of the copyright laws, the Copyright Act of 1976, was a response to a “fundamental change in the economics of recorded music [attributable to the cassette tape recorder that] led to a swift, full-out campaign to protect sound recordings.”6 Important changes in the law resulted, but the underlying principles survived. Why We Have Copyright Laws The purpose of the copyright laws is to provide authors with adequate incentives to create works. Such incentives are needed because intellectual property has strong public good aspects: Once produced, it can be shared among an unlimited number of consumers without diminishing the original stock, and in ways that are difficult to detect or (absent legal protections) prevent. Thomas Jefferson put this point famously:

3

See U.S. Const., Art. I, § 8, cl. 8. Congress enacted major revisions to the Copyright Act in 1831, 1870, 1909 and 1976. 5 Robert P. Merges, “One Hundred Years of Solicitude: Intellectual Property Law, 1900-2000,” California Law Review 88 (2000): 2187, 2191 (hereinafter “One Hundred Years of Solicitude”). 6 One Hundred Years of Solicitude, at 2197. 4

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He who receives an idea from me, receives instruction himself without lessening mine; as he who lights his taper at mine, receives light without darkening me.7 Such goods are subject to what economists call “free riding,” which is to say that it is relatively easy for people to consume them without paying for them or, again using the economists’ lingo, that their consumption is “non-excludable.” Economic theory tells us that such goods will, in a pure free market, tend to be underproduced, because those who produce them will generally not be able to reap full compensation for their efforts. The copyright laws address this problem by giving creators of intellectual property a legal right to charge for its use and thus to capture some of the value of their creations. The exclusive rights granted by copyright are sometimes said to confer upon the copyright owner a “monopoly,”8 but in an economic sense it is far from clear that this is the case. Indeed, copyright scholar Edmund Kitch has argued that the “erroneous assumption that [intellectual property rights] confer an economic monopoly on their owner” is an “elementary but oft-repeated error” that “has been the cause of much unnecessary complication and distraction.”9 The confusion arises from the intermingling of two distinct meanings of the word monopoly – one referring only to the existence of exclusive rights, and the other to existence of market power. For economists – and modern antitrust law – monopoly is inextricably linked to the latter concept. Monopolies exist where there is market power, which is defined by the extent of substitutability of similar goods and the ease or difficulty of market entry.10 In the context of intellectual property, most copyrighted works have close substitutes11 (think of ‘NSYNC versus The Backstreet Boys; or Greta van Susteren vs. Paula Zahn), and there are few if any barriers to entry by new producers of content. As a result, many economists believe that copyrights generally do not convey economic monopolies.12 While copyrights do not generally confer an economic monopoly, the exclusive rights they do embody an important economic tradeoff. Generally, economic theory tells 7

Albert Ellery Bergh, Ed. 1905. Writings of Thomas Jefferson. Vol. VI, 180-181. Washington: The Thomas Jefferson Memorial Association of the United States (available at http://www.constitution.org/tj/jeff06.txt). 8 See, Sony Corp. of America v. Universal City Studios, 464 U.S. 417, 429 (1984) (referring to "the monopoly privileges that Congress may authorize”). (hereinafter “Sony”). 9 Edmund W. Kitch, “Elementary and Persistent Errors in the Economic Analysis of Intellectual Property,” Vanderbilt Law Review 53 (2000): 1727, 1729. 10 See, e.g., U.S. Department of Justice and Federal Trade Commission. Horizontal Merger Guidelines: Section 1. Washington, D.C.: GPO, April 8, 1997. (available at www.usdoj.gov/atr/public/guidelines/horiz_book/hmg1.html). 11 Mark A. Lemley, “The Economics of Improvement in Intellectual Property Law,” Texas Law Review 88 (1997): 989, 996 n.26 (most intellectual property rights “merely prevent others from competing to sell copies of a particular product, not from selling different products that compete with the original"). 12 William M. Landes and Richard A. Posner, “An Economic Analysis of Copyright Law,” Journal of Legal Studies 23 (1989): 325, 361 (“[c]opyrights … rarely confer monopoly power”); Kitch at 1734 (“almost all copyrights … are not monopolies”).


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us that prices should be set equal to marginal cost, and this is the result competitive markets generally produce. In the case of public goods like music, however, the marginal cost of producing an additional copy is below average cost. (In the case of digital online music, it is for practical purposes zero.) Unless prices are set higher than marginal cost, producers will always lose money, and thus there will be no incentive for the goods to be produced at all – an economically inefficient outcome. The key economic question is thus one of providing optimal incentives for producing and distributing copyrighted works. To do so, economists argue that copyright should “provide rewards that generate appropriate levels of investment in creative activity.”13 Further, the “central problem in copyright law” is “striking a correct balance” in the tradeoff between “the costs of limiting access to a work against the benefits of providing incentives to create the work in the first place.”14 The courts have strongly endorsed this view of copyright law. As the Supreme Court put it, “the Framers intended copyright itself to be the engine of free expression. By establishing a marketable right to the use of one's expression, copyright supplies the economic incentive to create and disseminate ideas.”15 Even staunch critics of copyright owners and copyright law such as Larry Lessig and Jessica Litman concede that “[b]ecause of the incentives that copyright law provides, works get created that otherwise would not have been produced.”16 In addition, and crucially for our purposes, copyright laws are designed to provide for effective and efficient enforcement of the property rights they create. If enforcement is too costly or ineffective, the rewards copyright laws are intended to provide for creators may be greatly reduced or even eliminated.

13

Richard J. Gilbert and Michael L. Katz, “Perspectives On Intellectual Property: When Good Value Chains Go Bad: The Economics of Indirect Liability for Copyright Infringement,” Hastings Law Journal 52 (2001): 961, 963. 14 Landes and Posner, at 326. 15 Harper & Row, Publishers, Inc. v. Nation Enterprises, 471 U.S. 539, 558 (1985). See also at 546 ("'monopoly created by copyright thus rewards the individual author in order to benefit the public'") [quoting Sony Corp. of America v. Universal City Studios, Inc., 464 U.S. 417, 477 (1984) (dissenting opinion)]. 16 Lawrence Lessig, The Future of Ideas (New York: Random House, 2001). See also, Jessica Litman, Digital Copyright (Amherst, New York: Prometheus Books, 2001), 80 ("more and stronger and longer copyright protection will always, at the margin, cause more authors to create more works.") However, the case for legal protection of works is not without its critics. For example, in 1970 then-Professor Stephen Breyer argued that the case for legal protection in book publishing was suspect, arguing that publishers could adequately appropriate returns though various business models designed to take advantage of their ability to get to market prior to pirates. Stephen Breyer, “The Uneasy Case for Copyright: A Study in Books, Photocopies, and Computer Programs,” Harvard Law Review 84 (1970): 281. Some today make similar arguments about the opportunities the Internet affords the content industries. One seminal example: John Perry Barlow, “The Economy of Ideas,” Wired 2.03 (March 1994) (available at www.wired.com/wired/archive/2.03/economy.ideas.html).

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What the Copyright Laws Say As in most areas of public policy, it is a lot easier to enumerate broad principles than it is to write and implement the laws that put those principles into action. And, indeed, copyright is among the most complex areas of American jurisprudence. An understanding of some of the key elements is important, however, for those who want to understand the debate over digital online content. The Copyright Act establishes basic rights designed to protect all “original works of authorship fixed in any tangible medium,” specifically including literary, musical and dramatic works, as well as motion pictures and sound recordings.17 A work must meet three requirements to be covered. First, it must be original to the author. This does not require that it be novel or inventive, but only that it is created independently of other works.18 Second, and relatedly, a work must be creative, but “even a slight amount will suffice.”19 Finally it must be “fixed” – i.e. “embodied in a copy or phonorecord … [that] permit[s] it to be perceived, reproduced or otherwise communicated.”20 While copyright coverage is thus very broad, the protection it affords is limited to the “original expression” of the author, and does not extend to the ideas conveyed.21 This limitation is critical, since it enables subsequent authors to use ideas, facts, public domain materials and other matter not part of the “authors’ original contribution.”22 It thereby ensures that copyright serves its constitutional mandate of “advanc[ing] the progress of science and art" and does not interfere with the free flow of ideas protected by the First Amendment.23 The copyright laws expressly grant copyright holders a series of specific “exclusive rights,” which may not be exercised by anyone else without permission.24 These include the right to “reproduce” (i.e. make copies of) the work, to distribute copies of the work, to “perform [certain] copyrighted works publicly” to “prepare derivative works” (i.e. works based on the copyrighted work), and to “display” certain works “publicly.”25 The protections apply for a limited time, after which works lapse into the public domain. Initially the term was 14 years, but it has been extended over a dozen times, and now can exceed 100 years.26 17

18

17 U.S.C. § 102(a).

See Robert P. Merges, Peter S. Menell, and Mark A. Lemley, Intellectual Property in the New Technological Age (New York: Panel Publishers, 2000), 354-55. 19 Feist Publication, Inc. v. Rural Telephone Service Co., 499 U.S. 340, 345 (1991). 20 17 U.S.C. § 101. 21 Harper & Row, Publishers, Inc. v. Nation Enterprises, 471 U.S. 539, 548 (1985). 22 Id. at 558. 23 Feist, supra note 36, at 349-50. 24 17 U.S.C. § 106. 25 17 U.S.C. § 106 (emphasis added). 26 See Ruth Okediji, “Givers, Takers, And Other Kinds Of Users: A Fair Use Doctrine For Cyberspace,” Florida Law Review 53 (2001): 107, 158. As a result of the Sonny Bono Copyright Term Extension Act of 1998, Pub. L. No. 105-298, 112 Stat. 2827, § 102(b) (codified as 17 U.S.C. § 304(a) (1998)), the term for an individual is now the life of the author plus seventy years, and for a corporation, the earlier of 95 years


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The exercise of one of the exclusive rights of a copyright holder without permission is referred to as infringement. Examples include unauthorized duplication and unauthorized public performance of a work. Unless the infringement is excused under another doctrine (e.g. fair use, discussed below), the infringer is liable to the copyright holder for damages, which may be based on actual loss or amounts provided by statute.27 The copyright holder is also entitled to seek injunctive relief to stop infringing activities. There is also a criminal component to the copyright laws: As the notice at the beginning of every DVD movie reminds us – the FBI may investigate and the Department of Justice may prosecute copyright infringement.28 In certain circumstances, liability may be imposed on an entity that has not actually engaged in infringement, but whose relationship to the infringing activity justifies liability. The principal basis for such liability is contributory infringement, which imposes liability when the defendant ”induces, causes or materially contributes to the infringing conduct of another” and knew (or should have known) of the infringing activity.29 "The contributory infringement doctrine is grounded on the recognition that adequate protection of a monopoly may require the courts to look beyond actual duplication of a device or publication to the products or activities that make such duplication possible."30 Practical and efficient protection of copyright holders’ interests will at times require action against those who make the infringement possible, especially when it would be difficult or expensive to pursue the infringers.31 The fair use doctrine also plays an important role in the debate concerning protection of online content, and is the subject of great controversy. Initially the product of judicial development, the Copyright Act now expressly provides that it “is not an infringement of copyright” to make fair use of a work “for purposes such as criticism, comment, news reporting, teaching …, scholarship, or research ….”32 The statute identifies four factors as among those to be used in determining whether a use is fair.33 after publication or 120 years after creation). The Supreme Court recently granted certioriari in a case challenging the extension on Constitutional grounds. (See Eldred v. Ashcroft, 122 S. Ct. 1062 (February 19, 2002); amended 122 S. Ct. 1170 (February 25, 2002). 27 17 U.S.C. § 504. 28 17 U.S.C. § 506. 29 Religious Tech. Ctr. Servs. v. Netcom Online Communication, 907 F. Supp 1361, 1373 (N.D. Cal. 1995) (quoting Gershwin Publ’g Corp. v. Columbia Artists Mgmt., 443 F.2d 1159, 1162 (2d Cir. 1971). Contributory infringement is closely related to the doctrine of vicarious liability, which bases liability “on the alleged infringer's control of and benefit from the direct infringer's activities.” Angela R. Dean, Expanding The Doctrines Of Vicarious And Contributory Copyright Infringement, 4 Vill. Sports & Ent. L.J. 119 (1997). 30 Sony, at 442. 31 For a general discussion of the question of identifying the activities that should be the focus of optimal copyright enforcement, see Richard J. Gilbert and Michael L. Katz, ”Perspectives On Intellectual Property: When Good Value Chains Go Bad: The Economics of Indirect Liability for Copyright Infringement,” Hastings Law Journal 52 (2001): 961, 968-976. 32 17 U.S.C. § 107. 33 17 U.S.C. § 107. The four statutory fair use factors are “(1) the purpose and character of the use [e.g. commercial versus educational]…; (2) the nature of the copyrighted work; (3) the amount and substantiality of the portion used in relation to the copyrighted work as a whole; and (4) the effect of the use upon the potential market for or value of the copyrighted work.”

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The resulting broad balancing test gives courts great latitude, making fair use determinations “the most troublesome in the whole law of copyright.”34 In addition, Congress intended to leave courts “free to adapt the doctrine …. especially during a period of rapid technological change.”35 The Supreme Court has emphasized that the fair use doctrine should not be used to effectively undermine copyright law’s purpose of protecting copyright holders, declaring that it “must strike a balance between a copyright holder's legitimate demand for effective – not merely symbolic – protection of the statutory monopoly, and the rights of others freely to engage in substantially unrelated areas of commerce.”36 Leading commentators concur with the need to prevent impairment of the value of the copyright: "Fair use, when properly applied, is limited to copying by others which does not materially impair the marketability of the work which is copied."37 Consistent with this view, the effect on the potential market for the work (the fourth factor) has been given considerable emphasis, and uses deemed commercial (under the first factor) are seldom considered fair uses.38 This should not be taken to suggest that non-commercial uses are exempt from enforcement. Indeed, in 1997 Congress passed the No Electronic Theft Act (the “NET” Act)39 to clarify that computer theft of copyright works is criminal behavior, “whether or not the defendant derives a direct financial benefit from the act(s) of misappropriation…."40 The law was passed in response to a U.S. District Court’s decision that a bulletin board operator could not be held criminally liable for making copies of computer software freely available for downloading.41 The Court reasoned that although willful infringement was established, the prosecution had failed to establish that "for the purposes of commercial advantage or private financial gain."42 III. Digital Technologies, Broadband, and the Emerging Market for Online Content The digital revolution already has fundamentally changed the ways we handle information, and the changes it has brought have fundamental implications for 34

Sony, at 475. See also U.S. Patent and Trademark Office. The Conference on Fair Use, Final Report to the Commissioner on the Conclusion of the Conference on Fair Use. Washington, D.C.: GPO, 1998. p.3. (hereinafter “CONFU Report”) (available at www.uspto.gov/web/offices/dcom/olia/confu/confurep.htm). CONFU Report at 3 (fair use is “the most significant and, perhaps, murky of the limitations” on copyright). 35 See U.S. Congress. 94th Cong., 2d sess., 1976. H.R. Rep. 1476. (expressing “no disposition to freeze the doctrine in the statute"); U.S. Congress. 94th Cong., 1st sess., 1975. S. Rep. No. 473. 36 Sony, at 442. 37 Harper & Row, 471 U.S. 566-67 (quoting M. Nimmer, Nimmer On Copyright. Vol. 1. § 1.10[D],1984, pp.1-87). 38 See id., at 568 ("'If the defendant's work adversely affects the value of any of the rights in the copyrighted work . . . the use is not fair.'") (quoting Nimmer on Copyright, Vol. 3. § 13.05[B], 1984, pp. 1377-13-78); Sony, at 451 (“every commercial use of copyrighted material is presumptively an unfair exploitation”). 39 See No Electronic Theft Act, Pub. L. No. 105-147, 111 Stat. 2678 (1997). 40 See H.R. Rep. No. 105-339 (1996). 41 U.S. v. LaMacchia, 871 F. Supp. 535 (D. Mass. 1994). 42 17 U.S.C. 506(a); LaMacchia, 871 F. Supp. at 535, 539-40.


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copyrighted material. Broadband communications services represent the next important development. As more consumers adopt broadband services, rich digital online content like music and video will move from a technological promise to marketplace reality. The extent to which such content is actually available in the marketplace, however, will depend in large measure on whether a legal framework is created to facilitate its distribution while protecting property rights. The Digital Revolution and Online Content The digital revolution is called “digital” because of the central role played by binary-language (i.e. digital) computers and communications devices to capture, store, copy, manipulate, communicate and display information. Digital technologies dramatically lower – in some cases virtually eliminate – the costs of handling information. Digital technologies gradually are replacing the analog technologies that preceded them. In some arenas, the transformation is virtually complete. (Just try to find an “analog” typewriter in a modern office!) In others areas, the transformation is just beginning: There are more analog VHS video players than digital DVD players in American homes, for example, and more than 99 percent of our television sets (and virtually all of our radios) are still analog. An enormous amount of content, however, is already available in digital form. Indeed, virtually all forms of media are now commonly either created initially in digital form or digitized, including all forms of video (such as movies and television shows) and virtually all music. Digital photographs are becoming the norm, either the product of a digital camera or a scanning process. Publications are now largely presented in digital form on the Internet, either free to the public or for a subscription fee. Large searchable digital databases now exist containing enormous amounts of information that previously was available only in hard copy – including back issues of newspapers, legal references, and public records. The economic benefits of applying digital technologies to such content are enormous, making it possible (and economical) to copy, manipulate and communicate information in ways that previously were not feasible. First, digital technologies make it easy to produce perfect copies of digital works that are identical to the original. Someone with a computer and a CD burner can create exact copies that can substitute perfectly for the original CD. Moreover, there is no limit to the number of perfect copies that can be made; each copy can in itself be copied perfectly.43 Second, digital content can be searched for, rearranged and transformed in many ways, either to make new works or to rearrange works. Conducting electronic 43

See, e.g., The Digital Dilemma, at 31-32; Wendy M. Pollack, “Tuning In: The Future Of Copyright Protection For Online Music In The Digital Millennium,” Fordham L. Review 68 (May 2000): 2445-46 (“Digitization of copyrighted materials permits instantaneous, simplified copying methods that produce nearly perfect copies of originals.”) (footnote omitted).

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searches for information online is an everyday activity. One example that is creatively trivial, but perhaps important in meeting consumer desires, is the ability to easily choose among music tracks to listen to from a computer hard drive, server, or specialized MP3 player. Moreover, the opportunity for personal creativity may be greatly expanded. From inserting a photo into a word processing document to combining clips to create multimedia presentations, the opportunities for use of works easily is expanded.44 Third, the Internet provides an extraordinary opportunity for anyone to distribute works broadly and cheaply.45 Materials placed on a web site can be accessed by virtually anyone with Internet access, worldwide. Six years ago Register of Copyrights Marybeth Peters was already calling the Internet "the world's biggest copying machine.”46 Since then, Internet access has become close to ubiquitous in advanced countries, and growth in less-advanced nations is skyrocketing. For the owners of copyrighted works, these aspects of the digital revolution represent both an opportunity and a threat. By dramatically reducing the costs of creating and distributing content, and by expanding options for how works are used, they expand the potential market and increase the potential value of copyrighted materials. As discussed at greater length below, however, these very factors have the potential vastly to increase piracy, by eliminating degradation of copy quality as a barrier to piracy and by facilitating the duplication and distribution of infringing works. The Broadband Revolution and the “Virtuous Circle” Until recently, the large file sizes associated with rich content and the slow speed at which most people access the Internet have imposed major barriers to the use of the Internet for distributing such content. Advances in both of these areas, however, are now greatly reducing download time. File size has decreased with the creation of file compression technologies such as MP3, which can decrease the size of music files to ten percent of their former size without significantly decreasing sound quality (except At least equally important, affordable broadband perhaps for audiophiles).47 44

See Lawrence Lessig, The Future of Ideas (New York: Random House, 2001), 8-9 for a discussion of some of the more dramatic creative possibilities the digital revolution enables. 45 See, e.g., The Digital Dilemma, at 32-33, 38-43; Kenneth D. Suzan, “Tapping To The Beat Of A Digital Drummer: Fine Tuning U.S. Copyright Law For Music Distribution On The Internet,” Albany Law Review 59 (1995): 789, 796 (“The combination of digital audio technology and networks such as the Internet produces an environment where music can be easily distributed to an unlimited amount of computer users.”). 46 See Vic Sussman, “Policing Cyberspace,” U.S. News & World Rep, 23 January 1995, 54. See also, Kenneth D. Suzan, “Tapping To The Beat Of A Digital Drummer: Fine Tuning U.S. Copyright Law For Music Distribution On The Internet,” Albany Law Review 59 (1995): 789, 796 (“First, digitization offers an easy and inexpensive method to create an unlimited number of perfect copies. Second, digitized information can be instantaneously uploaded and downloaded by an unlimited number of users.”). 47 See, e.g., The Digital Dilemma, at 77; A & M Records, Inc v. Napster, Inc., 239 F.3d 1004, 1011(9th Cir. 2001) (hereinafter “Napster”) (“The MP3's compressed format allows for rapid transmission of digital audio files from one computer to another by electronic mail or any other file transfer protocol.”); William Sloan Coats, Vickie L. Feeman, John G. Given and Heather D. Rafter, “Symposium: Legal And Business Issues in The Digital Distribution Of Music: Streaming into The Future: Music and Video Online,” Loy. L.A.


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communications technologies have increased Internet access speeds by an order of magnitude or more. The essential features of broadband are that it provides high speeds and is a dedicated connection (and therefore can be “always on”).48 A typical dial-up modem transmits information at a maximum speed of 56 kbps. In contrast, currently available broadband connections provide speeds of 128 kbps to 1.5 mbps, and in the future are expected to provide speeds of 100 mbps or more. The two main providers of broadband services to households are cable companies, whose cable modems utilize the capacity available on cable television channels to offer download speeds of approximately 1 mbps,49 and telephone companies, who use Digital Subscriber Line (“DSL”) technology that employs unused frequencies on standard copper telephone lines to provide access at similar speeds. In addition, broadband services are also available from satellite providers (such as Starband) and via a variety of wireless technologies.50 Broadband Internet services are viewed by many as essential for restoring growth in the IT sector. Indeed, Federal Communications Commission Chairman Michael Powell has declared that widespread availability of broadband is “the central communications policy objective in America.”51 According to recent government reports, broadband availability and usage are growing rapidly. For example, in February 2002, the FCC reported that, as of June 2001, there were broadband subscribers in 78 percent of all zip codes (accounting for 97 percent of the population), up from just 60 percent of all zip codes in December 1999,52 and the Department of Commerce reported that 20 percent of residential Internet users utilized broadband to access the Web in September 2001, up from just 11.2 percent in August 2000.53 Despite these apparently encouraging figures, there is a substantial debate over whether either the pace at which broadband providers are rolling out their services, or the rate at which consumers are adopting them, is “fast enough,” and, if not, whether the failure is on the “supply side” (i.e. insufficient communications infrastructure) or the Ent. L. Review 20 (2000): 285, 289 (MP3 enables users to quickly and inexpensively distribute “nearperfect compressed copies of music”). 48 TechNet Report, at 4. 49 See information available at www.cable-modem.net/gc/basics.html; Michael Pastore, “Broadband Prices Are Up; Adoption Rates Are Down,” in Markets Broadband, (January 17, 2002); available at http://cyberatlas.internet.com/markets/broadband/article/0,,10099_957511,00.html). 50 Federal Communications Commission, February 6, 2002, Deployment of Advanced Telecommunications Capability to All Americans in a Reasonable and Timely Fashion, and Possible Steps To Accelerate Such Deployment Pursuant to Section 706 of the Telecommunications Act of 1996, CC Docket 98-146 (Washington, D.C.: GPO) 14-16, 55-60. (available at http://hraunfoss.fcc.gov/edocs_public/attachmatch/FCC-02-33A1.pdf). 51 Michael K. Powell, “Remarks of FCC Chairman Michael K. Powell.” Presented at the National Summit on Broadband Deployment, Washington, D.C., October 25, 2001, p.1 (hereinafter “Powell Broadband Deployment Remarks”). (available at http://www.fcc.gov/Speeches/Powell/2001/spmkp110.html). 52 See FCC, Deployment of Advanced Telecommunications Capability at 7 and Table 9. 53 See U.S. Department of Commerce. National Telecommunications and Information Administration. 2002. A Nation Online: How Americans Are Expanding their Use of the Internet. Washington, D.C.: GPO. pp. 39-40.

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“demand side” (i.e. insufficient consumer demand). On the “supply side,” some point to the communications companies as being too slow to make broadband widely available, and many regulatory experts (including those at The Progress & Freedom Foundation) argue that regulations imposed by the Federal Communications Commission artificially reduce the incentives for broadband deployment (especially by telephone companies), thereby slowing the deployment of broadband services relative to what the market would otherwise produce.54 Others have suggested that the problem lies on the “demand side” – that broadband does not yet provide a sufficient value proposition to justify ubiquitous consumer adoption, in part due to the lack of widely available digital content. FCC Chairman Powell, for example, recently seemed to adopt this view, suggesting that “[b]roadband applications that consumers value are not yet offered to justify broadband service.”55 And the Bush Administration, while thus far avoiding taking firm positions on specific broadband policies, has indicated it plans to “do what we can to develop a demand side.”56 While there is at least some underlying basis for all of these views, both the “fast enough” and “supply vs. demand” debates also have the potential to oversimplify and mislead. The “fast enough” debate implies that there is some objectively “right” pace of broadband deployment and adoption other than the one dictated by the marketplace. To the extent this view is adopted, calls for the setting of arbitrary national objectives, and all sorts of government programs to ensure the objectives are achieved, cannot be far behind.57 Instead, “fast enough” should be understood as the pace at which deployment would proceed in the absence of regulatory and market failures.58 More fundamentally, the “supply” vs. “demand” debate represents a massive oversimplification. The more complex reality is that the IT sector is comprised of several inter-related, and interdependent, technology sectors, including hardware (PCs, television sets, MP3 players, cell phones), software (Windows XP, Internet Explorer, 54

Jeffrey A. Eisenach and Randolph J. May, Comments to the FCC on the Deployment of Advanced Telecommunications Capability, CC Docket No. 98-146, (September 24, 2001):18-23 (available at http://gullfoss2.fcc.gov/prod/ecfs/retrieve.cgi?native_or_pdf=pdf&id_document=6512766069); Jeffrey A. Eisenach and Randolph J. May, Reply Comments to the FCC on the Deployment of Advanced Telecommunications Capability, CC Docket No. 98-146, (October 5, 2001): 4-5 (available at http://gullfoss2.fcc.gov/prod/ecfs/retrieve.cgi?native_or_pdf=pdf&id_document=6512767427); Randolph J. May and Larry F. Darby, Comments Of The Progress & Freedom Foundation, Review of the Section 251 Unbundling Obligations of Incumbent Local Exchange Carriers, CC Docket No. 01-338, (April 5, 2002) (available at http://www.pff.org/Publications/UNEfiling040502.pdf). 55 Powell Broadband Deployment Remarks, at 4; Information Technology Association of America, ITAA White Paper, Building a Positive, Competitive Broadband Agenda, (October 2001): pp. 9-10 (arguing that “it’s the content, stupid”). 56 “Broadband: Evans Calls Broadband ‘Next Big Move’ And A Bush Priority,” National Journal Tech Daily (March 6, 2002). 57 The recent TechNet report unfortunately falls into precisely this trap. See TechNet Report, at 6-7. 58 The reader should understand that we do believe there are important regulatory and market failures inhibiting growth in the broadband marketplace, including inadequate protection for digital online content, the subject of this paper. Thus, we agree that the current pace is slower than the optimal, marketdetermined rate.


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Media Player, Java), content (text, music, movies, pictures) and communications (dialup modems and telephone lines, broadband connections, wireless systems, fiber optics). As depicted below, all four technologies are linked in what is commonly referred to as a “virtuous circle”: progress in one creates an impetus for progress in the others; and, conversely, failures in one area can slow developments in the others. Figure One: The “Virtuous Circle” of IT Innovation & Growth

Software

Content

Communications

Hardware

Broadband communications and digital online content represent a classic case of such technological interdependence. More widely (and legally) available content would surely lead more consumers to be willing to pay for the broadband connections needed to access it. By the same token, cheaper, more reliable, more capable broadband connections would make it easier to access digital content, thereby increasing its value as well. The virtuous circle is especially powerful in the case of broadband and content because both markets are themselves susceptible to both declining cost curves (the cost per unit of producing a product falls as the number of units produced goes up) and network effects (the value of a given product or service to any particular user goes up as the number of users increases).59 Thus, improvements in content that result in more broadband users both lower the cost and increase the value of broadband; and, improvements in broadband that increase demand for content both lower its cost and increase its value. And these positive effects extend into all neighboring markets. Thus, for example, if a “killer” entertainment application draws more broadband users,

59

For an insightful discussion of such network effects, See Michael L. Katz and Carl Shapiro, “Antitrust in Software Markets,” In Competition, Innovation and the Microsoft Monopoly, edited by Jeffrey A. Eisenach and Thomas M. Lenard, (Washington, D.C.: Kluwer Academic Publishers, 1999), 32-34.

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the economic value and commercial viability of educational and commercial applications will also be enhanced. It is because of the importance of such interdependencies and network effects that most people believe broadband-enabled digital content is so important to initiating the next cycle of IT sector innovation and growth. In order for this potential to be fully realized, however, barriers to the efficient functioning of the market must be removed in each major sector. In some cases (e.g. communications) that may mean speeding deregulation, in others (e.g. software) it may require wise enforcement of the antitrust laws. In the case of digital online content, it means recognizing that clear and enforceable property rights are the sine qua non without which markets cannot function efficiently,60 and that providing a legal and institutional framework for property rights is a core role of government.61 As discussed below, the current framework leaves much to be desired. IV. The Digital Challenge to Copyright By fundamentally transforming the way content is produced and distributed, digital technologies present a formidable challenge to the copyright laws. In this section, we look at three elements of that challenge. First, we examine the doctrine of contributory infringement, focusing on its central role in the Napster decision and on its application to Internet Service Providers (ISPs) under the Digital Millennium Copyright Act. Next, we discuss technological efforts to prevent illegal copying and the various controversies those efforts have provoked. Third, we describe several issues associated with licensing content for digital online distribution. Contributory Infringement, Napster and the ISPs As discussed above, the doctrine of contributory infringement allows a third party who knowingly ”induces, causes or materially contributes to the infringing conduct of another” to be held liable for such conduct. The doctrine is especially important in the digital content arena, where infringing activities can involve literally millions of individuals, each of whom commits piracy on a relatively small scale. In such an environment, the costs of enforcing copyrights through direct litigation against each infringing party would seem to be prohibitive. Thus, content owners increasingly have relied on the contributory infringement doctrine, and both the courts and Congress have played important roles. 60

See Ronald H. Coase, “The Problem of Social Cost,” Journal of Law & Economics 3 (1960): 1., reprinted In Ronald H. Coase, The Firm the Market And the Law (Chicago: University of Chicago Press, 1988) 95, 97-104. See also Siebrasse, Norman. “A Property Rights Theory of the Limits of Copyright.” Univ. of Toronto Law Journal 51 (Winter 2001): 1, 61 n. 14 (“[a]s a result of Coase's insight, the importance of creating clearly defined property rights in order to prevent market failure is now well recognized.”). 61 See Ayn Rand, “The Property Status of the Airwaves,” Objectivist Newsletter 3 no.4 (April 1964) (“It is the proper task of the government to protect individual rights and, as part of it, to formulate the laws by which these rights are to be implemented and adjudicated.” (Available at http://www.pff.org/cad/spec396.html.)


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Napster: Napster did not invent digital piracy, any more than Henry Ford invented the automobile. What both did was to make available to the masses technological options that previously had been limited only to the few. The difference is that Ford produced and owned the cars it sold, while Napster basically was providing tools to facilitate the theft of property belonging to others. Founded by 19-year-old Shawn Fanning, Napster began operations in November 1999, providing a Web site from which users could download free software, which, it boasted, "takes the frustration out of locating servers with MP3 files."62 The software allowed Napster users to connect with one of Napster’s servers and to access a directory and an index of files which logged-on users were willing to share. Users indicated which MP3 files they were willing to share, which were then added to the directory and index. A user seeking a file could search the directory and index for MP3 files available for download from other users and, upon obtaining the necessary information, connect directly with another user’s computer to download the desired file(s).63 From the very beginning, Napster was one of the fastest-growing web sites ever. Within a year, it had over one million monthly users, trading well over one billion song files. At its peak in early 2001, Napster claimed over 70 million participants, with over 1.5 million simultaneous users64 “swapping” nearly three billion files per month.65 Fileswapping has been especially prevalent where users have cheap access to broadband connections, and notoriously so on college and university campuses. Indeed, piracy at universities has been so rampant as to cause severe congestion problems on many campus computer networks.66 Administrators generally have managed the problem by limiting bandwidth, diverting file-sharing to off-peak hours, or imposing fees for high traffic.67 62

A & M Records, Inc. v. Napster, Inc., 2000 U.S. Dist. LEXIS 6243 (N.D. Cal. 2000) at 3 (quoting Defendant’s Brief, at 4), vacated and remanded in 239 F.3d 1004, 1011(9th Cir. 2001). 63 A & M Records, Inc. v. Napster, Inc., at 5-6. 64 Michael Mahoney, Napster Downloads Fall 87 Percent Since February (June 6, 2001) (available at http://www.newsfactor.com/perl/story/10298.html). 65 See Damien A. Riehl, “Electronic Commerce in the 21st Century: Peer-To-Peer Distribution Systems: Will Napster, Gnutella, and Freenet Create a Copyright Nirvana or Gehenna?,” Wm. Mitchell Law Review 27 (2001): 1766-67; Todd Pack, “Pirating of Music Flourishes Despite Napster’s Unplugging,” The Orlando Sentinel, 7 September 2001, p. B1 (“over 2.7 billion files were traded on Napster at its peak in February 2001”). 66 Leslie Brooks Suzukamo, Heavy Traffic – College Students Downloading MP3 Digital Music Files Used To Overwhelm Their Schools’ Computer Networks: No Longer – Administrators Have Harnessed Technology That Puts Napster in the Slow Lane During Peak Hours (St. Paul Pioneer Press, 2001, 1E (Napster use had “gobbled up more than half of the Network’s information carrying capacity,” but the University of Minnesota solved the problem by giving Napster use low priority by day but removed the restriction at night.). 67 See Florence Olsen, “How Big a 'Pipe'? Colleges Struggle to Provide Network Bandwidth,” The Chronicle of Higher Education (November 2, 2001): 43 (“Administrators … admit they find it hard to prevent the misuse -- and even abuse -- of bandwidth, especially among undergraduates. ‘It's a problem,’ says Dennis J. Garbini, vice president for finance and technology at Seton Hall University. ‘Last year's Napster problem pales compared with this year's streaming-video problem, and who knows what next year's will be?’”).

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In response to the widespread piracy of music files over Napster, the major record companies, and well as artists and independent labels, brought lawsuits against Napster, claiming its activities constituted illegal contributory infringement. In the main litigation, filed by 18 record companies in December 1999, A&M Records, Inc. v. Napster, Inc., 239 F.3d 1004 (9th Cir. 2001) (subsequently joined by a class of music publishers), 68 the plaintiffs sought a preliminary injunction against further facilitation of file-sharing, plus damages that could well reach into the billions of dollars. While the case remains in litigation, it has produced a major court of appeals decision on the merits regarding two key issues. Both holdings were highly favorable to content owners. The first major holding of the Napster decision was that Napster users were violating the copyright laws. The Ninth Circuit stated flatly that copying files over the Napster system and making them available over that system for copying were both illegal: “Napster users who upload file names to the search index for others to copy violate plaintiffs' distribution rights. Napster users who download files containing copyrighted music violate plaintiffs' reproduction rights.”69 The court rejected Napster’s argument that these activities constituted fair use. Napster relied heavily on the Supreme Court’s 5-4 decision in Sony Corp. of America v. Universal City Studios, 464 U.S. 417 (1984), which held that Sony was not liable as a contributory infringer for making and selling the Betamax (a cousin of the VCR), which customers could use for infringing activity. The Sony Court had held that one of the uses of the Betamax – recording programs for later viewing or “time-shifting” – did constitute fair use.70 In contrast, the Ninth Circuit found that file-swapping over Napster was not a fair use based on a review of the statutory factors. It explained that the timeshifting addressed in Sony was fundamentally different from use of Napster, since it did not involve “distribution of the copyrighted material to the general public.”71 The second major issue decided by the Ninth Circuit was, from a practical perspective, even more important: Napster, the court ruled, was guilty of contributory infringement. Napster’s defense again relied on Sony, where the Court had held that Sony could not be held liable for contributory infringement merely on the basis that the Betamax could be used to illegally copy works. To avoid such liability, the Court stated that a product “need merely be capable of substantial noninfringing uses.”72 68

Complaint For Contributory and Vicarious Copyright Infringement, Violations of California Civil Code Section 980(A)(2), and Unfair Competition, A&M Records, Inc. v. Napster, Inc., 114 F. Supp.2d 896 (2000) (Nos. C99-5183-MHP and 00-0074-MHP)., rev’d in part and remanded, 239 F.3d 1004 (9th Cir. 2001). 69 Napster, at 1014. 70 Sony, at 442-56. See also Recording Industry Ass’n of America v. Diamond Multimedia Sys., Inc., 180 F.3d 1072 (9th Cir. 1999). 71 Napster, at 1019. 72 Sony, at 442; See also Matthew Bender & Co. v. West Publishing Co.,158 F.3 693, 707 (2d Cir. 1998).


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The Ninth Circuit seemed to apply an even more lenient standard in Napster, suggesting that, even if there were not substantial non-infringing use in the present, it would consider the potential for “future noninfringing use” in making its assessment, and criticizing the district court for not giving such uses sufficient attention.73 Even under this standard, however, it upheld the District Court’s preliminary injunction, based on evidence of Napster’s “actual knowledge” of infringement, its ability to “block access,” and its “material contribution” to the infringing activity.74 The Ninth Circuit also upheld the District Court’s determination that Napster should be held responsible based on principles of vicarious liability.75 As a result of these decisions, Napster suspended operations June 2001. In January 2002, it launched a preliminary version of a new system designed to meet the requirements of the injunction, and plans to begin full operations as a licensed distributor sometime this year. In the meantime, the case was on hold while the parties discussed a possible settlement. In February, however, the parties missed the District Court’s deadline for reaching a settlement, and while still negotiating, face further proceedings – including an inquiry into whether the content owners are unreasonably withholding licenses or otherwise misusing their copyrights.76 By April, Bertelsmann, which had previously made a major investment in Napster and installed CEO Konrad Hilbers, was indicating its intention to acquire Napster outright. Thus, the final chapter in the history of Napster remains to be written. While many observers regard the Napster litigation as a victory for copyright owners, it remains to be seen whether it will prove more pyrrhic or real in the long run. Certainly, relief did not come quickly for the plaintiffs: it took nearly a year-and-a-half from the time content owners filed suit until Napster finally suspended operations, during which time Napster use and piracy grew rapidly. Perhaps even more importantly, Napster has been succeeded by several new peer-to-peer (“P2P”) services, including Grokster, KaZaA, Music City (aka “Morpheus” or “Streamcast”) and others.77 Within two months of Napster’s demise, file-trading had reached 3 billion files per month, breaking Napster’s previous record,78 with 1.5 million 73

Napster, at 1021. Napster, at 1021-22. 75 Napster, at 1022-23. The Ninth Circuit did find that the District Court’s injunction placed too much of the burden of policing copyright infringement on Napster. The District Court subsequently reduced Napster’s burden by requiring plaintiffs to provide notice of copyrighted works and infringing files, although Napster still must police infringement against those materials. Napster, at 1027. 76 See David Kravets, “Napster Dispute still not settled,” in Yahoo! News, (February 19, 2002); Matt Richtel, “Judge Grants A Suspension Of Lawsuit On Napster,” The New York Times, 24 January 2002, p. C4; David Kravets, “Deadline passes, but Napster dispute still not settled,” Associated Press State & Local Wire, 20 February 2002. 77 In peer-to-peer systems, end-users’ computers communicate directly among themselves (rather than operating as the clients of central servers) sharing files, processing capacity, storage space, etc. More information is available from the Peer-to-Peer Working group web site (available at www.peer-topeerwg.org). 78 Tom Kirchofer, “So far, pay sites music to no one's ears,” The Boston Herald, 5 November 2001, p. 27 (reporting Webnoise estimates that 3.05 billion files were downloaded in August using the four most 74

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simultaneous users per month.79 And while content owners filed lawsuits against these services in October 2001,80 it is not a sure bet these suits will succeed. That’s because these systems utilize a software platform (“FastTrack”) that is far less reliant on centralized servers and directions than the Napster system. It is possible, therefore, that the courts may refuse to find KaZaA, et al guilty of contributory infringement.81 Indeed, in 2001 Buma/Stemra, a Dutch society representing music composers and publishers, instituted proceedings against KaZaA charging contributory infringement. It was initially successful – after a summary proceeding in November 2001, a Dutch court reportedly ordered KaZaA to “make it impossible for its users to continue to share copyright-protected material using the software,” threatening it with fines of up to $40,000 per day for failure to comply.82 KaZaA suggested that it could not comply, since its “software can’t disappear, it is already out there,” but finally stopped further downloads of its software in January.83 However, in March 2002, a Dutch appeals court overturned the order, holding that “[i]n so far as any infringing use is being made by the means of KaZaA, these acts are committed by its users, not by KaZaA."84 This case also points out the complications that can arise when activity occurs across a multiplicity of jurisdictions, creating potential substantive differences in applicable copyright rules and procedural obstacles in pursuing infringers located in other jurisdictions. In January 2002, KaZaA was purchased by an Australian firm – which promptly restarted downloads.85 As one report noted, “Whether [the Austrailian owner] could be liable for copyright infringement in the Netherlands wasn't certain. KaZaA would normally have faced fines totaling as much as $40,000 a day.”86 Such jurisdictional problems are not uncommon in music and other media.87 popular file-sharing systems, FastTrack, AudioGalaxy, iMesh and Gnutella, exceeding the 2.79 billion files downloaded with Napster its busiest month). See also Todd Pack, Pirating of Music Flourishes Despite Napster’s Unplugging, The Orlando Sentinel p. B1 (over 2.7 billion files were traded on Napster at its peak in February 2001). 79 Justin Oppelaar, “Cyber Biz,” Daily Variety, 3 December 2001; 80 See Jon Healey, “Suit Fires New Salvo in Copyright Battle,” Los Angeles Times, 4 October 2001. 81 For a lengthy summary of KaZaA’s defense, See Philip Corwin, Letter to Sen. Joseph Biden from Philip Corwin [Representing KaZaA]. February 26, 2002 (available at http://www.politechbot.com/docs/biden.kazaa.letter.030202.html). 82 Joris Evers, “KaZaA File-Swap Service Running Despite Shutdown Order,” IDG News Service/Amsterdam Bureau, 19 December 2001. 83 Joris Evers, “Judge halts use of Napster-like software,” InforWorld.com, 29 November 2001 (quoting KaZaA's attorney Christiaan Alberdingk Thijm). 84 Marcel Van De Hoef, “Dutch court overturns copyright conviction of KaZaA software to download music,” Associated Press, 28 March 2002 (quoting the court’s opinion); Amy Harmon, “Technology Briefing Internet: Dutch Ruling In Kazaa Case,” The New York Times, 29 March 2002, p. C6. 85 Lauren Barack, “Music Site Kazaa Is Bought,” The New York Post, 22 January 2002, p. 32; Justin Oppelaar, “A Software Switch,” Daily Variety, 22 January 2002, p. 7. 86 Marcel Van De Hoef, “Dutch court orders KaZaA to shut down, but users can still download its software,” The Associated Press, 31 January 2002. 87 In early 2002, for example, a Taiwanese Web site began offering an extensive catalogue of popular movies (e.g. The Perfect Storm and American Beauty) for viewing in RealNetworks Real Video format, for $1 per viewing. While the site’s owners claim to be complying with local copyright laws, content owners say this is just another case of digital on-line piracy, and promise legal action. See John Borland, “$1 Films Spook Hollywood,” CNET News.com, 7 February 2002 (available at http://news.com.com/2100-


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Recent developments in international coordination, in particular the new treaty the World Intellectual Property Organization (“WIPO”) Performances and Phonograms Treaty,88 may reduce these difficulties. This treaty and its sister treaty, the WIPO Copyright Protection Treaty,89 is designed to deal with some of the problems raised by digital media in the international context.90 The treaty was ratified by the required 30 signatories (including the U.S.) in February 2002, and will take effect in May 2002. Kamal Idris, director-general of the WIPO, declared that the treaty would "offer more comprehensive protection for creators and creative enterprises in the digital environment." 91 Record industry officials have also expressed their enthusiasm for the treaty, explaining that it "provides essential tools for the record industry to do business in the online world" and "strengthens our industry's protection from piracy on the Internet."92 ISPs and the DMCA: One of the most controversial issues in online piracy is the extent to which ISPs which provide service to copyright infringers should be responsible for policing copyright violations by their subscribers e.g., through the contributory infringment doctrine. In 1995, the Intellectual Property and the National Infrastructure (IPNI) Task Force Report advanced ISP liability as a potentially useful tool in combating piracy,93 and a variety of proposals were debated as part of the DMCA. In the end, DMCA addressed this issue by creating four “safe harbors” shielding ISPs from liability for infringing activity by their subscribers, but only if the ISPs abide by certain policies and procedures that assist content owners in combating piracy.94 In order to be eligible for any of the safe harbors, an online service provider must: (1) adopt and reasonably implement a policy of terminating subscribers who are repeat infringers and (2) accommodate “standard technical measures” used by copyright owners to identify or protect copyrighted works.95

1023-831383.html); and “$1 Cinema,” The Washington Post, 17 February 2002, p. H7. The site was shut down in mid-February, reportedly with the help of Taiwanese authorities. See John Borland, “Plug pulled on site selling $1 movies,” CNET News.com, 19 February 2002 (available at http://news.com.com/21001023-840228.html); Tony Karon, “Show's Over: Taiwan to Move Against Movie88.com,” Time.com, 21 February 2002 (available at www.time.com/time/world/article/0,8599,203691,00.html). 88 Available at http://clea.wipo.int/lpbin/lpext.dll/clea/LipEN/46e4b/48dcf?f=file%5Bdocument.htm%5D#JD_75683. 89 Available at http://clea.wipo.int/lpbin/lpext.dll/clea/LipEN/46e4b/48c86?f=file%5Bdocument.htm%5D#JD_754ab. 90 Rick Perera, “World intellectual-property treaty set to enter force,” InfoWorld Daily News, 7 December 2001. 91 Jonathan Fowler, “UN: Net Music Treaty to Take Effect,” AP Online, 21 February 2002. 92 Id. (quoting Jay Berman, Chairman of The International Federation of the Phonographic Industry). 93 U.S. Patent and Trademark Office. 1995. Intellectual Property and the National Infrastructure: The Report of the Working Group on Intellectual Property Rights. Washington, D.C.: GPO, pp. 122-24 (hereinafter “IPNI Task Force Report”). 94 See 17 U.S.C. § 512(h). These safe harbors are in addition to other defenses that an ISP might have. 95 17 U.S.C. § 512(i). This extent of this obligation is limited by the statutory definition of “standard technical measures,” which requires that they “(A) have been developed pursuant to a broad consensus of copyright owners and service providers in an open, fair, voluntary, multi-industry standards process; (B) are available to any person on reasonable and nondiscriminatory terms; and (C) do not impose

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Of particular interest are the requirements that service providers must meet to avoid potential liability for infringing materials residing long-term on their system and under their control, such as a subscriber’s web page. There are three additional conditions ISPs must meet to avoid potential liability for such material. First, they must not have “actual knowledge” that the material is infringing (nor be “aware of facts or circumstances from which infringing activity is apparent”).96 Second, they must not profit directly from that material.97 Third “upon notification of claimed infringement” according to prescribed procedures, they must “respond[] expeditiously to remove, or disable access to, the material that is claimed to be infringing.”98 This can be accomplished by removing links to such material or by removing sites. This last provision established what is known as the “notice and takedown” process. The process begins with the notice from the content owner. While the ISP is not required to respond to such a notice, failure to do so removes the benefit of the safe harbor. To maintain the safe harbor, the ISP, upon receiving notice, must block access to the material and notify its subscriber of this action. The subscriber can then send a counter-notice to the ISP disputing a claim of infringement, which is forwarded to the content owner. The ISP must block the material for at least ten days, but, unless the content owner then demonstrates that it is seeking judicial relief, the ISP must remove the block on the material within 14 days.99 There is a separate procedure enabling a copyright holder to subpoena an ISP to learn the identity of an allegedly infringing subscriber.100 Notices are generally sent to an email address specified by the service provider.101 To be legally effective, a notice must contain six elements: identification of the allegedly infringed copyrighted work; identification of the infringing material (and “information reasonably sufficient to permit the service provider to locate the material”); a statement of the sender’s “good faith belief” that the use of the material is not authorized; information “reasonably sufficient” to enable the ISP to contact the sender; the signature of the content owner or its representative (possibly electronic); and an affidavit attesting to the sender’s authority to act on behalf of the copyright holder and statement that the information in the notice is accurate.102

substantial costs on service providers or substantial burdens on their systems or networks.” 17 U.S.C. § 512(i)(2). 96 17 U.S.C. § 512(c)(1)(A). The service provider must also “expeditiously to remove, or disable access to, the material” if he obtains such knowledge or awareness of infringing material. Id. 97 17 U.S.C. § 512(c)(1)(B). 98 17 U.S.C. § 512(c)(1)(C). 99 17 U.S.C. § 512(g)(2). Following these procedures provides the ISP with immunity from liability to the subscriber (or others) for taking down material in good faith in response to a notice. 17 U.S.C. § 512(g). 100 17 U.S.C. § 512(h). 101 See Daniel J. Gervais, “Transmission of Music on the Internet: An Analysis of the Copyright Laws of Canada, France, Germany, Japan, the United Kingdom, and the United States,” Vand. J. Tran Nat’l Law 34 (2001): 1363, 1402. 102 17 U.S.C. § 512(c)(3)(A). See generally Richard Raysman and Peter Brown, “Notice and Takedown Under the Digital Millennium Copyright Act,” New York Law Journal (February 11, 2002): 3.


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One court has emphasized that the law requires the notifier only to “substantially compl[y]” with these elements, and was “written so as to reduce the burden of holders of multiple copyrights who face extensive infringement in their works.”103 As a result, it concluded that a notice identifying infringing pages consisting almost entirely of the plaintiff’s copyrighted work was sufficient, and that only a “representative list” of the works need be supplied.104 Content owners have made extensive use of the notice and takedown process, and according to some published reports it appears to function well. According to an early evaluation of the actual workings of the process, ISPs generally respond to notices within 24 hours of receiving the notice, and inform the content owner that the offending site as been taken down.105 To facilitate this process, content owners employ several companies to identify and help police online piracy. Such companies, including BayTSP.com, Copyright Agent and NetPD, use sophisticated software to track down sites with infringing material and send notices to the ISPs. For example, BayTSP’s system compares a sample digital media file with various copyrighted material and traces any matching file back to the server where it is posted. (Emusic has used a similar process of locating infringing material on Napster, utilizing an algorithm generating a “checksum” that uniquely identifies the music.106) An electronic notice is generated and sent to both the owner of the server and the service provider.107 Tracking can be facilitated by the fact that peerto-peer services such as KaZaA and Morpheus typically provide addresses where infringing material is available.108 However, programmers claim that these systems can be effectively countered by pirating sites through the use of encryption.109 The Business Software Alliance (“BSA”) also employs investigators who scan the Internet for host sites for pirate activity and send notices to the site’s service provider.110 BSA issued thousands of notices last year.111

103

ALS Scan Inc. v. Remarq Communities Inc., 239 F.3d 619, 625 (4th Cir. 2001). Id. 105 Michael Learmonth, “The Online Enforcer,” The Industry Standard, 16 February 2001.; See also Batur Oktay and Greg Wrenn, A Look Back at the Notice-Takedown Provisions of the U.S. Digital Millennium Copyright Act One Year After Enactment. World Intellectual Property Organization. (December 1, 1999). Doc. OSP/LIA/2 (available at http://www.wipo.org/eng/meetings/1999/osp/pdf/osp_lia2.pdf). However, it is difficult to determine whether these early reports reflect current realities as notices have increased, especially since (1) the extensive use of dynamic IP addresses makes tracking much more difficult, and (2) web site operators have increasingly placed material on their own servers, making it more difficult for ISPs to take down material without terminating the customer. 106 Brad King, “ISPs Face Down DMCA,” Wired News, 23 December 2000 (available at www.wired.com/news/print/0,1294,40816,00.html). 107 Brad King, “Pirates Beware: We’re Watching,” Wired News, 3 January 2001 (available at www.wired.com/news/print/0,1294,40866,00.html). 108 Denise Oshodi, “Notices of illegal downloads sent to USC students,” Daily Trojan, 24 January 2002. 109 See Id. 110 Jenna F. Karadbil, “Panel III: Intellectual Property Issues in E-Commerce: Piracy in the Internet Age,” Ariz. J. Int’l & Comp. Law 17 (2000): 131, 136. 111 Business Software Alliance. Press Release: BSA Sends Nearly 6,000 Take-Down Notices to Internet Sites Offering Unlicensed Software. (October 17, 2001)(announcing that they had sent nearly 6,000 104

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While the notice and takedown process reportedly seems to function fairly smoothly, its effectiveness is limited. For example, in aid of Metallica’s case against Napster, NetPD provided Metallica with the addresses of about half a million people who used Napster to pirate the group’s work millions of times.112 Responding to Metallica’s notice, Napster blocked access to over 300,000 of them.113 However, 17,000 of these users availed themselves of the counter-notice procedure, forcing Metallica to consider a lawsuit to keep them off the system.114 While those challenging the takedowns represented less than ten percent of the users blocked, it still represented a prohibitive number of potential lawsuits. In 2001, Copyright.net said it had served over one million copyright violation notices to service providers on behalf of 750 songwriters and performers, and was instituting a campaign against piracy on Napster.115 However, it reported that few of the ISPs it contacted actually complied; one ISP executive counters that “[w]e don’t see it as our responsibility, or even our jurisdiction, to police what’s on our member’s hard drives.”116 As noted above, ISPs operated by colleges and universities for the faculty and students appear to be particularly prone to copyright violations. Last fall, for example, the University of Maryland reported more than a five-fold increase in copyright notice violations, all from NetPD.117 The notices identify particular IP addresses and infringing file names, and ask for the university’s assistance in ending the infringing activity on the system. The university officials “can often, but not always, identify the student, faculty or staff responsible for the file sharing.”118 They specifically cite the DMCA and raise the possibility of liability for the infringing activity. Although some lawyers have questioned the adequacy of the notices (claiming, for example, that they do not meet the signature and affidavit requirements), many colleges are apparently responding.119 Rather than simply cutting off access, college officials may give lessons in copyright law or refer violators to student disciplinary proceedings, which could even result in

notices in the first eight months of 2001) (available at http://www.bsa.org/usa/press/newsreleases//200110-17.755.phtml). 112 Gordon Masson, “NetPD Tracks file Swapping On Web,” Billboard, 21 October 2000. 113 Mike Drummond, “MP3.com to silence music of 5 labels; Web site cuts off access during settlement talks,” The San Diego Union-Tribune, 11 May 2000, p.C1. 114 Jennifer Osborn, “UC-Davis Internet policies enforce standards for network users,” The California Aggie, 18 May 2000. 115 Dawn Chmielewski, “Stealthy Software Robot Puts Bootleggers on Notice,” San Jose Mercury News, 19 March 2001, p.C2. 116 Id. (quoting Kurt Rahn, a spokesman for Earthlink). 117 See Scott Carlson, “New Company Besieges Colleges with Notices About Copyright Violations,” The Chronicle of Higher Education ( November 30, 2001): 29. 118 Kadie Bye,. “Company Traces Pirated Music to Students,” Cavalier Daily, 27 November 2001 (quoting Robert F. German, an official with the University of Virginia’s Department of Information Technology and Communication). 119 See Scott Carlson, “New Company Besieges Colleges with Notices About Copyright Violations,” The Chronicle of Higher Education ( November 30, 2001): 29.


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suspension.120 Some college administrators reportedly “feel uncomfortable enforcing federal copyright laws,” but have contacted the students identified.121 The Promise and the Perils of Technological Protection Content owners increasingly are seeking to develop and deploy technological measures to discourage online piracy. Although such protection is incomplete,122 a principal advantage is that these measures can be, in theory, self-enforcing – the technology prevents unauthorized use without the need to resort to legal process. There are a number of technologies that can be used to protect digital content from piracy, either separately or in combination, but generally, they fall into one of two categories, encryption and watermarking. Encryption works by scrambling the material so that it can not be read without being unscrambled using a digital key, 123 while watermarking124 adds a digital “fingerprint” that can be used to track copyrighted material or in some cases to limit its use. More advanced technological protection systems may be used to define in detail the rights the user has in the work, e.g. whether she may copy it, how long she may 120

Denise Oshodi, “Notices of illegal downloads sent to USC students,” Daily Trojan, 24 January 2002; Jessica Flathmann, “Students Warned About Internet: Officials Say Violating Copyrights Could Bring Suspension, Prosecution,” The Charlotte Observer, 29 November 2001, p.18. 121 Stephen Watson, “The Recording Industry Wants to Curb Downloading Music from the Internet, so It’s asking Colleges to Police Computer Use,” The Buffalo News, 2 March 2002, p. A1. 122 One key problem is the “analog hole.” Audio and video content, even if protected in its digital form, must be converted into analog to be experienced. This analog signal, if captured, can be translated back into a digital signal and distributed over the Internet. Some participants are investigating whether this problem can be addressed through the use of watermark technology to embed usage rules in content that survive the digital to analog conversion. A description of the state of play from two of the participants is set forth in the AOL Time Warner - Intel Joint Statement of Principles (March 19, 2002) (available at http://www.intel.com/pressroom/archive/releases/20020319aol_intel.htm). Testimony on these problems has been presented at several Congressional hearings, including U.S. Senate Committee on the Judiciary, Hearings on Competition, Innovation, and Public Policy in the Digital Age: Is the Marketplace Working to Protect Digital Creative Works? (March 14, 2002) (available at http://judiciary.senate.gov/hearing.cfm?id=197) and U.S. Senate Committee on Commerce, Science and Transportation, Hearing on Protecting Content in a Digital Age -- Promoting Broadband and the Digital Television Transition (February 28, 2002) (available at http://commerce.senate.gov/hearings/hearings0202.htm).

123

“‘Encryption is the process of converting a message into cipher text (the encrypted message) by using a key so that the message appears to be nothing but gibberish.’ Encrypted data ordinarily cannot be read until it is decrypted using an appropriate key,” which the content owner can provide to authorized users. Stephen M. Kramarsky, “Copyright Enforcement in the Internet Age: The Law and Technology of Digital Rights Management,” J. Art & Ent. Law 11 (2001): 1, 8 (quoting Webster’s New World Dictionary of Computer Terms (8th ed. 2000) 189); IPNI Task Force Report, at 185 (“encryption amounts to a 'scrambling' of data using mathematical principles that can be followed in reverse to 'unscramble' the data”). 124 Digital “watermarks” (or “fingerprints”) are designed to mark digital files with copyright information in ways that are will not be perceived by the authorized user. To be effective, removal of the watermark must substantially degrade the content. Digital watermarks can incorporate user rights information or information identifying the copyright owner. They can be used to provide notice of copyright information to users, to track content over the Internet, or to implement Digital Rights Management (DRM) solutions. See Rosemarie F. Jones, “Wet Footprints? Digital Watermarks: A Trail to the Copyright Infringer on the Internet,” Pepp. L. Review 26 (1999): 559, 568-71.

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retain it, how often she may play it, etc. Such systems would allow content owners not only to block illegal copying, but also to “set different prices to different users” (i.e. price discriminate).125 These technologies are generally referred to as digital rights management (“DRM”) systems.126 Technological Controls and the Importance of Standards: To be effective, technological protection systems require a degree of compatibility between hardware, software and whatever protection is embedded in the content itself. Achieving compatibility requires the development of standards, which in turn depends upon the willingness of various market participants to collaborate. Such standard-setting exercises are seldom without conflict, as the incentives of the various participants generally differ to one degree or another. Nevertheless, various industry initiatives have brought content providers, hardware manufacturers, software developers and others together to develop common standards for technological protection measures. The most important success story of such industry cooperation is the adoption of the Content Scramble System (CSS), which is used to protect DVDs. In 1996, under a multi-industry arrangement, DVD makers were licensed to incorporate keys into DVD players to decrypt DVDs into DVD players. The keys enable viewing of the DVD, but not copying. Armed with this protection, movie studios began to release digital movies in the DVD format.127 Similar efforts are underway to develop a standard for digital transmission of video content. The “5C” consortium consists of five electronics manufacturers – Hitachi, Intel, Matsushita, Sony and Toshiba – who have developed a Digital Transmission Content Protection (“DTCP”) specification for digital content transmitted between a wide variety of digital electronics products (but which does not yet protect over-the-air broadcasts).128 Hardware and consumer product manufacturers have been generally supportive of the standard, while the movie industry has expressed a number of concerns. In July, 2001, Sony Pictures and Warner Brothers signed long-term licensing agreements to provide their digital programming using the DTCP protocol, but the other five major studios have not reached agreements with the 5C consortium, largely due to the lack of protection for over-the-air transmissions.129 Another industry group, called the 4C Entity – composed of Intel, IBM, Matsushita and Toshiba -- is developing a standard for incorporating DRM into storage devices such as hard drives.130 125

Michael A. Einhorn, “Digital Rights Management and Access Protection: An Economic Analysis,” Presented at the Association Littéraire et Artistique Internationale 2001 Congress: Adjuncts and Alternatives to Copyright, New York, June 2001 (available at http://www.law.columbia.edu/conferences/2001/1_program en.htm). 126 For useful background, See Commission of the European Communities. Commission Staff Working Paper: Digital Rights: Background, Systems, Assessment. (February 14, 2002) (available at http://www.politechbot.com/docs/european.commission.drm.030202.pdf). 127 Universal City Studios, Inc. v. Corley, 273 F.3d 429, 436-37 (2d Cir. 2001). 128 Information about the 5C consortium and the DTCP is available at www.dtcp.com. 129 “Sony, Warner Bros. Sign DTV Copy Protection Pact with 5C Group,” Communications Daily, 18 July 2001. 130 Information about the 4C Entity is available at www.4centity.com.


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The most significant effort to develop common standards for protection of online music has been the Secure Digital Music Initiative (“SDMI”).131 It began in 1998 with the backing of the major industry players (and a total of 160 companies), but encountered difficulties reaching consensus, especially once music became generally available in the unprotected MP3 format.132 As a result, no common standard has been adopted, and the new subscription services offering licensed music online (discussed below) are choosing among available security systems.133 For example, MusicNet uses technology from RealNetworks, while pressplay uses Microsoft’s technology. In addition, the individual record companies are experimenting with technological protection systems for digital content on CDs. To combat the practice of “ripping” songs from CDs, converting them to MP3 files, and illegally distributing them over the Internet, the content owners have developed mechanisms that prevent ripping (or playback) on personal computers.134 These efforts, however, have met with considerable protest – since they also prevent PCs from being used for the entirely legal purpose of listening to music.135 Some record companies are seeking to accommodate consumers’ desire for mobility by providing two versions of a recording on CD, on for playback on a CD player, the other playable on a computer but with protection that limits copying but permits transfer to a secure device.136 Hackers, Hacking and the Law: The major weakness of technological security measures is that they are susceptible to breach by hackers. The most important example has been the defeat of CSS by a number of hackers, most famously in 1999 by Norwegian teenager, Jon Johansen and collaborators. They reverse-engineered the copy protection and wrote a Windows-based program to decrypt CSS on a DVD player running on a Windows-based PC, dubbing it “DeCSS.” While Johansen has claimed that his intent was to play a DVD on a Linux operating system, DeCSS also lets the user decrypt and copy the file to a hard drive, where it can be recopied or modified.137 A second important example involved SDMI, which, anticipating the risks of hacking, issued a challenge in October 2000 to see whether certain watermarking techniques it was considering could be defeated. An academic group led by Professor Edward Felten claimed to have successfully defeated all of the measures, although this was disputed.138 131

Basic information about SDMI is available at www.riaa.com/Music-SDMI-1.cfm. See Sam Costello, “Why Secure Digital Music Initiative is Falling Apart,” IDG News Service, 6 February 2001. 133 See Jon Healey, “Initiative to Bar Pirated Music on Portable Players Takes Break,” Los Angeles Times, 19 May 2001, pt. 3 p.1 (quoting Phil Wiser of Liquid Audio as saying that "[t]ech companies are moving ahead without waiting for SDMI”). 134 “Record labels begin selling copy-proof CDs,” Associated Press, 24 August 2001. 135 L.A. Lorek, “Music giants try to neuter copycats,” San Antonio Express-News, 2 February 2002, p. 1D. It has also been alleged that the CD protection systems interfere with playback on some CD players. Michael Stroh, “Locked And Blocked,” The Baltimore Sun, 10 January 2002, p. 10D. 136 See Chris Marlowe, “BMG promo CDs copy-protected” The Hollywood Reporter, 9 April 2002. 137 Universal City Studios, Inc. v. Corley, 273 F.3d 429, 437-38 (2d Cir. 2001). 138 Amy Harmon, “Group Says It Beat Music Security but Can't Reveal How,” The New York Times, 15 January 2001, p. C2; Sam Costello, “SDMI cracked? Academics say yes; SDMI says no,” InfoWorld.com, 24 October 2000. 132

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All security systems are susceptible to breach in some manner.139 The problem facing industry is developing a system that will keep piracy to an acceptable level. This is made more complex by the fact that, once a decrypted copy is available, the Internet provides a mechanism for distributing it worldwide. Therefore, in theory, even a small leak can result in widespread piracy. Similarly, once a system has been successfully hacked, the Internet can be used to disseminate the method to others. The DMCA contains provisions designed to discourage hacking by creating legal roadblocks for hackers trying to develop and distribute programs to defeat technological protection systems.140 In part, the DMCA was enacted to meet the treaty obligations the U.S. entered into through the World Intellectual Property Organization (“WIPO”), including an obligation to provide protection against the circumvention of technological protection measures employed by copyright owners. The DMCA contains several controversial provisions designed to protect against such circumvention by prohibiting efforts to circumvent security systems. First, the DMCA prohibits anyone from circumventing "a technological measure that effectively controls access to a work protected under” the Copyright Act.141 This is referred to as the “anti-circumvention” provision. Second, the DMCA contains two closely related “anti-trafficking” provisions. One prohibits manufacture, sale or distribution of technologies or devices that are to be used “for the purpose of circumventing a technological measure that effectively controls access to a work protected under” the Copyright Act.142 The other is similar in structure, but instead applies to “technological measures that effectively protect a right of a copyright owner under” the Copyright Act.143 Thus the former provision applies to prevent circumvention of systems designed to limit access to the work itself, while the latter applies to prevent circumvention of systems designed to protect against unauthorized exercise of exclusive rights such as copying or public performance of the work. The prohibition on using anti-circumvention technology effectively applies to individual users, and thus may be relatively difficult to enforce through legal action (although it may induce voluntary compliance).144 Moreover, the DMCA does not prohibit the use of content that has been made accessible though circumvention. 139

See Stephen M. Kramarsky, “Copyright Enforcement in the Internet Age: The Law and Technology of Digital Rights Management,” J. Art & Ent. Law 11 (2001): 1, 8-9. 140 Its effective date was put off nearly two years to provide a period of adjustment primarily to “develop a record as to how the implementation of new technologies affects the availability of works for lawful uses.” See David Nimmer, “A Riff on Fair Use in the Digital Millennium Copyright Act,” U. Pa. L. Review 148 (2000): 673, 730 n.308. 141 17 U.S.C. § 1201(a)(1). 142 17 U.S.C. § 1201(a)(2). This prohibition also extends to technologies or devices that have “only a limited commercially significant purpose or use other than such circumvention” or are marketed with the person’s knowledge that it is for use in such circumvention. Id. 143 17 U.S.C. § 1201(b). 144 Glynn S. Lunney, “The Death Of Copyright: Digital Technology, Private Copying, And The Digital Millennium Copyright Act,” Va. L. Rev. 87 (2001): 813, 843.


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Therefore the anti-trafficking provisions, which attempt to prevent means of circumvention from being created and distributed, are likely to have greater practical significance as enforcement tools. Perhaps the most significant application of the anti-trafficking provisions has been to restrict Internet distribution of the DeCSS program (see discussion above).145 In another much-celebrated incident, a Russian hacker, Dmitry Sklyarov, and Elcomsoft, the Moscow software firm employing him, were indicted for criminal violations of the DMCA, based on their development and distribution of a program to defeat the security protecting Adobe’s e-book reader. Charges against him were dropped after he agreed to testify in any prosecution of his employer.146 In April 2002, a federal district judge rejected Elcomsoft’s motion for dismissal of the criminal charges on the ground that it was without jurisdiction since “the offense occurred primarily on the Internet and not in the U.S."147 The court rejected this claim based on substantial U.S. contacts – software was offered for sale on servers in the U.S., and was purchased by U.S. residents with payments made within the U.S.148 The DMCA has been attacked as violating the First Amendment, on the theory that the software code is protected speech, and the anti-trafficking provisions prohibit the dissemination of that speech (for example over the Internet). In the leading decision to date, Universal City Studios, Inc. v. Corley, 273 F.3d 429 (2d Cir. 2001), the Second Circuit rejected the claim that an injunction restricting posting or linking to DeCSS violated the First Amendment. The Second Circuit held that computer code “can merit First Amendment protection,” but that the anti-trafficking provisions were aimed at the non-speech or functional aspects of DeCSS.149 It therefore applied a relatively deferential level of scrutiny and upheld the law and the injunction. This will not end the controversy; an intermediate California appellate court recently reversed a grant of a preliminary injunction against posting of DeCSS, primarily on First Amendment grounds.150 First Amendment concerns have also been raised by encryption researchers who complain that the DMCA is inhibiting research and publication. When Professor Felten’s team claimed to have broken the SDMI code, its members reportedly received a letter from recording industry officials citing potential liability under the DMCA, which caused them to refrain from making their findings public. After further discussion (and some significant controversy), however, the results were subsequently made public, and

145

See, e.g., Universal City Studios, Inc. v. Corley, 273 F.3d 429 (2d Cir. 2001). Norwegian officials indicted the programmer who wrote DeCSS under Norwegian law in January 2002. See Amy Harmon, “Norway Indicts Teenage Programmer,” The New York Times, 11 January 2002, p. C2. 146 Matt Marshall, “Accused Russian programmer reaches deal with prosecution,” San Jose Mercury News, 14 December 2001. 147 Stephen Lawson, “Judge denies motion to dismiss Elcomsoft case,” InfoWorld Daily News, 2 April 2002 (quoting Joseph Burton, attorney for Elcomsoft). 148 Id. 149 273 F.3d 429, at 449, 450. 150 DVD Copy Control Ass’n. v. Andrew Bunner, 93 Cal. App. 4th 648; 113 Cal. Rptr. 2d 338 (2001).

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Felten’s case attacking the DMCA on First Amendment grounds was dismissed as moot in late 2001.151 Digital Rights Management and “Fair Use”: A series of concerns have been expressed that technological measures to protect content (and laws that support such measures) could diminish user rights.152 Some focus on the extent to which the technological measures and the DMCA will interfere with the exercise of user rights that are legal under the copyright bargain – such as the ability to engage in non-infringing uses and “fair use.” The broader policy concerns focus more on the potential for technological protection, especially DRM, to enable content owners to closely control (and charge separately for) various uses. Some commentators argue that basic technological protection measures that prevent access to a work can diminish user rights, since they prevent not just unlawful copyright infringement but other activities that do not infringe copyright or are protected by fair use. For example, Jessica Litman champions a right for consumers to experience works in “traditional” ways, and would protect it by limiting copyright to “commercial exploitation” of a work, enabling consumers to make copies for personal uses.153 Relatedly, a number of commentators maintain that the DMCA improperly interferes with the exercise of user rights by prohibiting circumventions of technological protection intended to enable non-infringing uses or fair uses.154 Their basic claim is that “[c]ourts should distinguish between circumvention aimed at getting unauthorized access to a work and circumvention aimed at making non-infringing uses of a lawfully obtained copy.”155 Some, like Lawrence Lessig, claim that similar limitations are necessary, based on the view that “fair use of copyrighted works is understood to be constitutionally required.”156 Most significantly, various commentators have expressed concerns about the potential for DRM to enable the exercise of the many potential uses of a work to be 151

See John Schwartz, “2 Copyright Cases Decided in Favor of Entertainment Industry,” The New York Times, 29 November 2001, p. C4. 152 See, e.g., Pamela Samuelson, “Intellectual Property and the Digital Economy: Why the Anticircumvention Regulations Need to Be Revised,” Berkeley Tech. L. J. 14 (1999): 519; John Therien, “Exorcising the Specter of a Pay-Per-Use Society: Toward Preserving Fair Use and the Public Domain in the Digital Age,” Berkley Tech L.J. 16 (2001): 979; James Boyle, “Cruel, Mean, or Lavish? Economic Analysis, Price Discrimination and Digital Intellectual Property,” Vand. L. Rev. 5 (2000): 2007.; Julie E. Cohen, “Copyright and the Perfect Curve,” Vand. L. Rev. 53 (2000): 1799.; Jessica Litman, Digital Copyright (Amherst, New York: Prometheus Books, 2001), 183. 153 Jessica Litman, Digital Copyright, 183. As discussed below, these arguments are now making their way into the public policy debate. 154 See, e.g. David M. Nimmer, “A Riff on Fair Use in the Digital Millennium Copyright Act,” U. Pa. L. Rev. 148 (2000): 673, 730.; Pamela Samuelson, “Intellectual Property and the Digital Economy: Why the Anticircumvention Regulations Need to Be Revised,” Berkeley Tech. L. J. 14 (1999): 519. 155 Pamela Samuelson, “Intellectual Property and the Digital Economy: Why the Anticircumvention Regulations Need to Be Revised,” Berkeley Tech. L. J. 14 (1999): 519, 539. 156 Lawrence Lessig, The Future of Ideas (New York: Random House, 2001), 188.


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“controlled, … unbundled and sold separately.”157 Some paint a picture in dire terms – the title of a recent story from Wired magazine referred to DRM as a “License to Bill” and suggested that “Big Media want you to pay for what you read, watch and hear – and keep paying. Digital rights management technology will make sure you do.”158 Critics also express similar concerns that DRM, like technological protection generally, will reduce access to non-infringing or fair uses, e.g., by creating opportunities to charge separately for what would otherwise be considered a noninfringing or fair use.159 More important, they claim that price discrimination could benefit content owners at users’ expense, by dramatically increasing the ability of content owners to exercise control and extract value from consumers, leading to reduced user benefits.160 These concerns need to be evaluated on both legal and policy grounds. In purely legal terms, there are a number of reasons for discounting claims that DRM technologies violate user rights under current law. To begin with, the fair use doctrine is a defense against claims of copyright infringement, not an independent source of user rights that would defeat an otherwise valid license restriction.161 Moreover, while certain forms of fair use (or non-infringing uses such as the right of a newspaper to quote or to paraphrase a statement) may also implicate First Amendment principles, these circumstances are limited: There is no generic First Amendment right to duplicate copyrighted material.162 The broader policy question, however, is whether technological restrictions and DRM, even if not interfering with legal rights, will violate consumers’ practical expectations. As a prominent National Research Council study recently suggested, “[a] widespread (and incorrect) belief prevails in society that private use copying is always

157

Lawrence Lessig, "The Law of the Horse: What Cyberlaw Might Teach,” Harv. L. Rev. 113 (1999): 501, 525. 158 Jeff Howe, “Licensed to Bill,” Wired, October 2001, 140. 159 See, e.g. John Therien, “Exorcising the Specter of a Pay-Per-Use Society,” Berkeley Tech. L.J 95, No. 4, Supplement (November 23, 2001): 937-977. 160 See, e.g. James Boyle, “Cruel, Mean, or Lavish? Economic Analysis, Price Discrimination and Digital Intellectual Property,” Vand. L. Rev. 5 (2000): 2007.; Julie E. Cohen, “Copyright and the Perfect Curve,” Vand. L. Rev. 53 (2000): 1799.; Julie E. Cohen, “Lochner In Cyberspace: The New Economic Orthodoxy of "Rights Management,” Mich. L. Rev. 97 (1998): 462. 161 See Raymond T. Nimmer, “Breaking Barriers: The Relation Between Contract and Intellectual Property Law,” Berkeley Tech. L.J. 13 (1998)827, 880-82. 162 See William F. Patry, The Fair Use Privilege in Copyright Law, 2d ed. (BNA Books Washington, DC, 1995) 579-80 (“There is, however, no constitutional right to steal a book or record from a store. There is no legal difference if the theft takes the form of an unauthorized reproduction.”); Dallas Cowboys Cheerleaders v. Scoreboard Posters, 600 F.2d 1184, 1188 (5th Cir. 1979) (“The First Amendment is not a license to trammel on legally recognized rights in intellectual property.”); Nimmer on Copyright, Vol. 1: §1.10[D] (“The first amendment guarantees the right to speak; it does not offer a governmental subsidy for the speaker, and particularly a subsidy at the expense of authors whose well-being is also a matter of public interest.”) Also, as Professor Bell observes, “fair use never comes for free,” due to the time and effort to locate and copy material. Tom W. Bell, “Fair Use vs. Fared Use: The Impact of Automated Rights Management on Copyright’s Fair Use Doctrine,” N.C.L. Rev. 76 (1998): 557; 580.

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or almost always lawful.”163 Such private use copying (e.g. borrowing and copying a friend’s CD) traditionally has not been challenged because the costs of enforcement were prohibitive. As a result, many consumers have come to regard such copying as an accepted use. DRM mechanisms could significantly interfere with such uses. On the other hand, technological protection will also generate significant benefits for consumers. By providing what may be the only effective protection for a content owner’s ability to receive compensation, technological protection may be essential for the work to be provided at all. DRM mechanisms can enable the implementation of new business models that may permit distributors to generate revenues sufficient to attract high-quality content. As discussed below, thus far it appears that traditional Internet business models have not generated such revenues, and firms are experimenting with a variety of alternatives, including some that impose limitations on use. As for concerns about the development of DRM-based business models that rely on price discrimination, there are a number of reasons to doubt such practices ultimately will prove harmful to consumers. First, economists generally recognize that a producer must have some degree of market power to engage in effective price discrimination.164 As noted earlier, leading economists view copyright as seldom granting a monopoly in an economic sense – content providers compete with each other, constraining their ability to extract rents from consumers.165 Content providers are further constrained by the need to provide products that consumers will value and therefore pay for. “[A] profit-maximizing supplier would have no general incentive to withhold or overprice desirable attributes.”166 As discussed below, there is evidence from the early experience with licensed online music services that competition is driving suppliers to respond to consumer preferences. Second, as economists have long recognized, price discrimination can enhance efficiency and consumer welfare by enabling the seller to serve more consumers than would be possible if only a single price and product can be offered.167 The potential for 163

The Digital Dilemma, at 214. See Fredrick M. Scherer, Industrial Market Structure and Economic Performance 2 ed. (Boston, Houghton Mifflin, 1980), 323. (“Price discrimination can be practiced profitably only if the discriminator possesses come monopoly power.”) 165 William M. Landes and Richard A. Posner, “An Economic Analysis of Copyright Law,” J. Legal Studies 23 (1989): 325, 361 (“[c]opyrights … rarely confer monopoly power”); Edmund W. Kitch, “Elementary and Persistent Errors in the Economic Analysis of Intellectual Property,” Vanderbilt Law Review 53 (2000): 1734 (“almost all copyrights … are not monopolies”). 166 Michael A. Einhorn, “Digital Rights Management and Access Protection: An Economic Analysis,” Presented at the Association Littéraire et Artistique Internationale 2001 Congress: Adjuncts and Alternatives to Copyright, New York, June 2001 (available at http://www.law.columbia.edu/conferences/2001/1_program en.htm). 166 For useful background, See Commission of the European Communities. Commission Staff Working Paper: Digital Rights: Background, Systems, Assessment. (February 14, 2002) (available at http://www.politechbot.com/docs/european.commission.drm.030202.pdf). 167 Dennis W. Carlton and Jeffery M. Perloff, Modern Industrial Organization 1st ed. (Addison Wesley Higher Education Publishers, 1990), 448-49 (discussing the conditions under which price discrimination can be beneficial or harmful). 164


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DRMs to provide such benefits has been widely recognized – for example, the Copyright Office has emphasized its potential benefits to consumers: [A] “pay-per-use" business model may be, in the words of the House Manager's Report, "use-facilitating" …. [M]any will probably find it advantageous to elect [a cheaper] "pay-per-use" option, which may make access to the work much more widely available than it would be in the absence of such an option.168 In short, DRM technologies may in the end make more content more affordable to more consumers than before – the exact opposite of what their detractors fear.169 One problem opponents of technological protection in general, and DRM in particular, need to confront is that the “cure” for their concerns might be worse than the disease: Permitting circumvention of technological protection systems in order to facilitate “fair use” copying might have the unintended effect of allowing its use for piracy as well. As Glynn Lunney explains: Dealing with decryption technology is difficult because the same decryption technology that enables the making of a non-infringing copy of a creative work also enables the making of an infringing copy …. As a result, decryption presents something close to an all-or nothing choice …. the DMCA's choice to limit almost altogether access to decryption technology may nevertheless prove the lesser evil ….170 168

U.S. Copyright Office. “Exemption to Prohibition on Circumvention of Copyright Protection Systems for Access Control Technologies.” Federal Register 65, (October 27, 2000): 64,556, 64,567).; Michael A. Einhorn, “Digital Rights Management and Access Protection: An Economic Analysis.” Presented at the Association Littéraire et Artistique Internationale 2001 Congress: Adjuncts and Alternatives to Copyright, New York, June 2001. (available at http://www.law.columbia.edu/conferences/2001/1_program en.htm). (“No-frills users may actually wind up paying less for basic services…”). Along similar lines, Professor Ginsburg observes that: “Access controls make it possible for authors to offer end-users a variety of distinctlypriced options for enjoyment of copyrighted works. Were delivery of works not secured,, novel forms of distribution would be discouraged, and end-users would continue to be charged for all uses, whatever the level in fact of their consumption. Jane C. Ginsburg, “From Having Copies to Experiencing Works: the Development of an Access Right in U.S. Copyright Law,” In U.S. Intellectual Property: Law and Policy, edited by Hugh Hansen, 3. (New York: Sweet & Maxwell, 2000). (available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=222493). 169 Indeed, Jane Ginsburg reports that a recent Copyright Office study found that “control over access appears, for now, to increase, rather than decrease, the public availability of works of authorship, because protection of technological measures removes a disincentive for copyright owners to disclose otherwise vulnerable works.” Jane C. Ginsburg, “Copyright And Control Over New Technologies Of Dissemination,” Colum. L. Rev. 101 (2001):1613, 1636. (citing U.S. Copyright Office. “Exemption to Prohibition on Circumvention of Copyright Protection Systems for Access Control Technologies.” Federal Register 65, (October 27, 2000): 64,556, 64,567). 170 Glynn S. Lunney, “The Death Of Copyright: Digital Technology, Private Copying, And The Digital Millennium Copyright Act,” Va. L. Rev. 87 (2001): 813, 820.

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All in all, it is virtually certain that technological countermeasures will continue to be deployed in the battle against online piracy and that hackers will continue efforts to defeat them. Further, new technologies will continue to affect the ways consumers obtain, experience – and pay for – digital content. It remains unclear, however, precisely how such systems will develop or how central a role they will play in the future of the online content marketplace. The ABC’s of Licensing Digital Content Even if there were no piracy, online music distribution would still depend on the ability of distributors to license content from content owners. Licensing arrangements for copyrighted music have always been complex. As the discussion below suggests, the advent of online distribution has only added to the complexities of the process. One source of complexity is the fact that “[e]very musical recording involves two separate copyrightable works:” the "musical work" (the notes and lyrics) and the "sound recording" itself.171 Typically the record company will hold the copyright in the recording, while the music publishers will generally be assigned the copyright by the composer. Thus the two copyrights are usually held by different entities, and licenses from each will generally be necessary to reproduce, distribute or publicly perform music. Further complicating the issue is the fact that different types of online delivery can at least arguably implicate different sets of rights, each requiring its own license. The net effect of all this complexity, still further aggravated by some unresolved legal issues, has made the licensing of online music a difficult and contentious process. In some instances, the copyright laws provide a means of shortcircuiting the licensing process by imposing “compulsory licensing.” Compulsory licenses allow the use of copyrighted material at a set fee, determined by negotiation or by the Copyright Office. While compulsory licensing ensures that content is available for a given use by a given class of users, it does so only by imposing de facto price controls, with all the distortions that generally accompany such systems. Thus, most economists regard compulsory licensing as a last resort to be applied only if voluntary licensing proves unworkable.172 To see how these issues play out in practice, it is useful to begin by understanding the differences between the two main forms of online distribution. In downloading, the entire music file is copied to the hard drive of the consumers’ PCs. It can either be made available for use without limitation, or limits can be placed on it technologically. These limits can include code making the file inaccessible after a period, code preventing copying, and code preventing use on other players. 171

See R. Anthony Reese, “Copyright and Internet Music Transmissions: Existing Law, Major Controversies, Possible Solutions,” U. Miami L. Rev. 55 (2001): 237, 240-42. 172 See, e.g., Gordon Tullock, The Political Economy of Rent Seeking (Kluwer, 1993) 224-35 (arguing that gains from government grants like compulsory licenses will likely be lost in rent-seeking activities); Robert P. Merges, “Contracting into Liability Rules: Intellectual Property Rights and Collective Rights Organizations,” Cal. L. Rev. 84 (1996): 1293, 1299 (summarizing arguments against compulsory licenses).


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In Webcasting, by contrast, a music site transmits (“streams”) a music file to a consumer who listens to it as it is received and processed in his computer. Typically only a few packets are processed at a time, and no permanent copy is created on the listener’s computer. A Webcast can be much like a standard radio broadcast, but, as discussed below, various business models can provide the consumer with much greater influence over the programming he receives. Downloading appears analogous to a reproduction (like making a CD), while Webcasting appears analogous to a public performance (like playing a song over the radio). However, the nature of Internet transmissions can blur the distinctions. In order to effectuate a download, bits must be transmitted over the Internet (like a performance). Conversely, in any Webcast, a portion of the music file must be stored in a RAM buffer prior to playing (like a reproduction). This blurring raises questions as to whether both downloads and Webcasting constitute both a reproduction and a public performance.173 If both rights are implicated, it becomes necessary to obtain two sets of licenses from two sets of rights holders (the publishers and the record companies), adding significantly to the complexity of the process.174 Licenses for Downloading: The Digital Performance Right in Sound Recordings Act makes compulsory licensing of the reproduction right held by music publishers applicable to downloads.175 The publishers, however, also argue that downloads constitute public performances of their works, for which a separate license must be obtained.176 While this position has been sharply criticized in government and academic circles, neither the courts nor Congress have resolved it definitively.177 In the meantime, publishers have reached an agreement with the record companies178 (and with other distributors, including Napster179) on a framework under which they are

173

R. Anthony Reese, “Copyright and Internet Music Transmissions: Existing Law, Major Controversies, Possible Solutions,” U. Miami L. Rev. 55 (2001): 250-263. 174 This may have limited practical effect in the case of the record companies, since both exclusive rights are generally concentrated in a single owner, so that they can treat the negotiation as for a single negotiation (particularly where there are no applicable compulsory licenses). 175 The Digital Performance Right in Sound Recordings Act of 1995, Pub. L. No. 104-139, 109 Stat. 336 (1995). 176 The record companies would hold the exclusive public performance right for the sound recording, but this is subject to certain restrictions and would not add to the value of their reproduction right. See R. Anthony Reese, “Copyright and Internet Music Transmissions: Existing Law, Major Controversies, Possible Solutions,” U. Miami L. Rev. 55 (2001): 237, 260-62. 177 For example, the IPNI Task Force Report stated simply that nevertheless took the position that such a transmission, "without the capability of simultaneous 'rendering'" of the work, "rather clearly" did not constitute a public performance. IPNI Task Force Report, at 71. 178 See Dawn C. Chmielewski, “Last obstacle removed for online music services,” San Jose Mercury News 10 October 2001.; Jon Healey, ”Deal Reached on Online Music,” Los Angeles Times 10 October 2001, pt. 3, p. 4. 179 See Matthew Fordahl, “Napster strikes deal with music publishers' agency,” The Associated Press 24 September 2001.; Tamara Conniff, “Napster in harmony with publishers,” The Hollywood Reporter, 25 September 2001.

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compensated for on-demand streaming and limited digital downloads provided through a subscription service.180 The reproduction rights held by record companies are not subject to compulsory licensing. Each company is of course free to distribute content for which it owns the rights, but both record companies and independent distributors must negotiate licenses for content owned by other companies. As discussed below, the process of negotiating such licenses, after many starts and stops, now appears to be moving forward. Licensing for Webcasting: Licenses for Webcasting or streaming raise still more complex issues because (1) services can vary widely, e.g. based on the degree of to which the service permits user tailoring or interactivity, and (2) the applicable licensing regime depends on the type of service provided. First, it is clear that Webcasting implicates the public performance rights for the musical work, both those held by the music publishers and those held by the record companies. The public performance right from the music publishers is generally available from the licensing rights societies (mainly ASCAP and BMI), or from the music publishers for particular works, and this process appears to operate relatively smoothly. The public performance rights held by the record companies are governed by the DMCA and The Digital Performance Right in Sound Recordings Act of 1995,181 in which Congress granted the record companies an exclusive right to public performance by means of digital audio transmission (e.g. Webcasting), and then established a limited compulsory licensing regime. In doing so, it established “a three-tiered system for categorizing digital transmissions based on their likelihood to affect record sales:”182 Certain specific transmissions were made exempt, non-interactive Webcasts (with restrictions) were accorded a compulsory license, and interactive Webcasts were required to obtain standard voluntary licenses. In February 2002, a Copyright Arbitration Royalty Panel proposed rates applied to Webcasts of commercial radio station broadcasts (0.07 cents per streamed to a listener) and other non-interactive Webcasts (0.14 cents per streamed to a listener).183 Both the record companies and the Webcasters 180

to be song song have

One record company attempted to rely on the compulsory license mechanism and the mechanical license it had received from the music publisher when it streamed recordings containing the particular musical work, but this claim was rejected. See Rogers & Hammerstein Org. v. UMG Recordings, Inc., 2001 U.S. Dist. LEXIS 16111 (S.D.N.Y. September 26, 2001). Attempts to have pre-existing contractual arrangements govern digital distribution have been attempted by newspapers (See N.Y. Times Co. v. Tasini, 533 U.S. 483 (2001) and book publishers (See Random House, Inc. v. Rosetta Books LLC, 150 F. Supp. 2d 613 (S.D.N.Y. 2001)). 181 The Digital Performance Right in Sound Recordings Act of 1995, Pub. L. No. 104-139, 109 Stat. 336 (1995) (as amended by the Digital Millennium Copyright Act). 182 Bonneville v. Peters, 153 F. Supp. 2d 763, 767 (E.D. Pa 2001) (citing S. Rep. No. 104-128 (1995) at 13-15, 17; H.R. Rep. No. 104-274 (1995) at 5-9, 12-13). 183 “Report Of The Copyright Arbitration Royalty Panel,” In re Rate Setting For Digital Performance Right Carp Dtra 1 & 2 In Sound Recordings And Ephemeral Recordings, Docket No. 2000-9, CARP DTRA 1 & 2, (February 20, 2002) (available at http://www.loc.gov/copyright/carp/webcasting_rates.pdf). See also:


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appealed the ruling – the former seeking higher rates and the former arguing for lower ones.184 Some Webcasters argue that if the rates are put into effect by the Copyright Office, “[t]he Webcasting landscape will be a moonscape in six months.”185 Others maintain that even with lower rates some will go under due to lack of revenues. The Librarian of Congress must decide by May 21, 2002 whether to accept the rates, and can reject them only if they are “arbitrary or contrary to any provision in the Copyright Act.”186 In the meantime, a significant debate is underway on what constitutes an “interactive” Webcast. Some Webcasters, for example, provide “narrowcasts” – a very specific type of music intended to appeal to the tastes of a particular group. Even further along are stations that give some control to the listener over the music played – for example the opportunity to skip to the next song. And some services provide the listener with virtually complete control – i.e. on-demand streaming. The Copyright Office, in declining to make a ruling on which of these services, if any, constitute interactive programming, observed that “[w]hat is not clear is how much influence a consumer can have on the programming offered … before that activity must be characterized as interactive.”187 It also declined to determine in advance the eligibility of various Webcasters to participate in the CARP based on whether they offered interactive services.188 The record companies and Webcasters have instituted litigation seeking judicial declarations of what qualifies as interactive services with respect to the public performance right.189 Finally, in its DMCA report, the Copyright Office found that “temporary buffer copies that are incidental to a licensed digital transmission of a public performance”190 Amy Harmon, “Panel's Ruling on Royalties Is Setback for Web Radio Services,” The New York Times, 21 February 2002, p. C11; Brad King, “Webcasters Learn Cost of Music,” Wired News, 21 February 2002.; U.S. Copyright Office, “Digital Performance Rights in Sound Recordings and Ephemeral Recordings.” Federal Register 66 (July 23, 2001) 38324; U.S. Copyright Office, “Digital Performance Right in Sound Recordings and Ephemeral Recordings: Initiation of Voluntary Negotiation Period,” Federal Register 67 (January 30, 2002) 4472. 184 Jon Healy, “Groups Appeal Online Royalties Proposal,” Los Angeles Times, 8 March 2002, pt. 3 p.4. 185 Dawn C. Chmielewski, “Small Webcasters Threatened By Fees,” San Jose Mercury News, 24 March 2002, p.1 (quoting Sean Ryan, CEO of leading webcaster Listen.com). See also, Jenna Greene, “Pennies and millions at stake in D.C. hearing,” The National Law Journal (August 27, 2001): A17 (quoting Kenneth Steinthal, a lawyer representing the broadcasters, as arguing that the recording industry’s proposal “changes the economics of the entire industry," and “would make the cost of Webcasting so prohibitive it wouldn't exist"); Brooks Boliek, “Webcasters see RIAA as Goliath in royalty tiff,” The Hollywood Reporter, 01 August 2001 (describing webcasters’ arguments that existing webcasting licenses did not accurately reflect the market). 186 U.S. Copyright Office, Information about the Process for Setting Webcasting Rates and Terms (available at http://www.loc.gov/copyright/carp/webcast_process.html). 187 U.S. Copyright Office, “Public Performance of Sound Recordings: Definition of a Service,” Federal Register 65 (December 11, 2000) 77330, 77332. 188 See id. 189 Jenna Greene, “Tug of War Over Webcast Royalties,” Legal Times, 14 August 2001, p.1. 190 U.S. Copyright Office, DMCA Section 104 Report. (August 2001) 142-43 (hereinafter “DMCA Report”) (available at www.loc.gov/copyright/reports/studies/dmca/dmca_study.html).

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do not infringe the reproduction right (and may be fair use), and recommended legislation to clarify this aspect of the law. It emphasized that the “economic value” was in the public performance rights already licensed and that “the buffer copies have no independent economic significance.” 191 As the discussion above indicates, the process of licensing digital online content is both complex and contentious. To some extent, however, the complexity is inherent in the nature of the products and the marketplace – a complex system is needed to govern a complex set of rights involving diverse products and services, and is not necessarily evidence of the need for reform. And, as the experience with compulsory licensing indicates, a certain degree of contentiousness would seem to be an inevitable result of the significant economic stakes involved. As discussed below, however, policymakers are keeping a close eye on the process, and various proposals for change – including extensions of actual or de facto compulsory licensing to other elements of the process – are being debated. As the market develops, legal uncertainties are resolved in the courts, and property rights become better defined, there is also reason to hope that the process will evolve naturally in the direction of greater harmony and simplicity. V. Dynamic Markets, Changing Policies While Napster and its imitators have demonstrated that there is indeed a market for online music, the legitimate (i.e. licensed) market for digital online content remains in a relatively early stage of development. Thus, while billions of music files continue to be “swapped” online every month, we are still a long way from having a robust, efficient, mature marketplace for digital online content. While the difficulties of policing piracy and the complexities of achieving agreements on licensing issues no doubt have slowed the market’s development, it is also true that technologies, business models and infrastructures take time to put in place, and consumer habits are often slow to change. In this section, we review the state of play (no pun intended) in the online music distribution business – and find it to be dynamic and rapidly growing. Next, we examine some key components of the policy debate, focusing mainly on proposals relating to music licensing and the setting of standards for technological protection. Like the marketplace, the policy debate appears to be at a relatively early and dynamic stage, with policymakers generally far away from a consensus on any major changes. Given the dynamic state of the market, the lack of a consensus on policy may be, for the time being at least, a good thing. In the long run, however, we believe policy changes will be needed, and at the end of this section we suggest some areas we believe merit further exploration. 191

DMCA Report, at 143. There exists stream-ripping technology designed to capture the information from stored temporarily in RAM and copy it, so that the user obtains a digital copy, but the “leakage” this causes may be limited. Library Of Congress, Copyright Arbitration Royalty Panel, In the Matter of Digital Performance Right in Sound Recordings and Ephemeral Recordings (Docket 2000-9), Testimony of William W. Fisher III ¶ ¶ 27-29 (available at http://216.239.51.100/search?q=cache:6Txl_8HVPUwC: cyber.law.harvard.edu/jz/jzcarp2.pdf+stream-ripping+and+testimony&hl=en).


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The State of the Marketplace The explosive growth of Napster and similar P2P file sharing services has demonstrated that there is a demand for music delivered over the Internet, so long as it’s free, and that music will be supplied over the Internet, so long as its owners don’t have to be compensated. What has not yet been proven, however, is that a sustainable business model exists that can provide value to consumers while preserving the incentives of suppliers to continue creating, producing and distributing their wares. And, indeed, early efforts to create licensed outlets for online distribution were not commercially successful. By early 2002, however, there were enough commercial ventures underway that the market for online music appeared to be reaching critical mass. Thus, while we may not yet see light at the end of the digital tunnel, it is fair to say we are least beginning to hear the music. Some early online music suppliers built their business plans around advertiser support. Indeed, Webcasting services continue to rely heavily or exclusively on advertising revenues, just like their broadcast radio cousins. However, there is little reason to believe that revenues from advertising will be sufficient to support broader exploitation of rich content (e.g., downloads or on-demand streaming). Indeed, with the downturn in advertising demand, even the largest Webcasters are having a difficult time staying afloat.192 In late 2001 and early 2002, however, several new services were launched that rely on a subscription model – that is, selling access to a set amount of music, either through downloads or streaming, for a fixed price per month. This approach has been used with great success on the Internet, with AOL being a prime example. The subscription-based services that have thus far received the most attention are two joint ventures formed by the major record companies – which, interestingly, have adopted divergent business strategies. MusicNet is a joint venture of AOL/Time Warner, EMI and Bertelsmann, with RealNetwork as the technology partner.193 MusicNet acts as a wholesaler, licensing online retailers to distribute its catalog of music over the Internet. Pressplay pairs Sony and Vivendi, and has a technology agreement with Microsoft. 194 It sets the prices and provides service through various online affiliates who receive a percentage of the revenues. In each venture, each of the record company partners has licensed portions of its catalog to the joint venture on a non192

See Dawn C. Chmielewski, “Signal fading on biggest Webcast Live365,” San Jose Mercury News, 3 January 2002 (reporting on the financial difficulties facing the largest internet radio network); Jon Healey, “Digital Living Room: Net Radio Feels Pinch of Ad Slump,” Los Angeles Times, 3 May 2001, pt. T, p. 2 (reporting on the effect of internet advertising downturn on webcasters); Bob Tedeschi, “Web radio executives await a ruling on royalties they must pay recording companies to stream music,” The New York Times, 18 February 2002, p. C5 (describing limited interest in internet advertising to support webcasts and low profits). See also discussion above, p. 32. 193 Information about MusicNet is available at www.musicnet.com. 194 Information about pressplay Is available at www.pressplay.com.

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exclusive basis. Each has reportedly discussed licensing the catalogs of the other’s partners (indeed, EMI has also licensed its catalog to pressplay).195 Both have licensed music from independent labels as well. MusicNet and pressplay are experimenting with price and service options. Each has imposed substantial restrictions on the use of the music – for example there are limits on the ability to transfer music from a computer to other devices.196 These restrictions, as well as the fact that the choices of music remain limited, have been criticized extensively in the press.197 The companies have responded that the limitations reflect the early stage of development of the products and/or their continued concerns about making content available in the absence of effective copy protection. By early 2002, MusicNet and pressplay had been joined by a number of new entrants that had either begun offering services or announced plans to do so in the very near term. Some of these new entrants are working in collaboration with the music industry partnerships, including RealOne and AOL (MusicNet), and Microsoft and Yahoo (pressplay). Others are offering services independent of the joint ventures. Napster began testing a preliminary version of a new service in January and is negotiating with the major labels. Listen.com offers Rhapsody, which provides ondemand streaming for music from independent labels, and has licensed music from four of the major record companies – Warner, BMG, EMI, and Sony.198 Another streaming service, Echo (which is in the process of relaunching as a subscription service), has licensed Time-Warner’s catalog.199 EMusic.com also provides a subscription service.200 And MusicMatch, having “negotiated the tricky licensing issues,” has 100,000 customers for its streaming radio business as of 2002.201 A number of other firms are also seeking licenses. There are also a variety of companies providing related software and devices to support licensed provision of music. RioPort's PulseOne Media Service enables firms to sell and deliver digital music content to consumers over the Internet simply and securely.202 RioPort also offers technology to automate order fulfillment and provide 195

See Bob Tedeschi, “E-Commerce Report: Record Labels Struggle with Napster Alternatives,” The New York Times, 23 April 2001, C7; Jon Healey, “Pressplay Sets Deal to License Songs From EMI,” Los Angeles Times, 3 October 2001, pt.3 p.6. 196 MusicNet does not permit users to “burn” songs to CDs or transfer them to other devices; pressplay permits limited burning, but otherwise has similar restrictions. 197 Jon Healey, “Digital Living Room: Music Subscription Services Singing Different Tunes,” Los Angeles Times, 13 December 2001, pt. T p.1 (quoting Dennis Mudd, chief executive of MusicMatch, an MP3 jukebox software maker); David Bloom, “Nap Attack: The record industry fights back. But are they going too far?,” New Times Los Angeles, 6 December 2001 (available at http://www.newtimesla.com/issues/2001-12-06/music.html/1/index.html). 198 Press Release, “Warner Music Group Licenses Catalog to Listen.com for Rhapsody Subscription Service,” (February 25, 2002). 199 Information is available at www.echo.com/home.jsp?bhtime=1010689685075. 200 Information is available at www.emusic.com. 201 Brad King, “Online Tunes: People Are Paying,” Wired News, 22 February 2002. (available at www.wired.com/news/mp3/0,1285,50565,00.html). 202 Information about RioPort's PulseOne Media Service is available at http://www.rioport.com/RioProductsNew/1,4930,,00.html.


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DRM. Gracenote’s CDDB Music Recognition Service is the largest online database of audio CD and song titles. It also offers sellers the ability to aggregate and deliver additional content related to the music as it plays.203 How will these services fare in the marketplace? One seemingly obvious conclusion is that it is and will remain difficult for subscription-based services to succeed so long as they are competing against the “free” alternatives of piracy-based offerings. Some have suggested that subscription services can overcome the problem of having to charge money for their primary products by offering differentiated services or additional features. They argue that “[t]he judicious selection of a business model may significantly reduce the need for technical protection or legal protection…”204 Others say the problem is subscription fees are “too high,” and that they would have more success if they would only charge more “reasonable” prices.205 Many observers, indeed, believe that piracy-based competition to the subscription services poses a substantial, perhaps insurmountable problem, arguing that “[t]he illegal services are going to be way more compelling.”206 Not only are the services free, they point out, but because they are completely unrestricted by licensing agreements they can provide broader selections of music with virtually no restrictions on use. The new subscription services recognize the difficulty: “Free and unlimited is a difficult thing to compete with,” one executive pointed out recently.207 One reason content owners may be inclined to accelerate their online distribution efforts is that online piracy appears, for the first time, to be eating significantly into offline sales. While demand for music CDs had remained fairly strong in 1999 and 2000, unit sales of CDs fell 6.4 percent in 2001, while overall sales of recorded music were down over 10 percent.208 Record company executives attributed much of the decline to increased piracy, emphasizing survey evidence that those downloading music from the Internet are now far more likely to copy the music to other media, such as

203

Information about Gracenote’s products is available at http://www.gracenote.com/about.html. The Digital Dilemma, at 224. 205 See, e.g., Rob Pegoraro, “Labels With The Wrong Music Mission,” The Washington Post, 21 December 2001, p. E1 (stating his “refus[al] to believe that there's no business to be had in selling music online at a reasonable price” despite piracy); Stephanie Sanborn, “Digital content providers search for a moneymaking business model,” InfoWorld, 31 July 2000, 8 (quoting Clickshare’s vice president Bill Densmore as maintaining that when “presented with prices and processes that are reasonable,” people will not engage in piracy). 206 Jon Healey, “Labels Prepare Their Online Assault: Music giants are launching Internet offerings, but some doubt they can compete with free services,” Los Angeles Times, 23 July 2001, pt. 3 p.1. See also, Warren Cohen, “Digital Music Fans Face a Battle of the Bands,” Fortune, 29 October 2001, 34; Maureen Sirhal, “E-music Industry Gets Into a Groove,” National Journal's Tech Daily, 10 December 2001. 207 BBC News, “MusicNet to Launch 'In 60 days'.” BBC News, 27 September 2001 (quoting Richard Wolpert of MusicNet). 208 Adam Creed, “RIAA Blames Digital Music Pirates for Bad Year,” Newsbytes, 25 February 2002 (available at http://www.newsbytes.com/news/02/174732.html); Tamara Conniff, “Piracy Cited for album slump,” The Hollywood Reporter, 25 February 2002. 204

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CDs.209 Others speculated soft sales were attributable to online piracy “to some extent,” but also emphasized the bad economy that left holiday sales off overall.210 For whatever reason, the market for licensed online music now appears to be developing at a rapid pace, and most agree it will continue to do so. As Aram Sinnreich, senior analyst with Jupiter Media Metrix, recently put it: "The fundamental question in a post-Napster era is, 'Can you create a business model?' The answer is yes.”211 The Policy Options While the emergence of legitimate online music services represents clear progress, many observers agree copyright protection needs to be strengthened if the market for online digital content is to reach its full potential. As FCC Chairman Powell said in a recent speech: [M]uch of the broadband-intensive content that is likely to be the core of broadband applications … is in the hands of major copyright holders that are unlikely to make it widely available without stringent protections and a way to profit from its distribution (see, for example, the Napster experience). This will take some hard work and time.212 Chairman Powell’s remarks reflect one important perspective on what is needed for the marketplace to develop, which we largely share: That clear and enforceable property rights are essential to the development of a sustainable, value-producing marketplace. As noted above, however, some believe that property rights are less important than encouraging more rapid (perhaps even compulsory) licensing of online distribution rights and the development of alternative business models that do not rely on charging for copyrighted material itself. Not surprisingly, these alternative views are reflected in the two main legislative proposals before Congress, the Music Online Competition Act and the Consumer Broadband and Digital Television Promotion Act. The Music Online Competition Act:213 On August 3, 2001, Congressmen Cannon and Boucher introduced the Music Online Competition Act (“MOCA” or the “Cannon-Boucher Bill”). MOCA’s most significant provision requires holders of sound recording copyrights to license independent Internet music distributors on terms that are no less favorable than those on which they license “affiliated” 214 distributors (such as

209

Id. “CD Prices set to take a plunge,” Reuters, 28 December 2001. 211 Brad King, “Online Tunes: People Are Paying,” Wired News, 22 February 2002. (available at www.wired.com/news/mp3/0,1285,50565,00.html). 212 Powell Broadband Deployment Remarks, at 5. 213 A copy of the bill as introduced is available at www.house.gov/boucher/docs/CANNON_0282.PDF; a summary is available at www.house.gov/boucher/docs/moca-summary.htm. 214 A distributing entity is “affiliated” with a licensor (record company) if the licensor has a five percent ownership interest in the entity. § 4(b)(2)(A). 210


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the joint ventures MusicNet and pressplay).215 MOCA’s non-discrimination approach can be viewed as a form of compulsory licensing, where the terms are set by reference to contracts with affiliates rather than by a government agency. The practical application of this requirement is very complex, due to the wide variation among potential licensees. The legislation attempts to address this problem by providing that if there are any of five specified “material differences in the scope of the requested license”, then “different terms and conditions” may be imposed. It requires that any different terms and conditions “accurately reflect any such material differences,” and apparently intends that only these five differences may be considered.216 In addition, MOCA specifically permits the record companies to set “reasonable and non-discriminatory performance criteria” for digital rights management technologies and for digital music players in the license, but precludes them from requiring the use of any specific technology.217 The other key provisions are a series of expansions in exceptions from copyright liability for certain types of copies and performances. These include exceptions for (1) “ephemeral” copies of a musical work that are stored on a consumer’s computer during Webcasts, and (2) consumer’s archival (i.e. back-up) copies of legitimately obtained music files. The bill also includes exemptions for Webcasters to make multiple “ephemeral” copies on various servers and for promotional Webcasts of 30 to 60 second music samples from royalty obligations. Finally, the bill contains several provisions relating to exercise of existing compulsory licenses. One provision is designed to streamline the process through which Webcasters can obtain the existing statutory license to perform musical works over the Internet.218 Another directs the Copyright Office and Commerce Department to study the impact of the programming restrictions that Webcasters must observe to be eligible for a statutory license for Webcasting. A third requires that payments under the compulsory license for the digital sound recording performance rights (which are required to be divided equally between the record company and the artist) be made directly to each group rather than to the record company. The Consumer Broadband and Digital Television Promotion Act: In March 2002, Senator Hollings (with five other Senators cosponsoring) introduced the CBDTPA. This legislation had been long-awaited, and was instantly the subject of much controversy. The CBDTPA would impose a broad regulatory framework over security technologies used in a wide range of devices and media, requiring all new “digital media

215

Specifically, it requires that “be made available on no less favorable terms to all bona fide [independent] entities that offer similar services.” § 4(b)(1)(A). 216 The five specific aspects of license scope identified as potentially warranting different terms and conditions are: “the type of service, the particular recordings licensed, the frequency of use, the number of subscribers, or the duration.” § 4(b)(1)(A). 217 § 4(b)(3). 218 The Copyright Office itself recently proposed to make extensive changes to make the procedures for processing applications for compulsory licenses easier.

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devices”219 to incorporate “standard security technologies.”220 It prohibits firms from making or selling any digital media devices that do not include and utilize standard security technologies, prohibits consumers from removing or altering any such security technologies, and requires that interactive computer services store and transmit security measures “with integrity.”221 The Hollings bill directs the Federal Communications Commission, in consultation with the Register of Copyrights, to ensure that security system standards are adopted according to a specific timetable. It gives representatives of digital device manufacturers and copyright owners one year to reach a consensus on standards (which may be extended to 18 months). Any standard agreed to by industry representatives is to be adopted by the FCC pursuant to notice and comment rulemaking. If no agreement on standards is reached, the FCC, in consultation with industry representatives and the Register of Copyrights, must initiate a rulemaking and adopt standards within one additional year. The bill provides very little guidance as to the content of standards, merely listing six criteria they should meet “to the extent practicable.”222 It does require that encoding rules adopted “take into account the limitations on the exclusive rights of copyright owners, including the fair use doctrine,” and specifically protects the right to engage in time-shifting of television broadcasts.223 The Hollings bill has provoked a contentious debate over the role of technological protection and DRM in the future of the online content marketplace. One perspective comes from those who fear the impact of such technologies on consumer practices such as private copying. Thus, Congressman Boucher has expressed concern that the protections being utilized to prevent piracy of CDs may interfere with consumer rights under the Audio Home Recording Act of 1992.224 He recently requested assurances from content owners that user rights would be respected,225 and has called for legislation to reaffirm elements of the fair use doctrine.226 A new consumer group, DigitalConsumer.org, is seeking legislation (the “Consumer Technology Bill of Rights”) 219

A digital media device mans “any hardware or software that – (A) reproduces copyrighted works in digital form; (B) converts copyrighted works in digital form into a form whereby the images and sounds are visible or audible; or (C) retrieves or accesses copyrighted works in digital form and transfers or makes available for transfer such works on hardware or software described in described in subparagraph (B). § 9(3). 220 See §§ 5 and 9(1). 221 See §§ 4-6. It does permit the use and resale of devices that do not include technology satisfying a standard, provided that the device was first sold prior to the effective date of that security standard. See § 5. It also prohibits the use of a certified technology for the purpose of preventing a person from making personal copies of programs on broadcast TV or non-premium cable or satellite services for the purpose of time-shifting. See §§ 4-6. 222 See § 3(d). 223 See § 3(e). 224 See Letter from Congressman Rick Boucher to Hilary B. Rosen, President and CEO, RIAA and Jay Berman Chairman and CEO, IFPI (January 4, 2002) (available at http://www.house.gov/boucher/docs/riaaletter.htm). 225 Id. 226 See Congressman Rick Boucher Urges Reaffirmation of Fair Use Rights (available at http://www.house.gov/boucher/docs/fairuse.htm).


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that aims to protect consumers’ ability to use digital technology to time-shift or spaceshift content, make backup copies, and convert content into different formats.227 Some of the computer manufacturers have begun to sound these themes as well. Fair use advocates describe Apple’s well-known campaign (“Rip, mix, burn, Apple instructs. After all, it’s your music.”) as an illustration of the variety of ways in which computers can promote creativity.228 In April 2002, Gateway followed Apple’s lead, launching a campaign to promote downloading of music, and opposing efforts to impose technological standards that would limit the use of computers for such uses. Its new TV ad proclaims that “Gateway supports your right to enjoy digital music legally.”229 At the opposite end of the spectrum, Disney President and CEO Michael Eisner recently testified before the Senate Commerce Committee in support of the Hollings bill. In his testimony, he was intensely critical of the computer sector, claiming that “at least one high-tech executive has described illegal piracy content as a ‘killer application’ that will drive consumer demand for Broadband.”230 The computer and hardware industries respond that they have collaborated willingly in a number of standards-setting exercises, and will continue to do so in the future. Government-mandated standards, however, could have a disastrous impact on innovation and detract from the tremendous value consumers get from personal computers and other digital devices. As Intel Executive Vice President Les Vadasz put it in testimony before Senator Hollings, “Any attempt to inject a regulatory process into the design of our products will irreparably damage the high-tech industry: it will substantially retard innovation, investment in new technologies, and will reduce the usefulness of our products to consumers.”231 Given the level of controversy surrounding both the Cannon-Boucher and Hollings proposals, it seems quite unlikely either will pass Congress in anything like its current form. A number of less expansive proposals, however, are being seriously considered by relevant committees in Congress. While many could have important effects on particular aspects of the law as it applies to online distribution, and some

227

Benny Evangelista, “Fighting for consumers' digital rights: Group proposes law to protect personal use of music, other content,” The San Francisco Chronicle, 15 March 2002, p. B2. 228 Lawrence Lessig, The Future of Ideas (New York: Random House, 2001) 9-11. 229 Jim Hu, “Gateway sings praises for digital music,” ZD News, 10 April 2002 (available at http://zdnet.com.com/2100-1104-879865.html). Gateway maintains that it ultimately hopes for “a marketdriven solution that comes out of technology and content companies working together." Id. (quoting Gateway spokesman Brad Williams). 230 Testimony of Michael D. Eisner Before the Committee on Commerce, Science and Transportation, (February 28, 2002). See also Brooks Boliek, “Eisner: Piracy 'killer app' for computer profiteers,” The Hollywood Reporter, 1 March 2002.; See also Amy Harmon, “Piracy, or Innovation? It's Hollywood vs. High Tech,” The New York Times, 14 March 2002, p. C1. 231 Testimony of Leslie L. Vadasz, Before the Committee on Commerce, Science and Transportation (February 28, 2002).

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would help clarify important ambiguities in the current property rights regime, none would fundamentally reshape the current framework. 232 Where To From Here? It has not been our goal in this paper to reach any final conclusions with respect to policy proposals, nor to offer specific recommendations for reform. In conclusion, however, we do offer a few observations on where the marketplace is likely headed, and what policymakers ought to consider in thinking about proposed changes in policy. First, it is clear that rich digital online content will play a key role in the next generation of IT sector growth. Enabled by the widespread adoption of broadband networks, consumers increasingly will seek to obtain music, video, digital gaming and related content over the Internet. As they do so, they will create demand for new types of digital services and devices. No one can know precisely what form these services or devices will take, but even the most cursory analysis demonstrates that the economic growth associated with the transition to Web-based content will be substantial, fundamentally transforming the IT sector, from services like broadcasting and communications to products like personal computers and wireless telephones. Second, the marketplace for digital online content is dynamic and growing rapidly. Historically, such markets have tended to develop along an “S” curve, with growth in the early years generally relatively flat until an “inflection point” is reached where growth accelerates exponentially. During the early period, it is typical for firms to experiment with different business models. (In the case of radio, for example, programming initially was provided commercial free by radio manufacturers seeking to encourage consumers to buy radios.) Such experimentation is now well underway in the market for digital online content. Third, competitive pressures and the desire to attract consumers provide strong incentives for all of the participants in the online music business to meet consumers’ needs. As the marketplace continues to develop, new business models will emerge. Most of them will fail, sometimes because a better model comes along, other times because consumers find some aspect or other offensive or unattractive. Policymakers would do well to allow this process of “creative destruction” to work its course. Fourth, and especially given the dynamic state of the marketplace, policymakers should be cautious about jumping in to dictate in advance outcomes that might turn out to be quite different from those that would be arrived at in the market. Thus, for example, proposals (such as MOCA) which would further regulate the terms and 232

Some of the proposals being debated are discussed in an August 2001 report by the Copyright Office evaluating the impact of the DMCA on certain aspects of copyright law, including fair use. See U.S. Copyright Office, DMCA Section 104 Report (August 2001) (available at http://www.loc.gov/copyright/reports/studies/dmca/sec-104-report-vol-1.pdf). See also Testimony of Marybeth Peters, Register of Copyrights, Before the Subcommittee on Courts, the Internet and Intellectual Property Committee on the Judiciary United States House of Representatives (December 12, 2001) (available at http://www.loc.gov/copyright/docs/regstat121201.html).


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conditions under which online content must be licensed could unwittingly prevent the development of the very business models needed for online content to reach consumers. As for the setting of technological standards, the need for effective copyright protection should be weighed against the very real potential for government to mandate costly and/or ineffective technological solutions. Fifth, and finally, it seems apparent that there is room for improvement in the current framework as it applies to the definition and enforcement of property rights. With respect to enforcement in particular, it is difficult to praise a system that has thus far failed to provide an effective deterrent to the massive piracy embodied in P2P file swapping. If improvements are to be made in the law, the first place to look should be in the arena where government’s role is clear: To help define property rights and provide the means by which they can be enforced.

The Progress & Freedom Foundation is a market-oriented think tank that studies the digital revolution and its implications for public policy. Its mission is to educate policymakers, opinion leaders and the public about issues associated with technological change, based on a philosophy of limited government, free markets and civil liberties. The Foundation disseminates the results of its work through books, studies, seminars, conferences and electronic media of all forms. Established in 1993, it is a private, non-profit, non-partisan organization supported by tax-deductible donations from corporations, foundations and individuals. PFF does not engage in lobbying activities or take positions on legislation. The views expressed here are those of the authors, and do not necessarily represent the views of the Foundation, its Board of Directors, officers or staff.

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