promises to keep: technology, law, and the future of entertainment william fisher march 25, 2003

Promises to Keep:Technology, Law, and the Future of

Entertainment

William Fisher

March 25, 2003

OutlineI. Potential Benefits of New TechnologiesII. Background: Copyright Law circa 1990III. Cycles of Innovation and Resistance

DAT Recorders / AHRA Encryption circumvention / DMCA §1201 Music Lockers / MP3.com litigation Webcasting / DPRA-DMCA §114; CARP ruling Centralized File Sharing / Napster-Scour litigation P2P / P2P litigation; limited authorized services CD Burning / CD copy protection

IV. Defects of the Resultant SystemV. Where Do We Go from Here?

A. Private PropertyB. Regulated IndustryC. An Alternative Compensation System

TechnologiesDownloading: Transmission over the Internet of a

digital copy of a recorded musical performance, followed by storage of that file on the recipient’s computer, enabling the music to be replayed repeatedly on demand

Interactive Streaming: At the request of the recipient, transmission over the Internet of a digital copy of a recorded musical performance, which is then “played” but not stored

Noninteractive Streaming: Same process not at the request of the recipient

Distribution of the SRLP of a Typical CD

Retailer: 38%

Distributor: 8%Marketing: 8%

Manufacturer: 8%

Recording Artist: 12%

Overhead: 14%

Music Publisher: 4%

A&R: 5%

RC Profit: 1%

Functions of Record Companies

A&R (Artists and Repertoire)

ProductionPromotionDistributionRisk Spreading

Rapidly dropping studio costs

Less dependence on (expensive) radio promotion

Inexpensive distribution through the Internet

Fewer “losers”; less need for insurance

Internet Distribution

Retailer: 38%

Distributor: 8%Marketing: 8%

Manufacturer: 8%

Recording Artist: 12%

Overhead: 14%

Music Publisher: 4%

A&R: 5%

RC Profit: 1%

Results: increased revenues for writers and artists, decreased prices for consumers, or both

Internet Distribution of Unsecured Digital Files

Benefits(1) Cost Savings(2) Eliminate

Overproduction and underproduction

(3) Convenience & precision

(4) Increase number & variety of musicians

(5) Semiotic Democracy

Dangers:

(1) Threaten Revenues of Creators

--fairness

--incentives

(2) Threaten Moral Rights

(3) Threaten Audience Interests in stable culture

Copyright Law circa 1990

Objects of ProtectionMusical compositionsSound recordingsMotion pictures

RightsReproductionDerivative worksDistributionPublic Performance

Exceptions and LimitationsFirst-sale doctrineCompulsory licenses

jukeboxes; PBS license; cable and satellite retransmissions; “covers”

Fair Use

Composer

Publisher

Sheet MusicPrinter

MovieStudio

RecordCompany

BMI; ASCAP; SESAC

RestaurantRadio or TVStation

Blanket licenses

Assignment of musical-works copyright

Mechanicallicense

Synchronizationlicense

Reproductionlicense

RecordingArtist

Assignmentof sound-recordingcopyright

Performancelicense

Figure 2.1: Legal Rights in the Music Industry

RecordImporter

Importlicense

Harry Fox Agency

payola

Novelist

Actors

Screenwriters

Director

RecordCompany

Producer

“Work for Hire” agreementsDerivative-work license Synchronization and

performance licenses

Theatres

Video Stores

TV Networks

HBO, Airlines

Recordcompany

Merchandisemanufacturer

Rentals plus


Cablecompany

Com

pulsory licensemechanical

license

derivative-work

licenses

Studio

Distribution agreement

Movies

Sales

Advertiser

MusicPublisher

Master u

se license

“Location”owners

relea

ses

Composer

Studio

TV Networks

Figure 2.5: Compensation System for Network Broadcasts of Films

Advertisers

Viewers

Sony

licenses

license fees

cost of VCRs

advertising fees

productpurchases

VCRs

free programming(with embedded ads) $

Holdings of Sony

Manufacturer of a device that can be used to violate the copyright laws is liable for contributory copyright infringement if and only if the device is not capable of significant noninfringing uses

Timeshifting copyrighted programs is a fair use

Audio Home Recording Act (1992)

Serial Copyright Management SystemTax and Royalty SystemSafe Harbor for Noncommercial Coping

AHRA 1008

“No action may be brought under this title alleging infringement of copyright based on the manufacture, importation, or distribution of a digital audio recording device, a digital audio recording medium, an analog recording device, or an analog recording medium, or based on the noncommercial use by a consumer of such a device or medium for making digital musical recordings or analog musical recordings.”






Fair Use

AHRA

Encryption Initiatives

DVDs: CSS SDMIRealMedia

copy-protection switch

Ebook reader

CircumventionDeCSS;

SmartripperFeltenStreamripperSklyarov

Anti-Circumvention: §1201Prohibitions:

Circumventing access-control technology – §1201(a) Manufacturing or “trafficking” in technology that circumvents

access controls – §1201(a) Manufacturing or “trafficking” in technology that circumvents

technological protections for rights of copyright owners – §1201(b)

Exceptions include: Reverse engineering in order to achieve interoperability §1201(f) Encryption research Ambiguous reference to the survival of fair use – §1201(c) Biennial rulemaking establishes limits to ban on acts of

circumvention – §1201(a)(1)(C)

Anti-Circumvention: §1201Civil Remedies:

Injunctions Impoundment and/or destruction of devices Damages (treble for repeat offenders) Attorneys’ fees, costs

Criminal penalties (for willful violations for commercial advantage or personal gain) -- §1204 First offense: up to $500,000 and 5 years in prison Second offense: up to $1M and 10 years in prison

Streambox (WD Wa 2000)

Streambox “VCR” mimics authentication procedure of RealMedia files and disables copy-protection switch

Held: violation of §§1201(a) & (b)Sony doctrine not applicable

Links to Illegal Material

Site #1

advertising

Webpage

Webpage

DecryptionProgram

2600 Magazine

advertising

Visitor

Webpage

Webpage

Plaintiff

?

Reimerdes (SDNY, August 2000)Providing a link to a website that, in turn,

enables visitors to download copies of encryption-breaking software = “trafficking” in violation of §1201(a)(2)

Claim that purpose was to create Linux DVD player not credible

§1201 trumps fair useReverse-engineering exemption does not

justify public sharing of the information

Reimerdes (CA2, 11/28/2001)Uphold issuance of the injunction§1201, as applied, does not violate 1st amend:

Content neutral Advances a “substantial governmental purpose”:

assisting copyright owners in preventing access to their “property”

Does not burden more speech than necessary for that purpose

Other constitutional challenges were not properly raised at trial:

§1201 exceeds Congress’ power under Commerce Clause and Art. 1, Sec. 8, Clause 8

§1201 unconstitutionally curtails “fair uses”

FeltenSept. 2000: SDMI issues challenge to break watermark prototypesFelten breaks codes, proposes to publish resultsRIAA sends Felten a letter, suggesting that publication “could

subject you and your research team to actions under the DMCA” June 2000: Felten brings declaratory judgment action against

RIAA, SDMI, and U.S. in NJDCtDefendants insist they have no intention to sueAugust 2001: Felten presents results at a conferenceNovember 2001: Suit dismissed because of absence of “case or

controversy”

SklyarovAdobe’s eBook Reader prevents copying of electronic

booksSklyarov developed for ElcomSoft a program that

enables the copying of eBook filesSklyarov (temporarily in U.S. for Def Con conference)

arrested and indicted in NDCal for violating §1201(b) – and “aiding and abetting” a violation; Elcomsoft charged with conspiracy

Dec. 2001: Charges against Sklyarov are droppedFeb. 2002: Prosecution argues DMCA applies globally

UMG Recordings v. MP3.com Nonpermissive copying violates §106 No fair-use defense:

1) Copying was for a commercial purpose; not transformative

2) Copied material is highly creative

3) Songs copied in their entirety

4) Undermines legitimate “potential market”

Settlements with 4 of the plaintiffs Finding of “willful infringement” of Universal 5/2001: Universal buys MP3.com for $372m

“Live 365”Electro Jungle Spoken Word

Alternative Experimental Latin Swing

Ambient Folk Metal Talk

Asian Funk Music To ... To Techno

Blues Goth New Age Trance

Breakbeat Government Oldies UK Garage/2-Step

Christian Hard House Pop Valentine

Classical Hip-Hop Punk Various

Classic Rock Holiday R&B Western

Comedy House Rap World

Country Indie Rock Reality 50s

Dance Industrial Reggae 60s

Downtempo International Religious 70s

Drum 'n' Bass Irish Rock 80s

Dub Jazz Soundtracks 90s

Examples of “Folk” Webcasters

Makossa Jukebox (offering “100% Cameroonian ethnic music: makossa, bikutsi, manganbeu, assiko and other freestyles”)

Pagan Paradise Samhian (offering “a magical mix of neo-Pagan, XTC, Tull, McKennitt, Yes, Mediaeval Baebes, Genesis, Heart, Rush [and] traditional folk”)

Radio Free Boonie (offering a “one-hour show for the 0 to 4 crowd and their respective grownups”)






Fair Use

AHRADPRA Limitations (114)

digital audio transmission

Types of Digital Audio Transmissions of Sound Recordings

Level 3: Copyright Owners may refuse to issue licenses – or may demand freely negotiated fees

Level 2: Copyright Owners must accept “compulsory licenses” set by an Arbitration Panel

Level 1: Exempt transmissions

Librarian of Congress, 2/24/2002Per Performance Fee

Ephemeral License

Webcasters: retransmission of radio 0.07¢ 8.8% of performance fee

Webcasters: all other webcasts 0.07¢ 8.8% of performance fee

Commercial Broadcasters: simulcasts

0.07¢ 8.8% of performance fee

Commercial Broadcasters: all other webcasts


Noncommercial Broadcasters: simulcasts


Noncommercial Broadcasters: all other webcasts


Suppose HipHop.com distributes ad-free popular music to (on average) 10,000 listeners, 24 hours a day Aprx. 15 songs per hour 360 songs per day 131,400 songs per year 1,314,000,000 performances per year

Performance fee: $919,800 per yearEphemeral fee: $80,942 per yearTotal: $1,000,742 per year

CARP Ruling, 2/20/2002

Napster Website

UserUser1Library

Directory

UserUser2Library

Inde

x

UserUser6Library

UserUser7Library

UserUser8Library

UserUser4Library

UserUser3Library

UserUser5Library

UserUser9Library

A&M Records v. Napster, Inc. Claim: contributory copyright infringement;

vicarious copyright infringement Napster’s defenses:

1) DMCA §§512(a), 512(d)

2) AHRA §1008

3) Sony defense

4) Copyright misuse

A&M Records v. Napster, Inc. 7/26/00: Judge Patel rejects all of the defenses, grants

preliminary injunction against “facilitating … copying, uploading … plaintiffs’ … compositions and recordings”

7/27/00: CA9 stays the injunction 2/12/2001: CA9 modifies and remands 3/5/2001: Patel issues modified injunction 6/28/2001: New Napster software with file ID technology; old

software is disabled 7/2002: Napster goes offline 1/2002: Patel permits discovery on copyright-misuse issue;

settlement discussions intensify 2/2002: Settlement fails; case resumes 5/2002: Bertelsmann buys residue of Napster

User 1

User 3

User 2

CentralServer

SuperNode

SuperNode

SuperNodeUser 7

User 8

User 9

User 6User 5

User 4

Adapted from Webnoize

Fasttrack

Peer-to-Peer Copying SystemsParent technology:

GnutellaAimster/Madster Kazaa/Morpheus-

Music City/ Grokster/Altnet

80,000,000 downloads 3.6 billion downloads in

January 2002

Audiogalaxy 30,000,000 downloads

Japan MMO

MPAA/RIAA suit MPAA/RIAA suit

(Cal) Dutch court enjoins

software downloads; sale to Sharman Networks (Australia); investigation by APRA

RIAJ & JASRAC suit; April 2002 injunction

RIAA suit in NY; settlement

Authorized ServicesMusicNet

EMI, AOL Time Warner, BMG, RealNetworks

Pressplay Sony, EMI, Vivendi

Universal (MP3.com), Yahoo

Listen.com Subscription streaming,

$10 per month [Ongoing civil

investigation by USDOJ]

Secure (nontransferrable) short-term digital downloads and streaming

Subscription fees, $10-$25 per month

Limits on permanent downloads and CD burning slowly lifting

Copy-Protected CDs

Rapidly spreading experiment in US 10,000,000 CDs produced by Midbar so far

Similar initiative in JapanConsumer backlashPhilips, owner of patents on much of CD

technology, protests deviations from Red Book standards

Likely shift toward DVD-Audio

Defects of the Current RegimeHigh transaction costsPrice to consumers of access to recorded

music remain highNo “celestial jukebox”Encryption and ephemeral downloads

reduce flexibility, curtail “fair use” and impede semiotic democracy

Continued concentration of music industry reduces consumers’ choices

Limited effectiveness: P2P threatens artists’ revenues

"Besides, what's Plan B?”-- Alan McGlade, Chief Executive of MusicNet, July 1, 2002

OutlineI. Potential Benefits of Internet DistributionII. Background: Copyright Law circa 1990III. Cycles of Innovation and Resistance




“No black flags with skull and crossbones, no cutlasses, cannons, or daggers identify today’s pirates. You can’t see them coming; there’s no warning shot across your bow. Yet rest assured the pirates are out there because today there is plenty of gold (and platinum and diamonds) to be had. Today’s pirates operate not on the high seas but on the Internet, in illegal CD factories, distribution centers, and on the street. The pirate’s credo is still the same--why pay for it when it’s so easy to steal? The credo is as wrong as it ever was. Stealing is still illegal, unethical, and all too frequent in today’s digital age. That is why RIAA continues to fight music piracy.” Website of the Recording Industry Association of America

Theory: Clarify and enforce the property rights of the

creators of music; Rely upon Coasean bargains and the emergence

of private collective rights societies to overcome transaction costs (Merges)

Private Property

Features of Private Property

In Real Property Right to exclude

Injunctive Relief

Criminal Trespass

Prohibition of burglary tools

Privilege of self-help tracks right to exclude

Copyrights Add full public-performance

right for sound recordings Eliminate compulsory licenses Lower “willful requirement and

increase enforcement of criminal copyright infringement

CBDTPA Curtail DMCA and add Ploof-

style liability

SSSCA; CBDTPASecurity Systems Standards and Certification Act;

ConsumerBroadband and Digital Television Promotion Act

Would make it “unlawful to manufacture, import, offer to the public, provide or otherwise traffic in any interactive digital device that does not include and utilize certified security technologies that adhere to the security system standards”

Private sector has 12 months to agree on a standard If fail, standard selected by National Institute of

Standards and Technology

SSSCA; CBDTPA“The term ‘interactive digital device’ means any

machine, device, product, software, or technology, whether or not included with or as part of some other machine, device, product, software, or technology, that is designed, marketed or used for the primary purpose of, and that is capable of, storing, retrieving, processing, performing, transmitting, receiving, or copying information in digital form.”

Would apply to PCs, hard drives, CD-Rom drives, TVs, set-top boxes, CD players, MP3 players, video game consoles, other digital appliances

Benefits:Media companies, confident in their ability to

make money in the new environment, would accelerate Internet distribution

Associated socioeconomic advantages and cost savingsEmergence of refined and flexible private

licensing societies (cf. ASCAP) would overcome transaction-cost barriers to licensing (Merges)

The price system would provide creators precise signals concerning the tastes of consumers (Goldstein)

Enable musicians to break free of record companies

Disadvantages

Critical and transformative uses of recordings would be curtailed, threatening semiotic democracy

Erosion of “end-to-end” principleFacilitate price discrimination – on balance,

pernicious in this context

Effects of Increased Price Discrimination

Benefits Increased profits stimulate

inventive activity Reduced deadweight

losses Egalitarianism

(progressive redistribution of wealth; broader access to creative works)

Reduction of costs associated with cruder 2nd-degree PD

Harms Increased “granularity” of

social life Invasions of privacy Threats to transformative

uses Radically increased profits

cause increased rent-seeking within music and film industries

Threats to “End-to-end”

Proprietary control over the pipes E.g., AT&T’s exercise of control over its cable

modem systemStandardization and “dumbing down” of the

computers located on the endsResults:

Greater proprietary control over digital content Curtailment of both competition and innovation

OutlineI. Potential Benefits of Internet DistributionII. Background: Copyright in Music circa 1990III. Cycles of Innovation and Resistance




Regulated IndustryTheory: Increased

governmental involvement necessary to:

Respond to oligopolistic structure of the industry

Calibrate more finely the balance between incentives and public access

Equalize bargaining power between artists and record companies

Reject the “propertization”of copyright; Reinstatethe utilitarian balance

Theory ofcompulsoryterms

Regulated Industry

Preserve and extend prohibitions on file-sharing and encryption circumvention

Enforcement at ISP level NET prosecutions of operators of SuperNodes

Compulsory Royalty Systems for all forms of Internet distribution of recorded music(extend current §114(f)(2)(B) and AHRA)

Mandatory (inalienable) distribution of revenues between performers and producers(extend current §114(g); cf. EC Directive)

Compulsory RoyaltiesCopyright Office at two-year intervals establish:Types of Internet distribution of recorded music

Nonsubscription noninteractive webcasting Subscription noninteractive webcasting Interactive webcasting Ephemeral downloads Permanent downloads

Terms and conditions for eachRoyalty rates for each

For owners of copyrights in musical works For owners of copyrights in sound recordings

boundarieswill shift asconsumptiontechnologieschange

ReplaceASCAP,BMI,SESAC

Likely ResultsBenefits:

Internet distribution of recorded music grows rapidly Reverse vertical integration of the music industry Diversity of services available to consumers increases Net revenues of record industry stable Composers and performers get larger shares of revenues

Drawbacks: Transaction costs remain high Copy-protections limit semiotic democracy Surveillance and invasions of privacy

OutlineI. Potential Benefits of Internet DistributionII. Background: Copyright Law circa 1990III. Cycles of Innovation and Resistance




Intellectual Products are “Public Goods”

Can be used and enjoyed by an infinite number of persons without being “used up” (nonrivalrous)

It is difficult to prevent people from gaining access to the good (nonexcludable)

Creates a danger that an inefficiently low number of such goods will be produced

Possible Responses to Public-Goods Problem

Government provides the good e.g., lighthouses; armed forces

Government subsidizes production of the activity e.g., basic scientific research; NEA

Government issues prizes cf. reward system for atomic-energy inventions

Government confers monopoly power on producers e.g., 19th c. toll roads; intellectual-property rights

Government assists private parties in increasing “excludability”

Trade-secret law; anti-circumvention laws

RegisterTaxCountPay

Alternative Compensation System

Registration Copyright owners register recordings with Copyright

Office Only unencrypted recordings may be registered

Unique ID numbers inserted into file name of publicly available recordings

E.g., #4m8sp60wxi# Application designates:

any other registered digital recordings incorporated into the work duration of the incorporated work In the case of audio recordings, the owner of the copyright in the

composition Small registration fee to make the system self-financing Opposition Procedure

Taxation

Possible principles:

1) Provide creators the full social surplus of their efforts

2) Fairness

3) Make creators, as a group, whole

4) Preserve a flourishing entertainment culture

Composer

Publisher

Sheet MusicPrinter

MovieStudio

RecordCompany

BMI; ASCAP; SESAC

RestaurantRadio or TVStation

Blanket licenses

Assignment of musical-works copyright

Mechanicallicense

Synchronizationlicense

Reproductionlicense

RecordingArtist

Assignmentof sound-recordingcopyright

Performancelicense

RecordImporter

Importlicense

Harry Fox Agency

WebcasterPerformancelicense Sound

Exchangepayola

Figure 6.1: Revenues Streams Threatened by Free Internet Distribution

Novelist

Actors

Screenwriters

Director

RecordCompany

Producer

“Work for Hire” agreementsDerivative-work license Synchronization and


Theatres

Video Stores

TV Networks

HBO, PPV, Airlines

Recordcompany

Merchandisemanufacturer

Rentals plus


Cablecompany

Com

pulsory licensemechanical

license

derivative-work

licenses

Studio

Distribution agreement

Movies

Sales

Advertiser

MusicPublisher

Master u

se license

“Location”owners

relea

ses

Composer

TaxationBaseline year: 2000Estimated revenues needed (year 1):Music Industry

Injury to record companies from diminished sales: $1.05 billion

Injuries to music publishers from diminished record sales: $132 million

Injuries to music publishers from reduced radio public-performance fees: $58 million

No compensation for diminished webcasting license fees Music Industry total: $1.24 billion

Taxation

Film Industry: Impairment of studios’ income from domestic

home-video sales and rentals: $435 million Impairment of cable and satellite licensing

revenues: $60 million Impairment of pay-per-view revenues: $37

million Film industry total: $532 million

Total: $1.774 billion

Taxation

Assuming that the agency devotes 20% of its revenues to administrative costs, it would need to collect in taxes during the first year: $2.217 billion

Adjusted (using Consumer Price Index plus projected inflation rate to 2004): $2.418 billion

Count consumption

Webcasters report playlists and number of listeners

Websites count number of downloadsP2P systems report frequency of sharing

registration numbersSurveys estimate frequency of replaying stored

recordingsSales of prerecorded, non-copyprotected CDsSampling and penalties to deter “ballot stuffing”

PaymentMonies allocated among categories of copyright

owners, initially, in accordance with magnitude of estimated injuries

Sound recordings: $1.05 billion Musical compositions: $190 million Motion pictures: $418 million

Within each category, money distributed in accordance with frequency of consumption

Over time, the shares allocated to each genre would shift in response to changing injuries and costs

Lift Copyright System and DMCA

No liability for reproduction, distribution, modification, adaptation, or performance of audio or video recordings over the Internet

No liability for circumventing encryption protections

Merits

For consumers:Large cost savings Elimination of deadweight loss (music

priced at marginal cost of replication); increased consumer surplus

ConvenienceNo price discriminationCultural diversity and semiotic democracy

Cheaper EntertainmentAverage American household currently spends

$100 on CDs and $350 on video recordings. Total: $450

Broadband subscribers: for $42 per year in taxes, get unlimited “free” music and movies

Dial-up modem users: for $180 in increased subscription fees plus taxes, get unlimited “free” music and movies

Households without Internet Access: no material change in position

Merits

For artists:Incomes protected from corrosion Opportunity to offer products directly to

consumers economic and cultural gains

Merits

For manufacturers of electronic equipment and suppliers of electronic services:

Increased taxes offset by increased value of the products and services

Merits

For society at large:Decreased litigationDecreased costs of law enforcementDecreased encryption costs

Demerits

Who gets hurt?:ManufacturersDistributorsRetailersRecord Companies and Studios??

Demerits

Distortions and Cross-subsidies E.g., data CD sales Underconsumption of ISP access

Giving a government agency considerable discretionary power Risks of rent-seeking

Life Cycle of the SystemLaunch:

Reform Berne Convention, Articles 9, 11, 12 No 5th amendment problem

Growth Increased usage results in increased taxes Offset by:

• Growing tax base• Increasing savings

Expansion and technological change may eventually lead to replacement with federal income tax

Variations on the Theme

Global versionComprehensive Domestic VersionNUL Domestic VersionVoluntary Version – entertainment co-op

Scale

geographic

Var

ieti

es o

f M

ater

ials

Varieties of Uses

national

multilateral treatymusic & film

All uses

P2P

everything

music

global

all forms of Internet distribution

Entertainment Co-opArtists register with private co-op

Grant transferable non-exclusive license to download or stream material

Co-op licenses webcasters and download sites Each accessible with a single subscription fee and

associated password Licensees provides data concerning usage

Revenues from subscription fees distributed in accordance with revenue-sharing plan

Consumer willingness to subscribe reinforced by tightened penalties on P2P systems

promises to keep: technology, law, and the future of entertainment william fisher march 25, 2003

Documents

recipient slide

insurance slide

music publisher

internet distribution

fair use slide

stable culture slide

recorded musical performance

music lockers