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The Myth of DRM-Free Music May 31, 2015

Posted by Bill Rosenblatt in DRM, Music, United States.

The annual IDPF Digital Book conference took place this week in New York, as part of the BookExpo America trade show for the publishing industry.  You can count on two topics being discussed at any book publishing conference: Amazon and DRM.  IDPF Digital Book 2015 was no exception.  One particular panel featured writers from leading book industry trade magazines, and the moderator was Joe Wikert, a well-respected digital publishing executive who is an outspoken opponent of DRM.  The discussion turned to the pros and cons of “walled gardens” such as Amazon’s Kindle ecosystem.  Wikert remarked on how quickly the music industry got rid of DRM and suggested (as he often does) that book publishers should follow.

The usual story is that the music industry went DRM-free in 2009 when Apple completed its removal of DRM from its vast iTunes music catalog.  But how true is that?  Not very, as it turns out.  I’d argue not only that DRM never really went away but that it’s making a comeback.

The first thing to recognize is that downloaded files are the only mode of digital music delivery in which the music isn’t encrypted.  All on-demand music services (Spotify, Rhapsody, Google Play Music, Beats Music, etc.) encrypt streams as well as music tracks that users download for “offline listening.”  And all forms of digital radio — Internet (Pandora), Satellite (SiriusXM), and digital TV (Music Choice) — are encrypted.

These modes of delivery are now more popular than download purchases.  Music download sales peaked in 2012 and have moved into sharp decline.  Based on publicly available subscribership figures and studies such as Edison Research and Triton Digital’s The Infinite Dial, I estimate the total U.S. active monthly listenership to on-demand music services in the 60-70 million range.  That’s counting the use of YouTube as a de facto on-demand music service, which The Infinite Dial estimates as more than four times that of Spotify.  (The study says that 73% of YouTube music users don’t even watch the videos but just listen.)  Internet radio, led by Pandora and iHeartRadio, has well north of 100 million active listeners, while over 27 million people subscribe to SiriusXM.  All of these numbers are growing steadily.

How many people purchased digital downloads?  About 40 million in a year (based on 2013 research from NPD), and declining.  Of course, once someone has downloaded a file, she can play it any number of times, but the number of download buyers is a reasonable measure of active users of the purchased-download model.  So it’s safe to say that the number of people who obtain music using a DRM-free model (legally) is much lower than the number of people who get it through a model in which music is encrypted.  To be more precise, the percentage of people who purchase music downloads is only about 18% of the total digital music market.  (That’s a lower bound, assuming no overlap, but it doesn’t include satellite or digital TV radio.)

More recent research by GlobalWebIndex reinforces the trend.  The firm’s Q1 2015 survey of teenagers around the world shows that while 60% used a streaming service during the last month, only 21% purchased a music download.

Compare this to the numbers in 2008, the end of the supposed “DRM era.”  At that time, iTunes represented about three-quarters of the music download market.  At least 10 million people in the U.S. purchased music on iTunes on a monthly basis, meaning that over 13 million purchased music downloads from anywhere.  Internet radio had perhaps 7 million active users, and on-demand services had less than 2 million subscribers.  In other words, download purchasers accounted for a lower bound of 60% of all Internet music users in 2008 — more than triple the percentage today. (These are all rough estimates; email me to find out how I calculated them.)

An even better way of measuring the percentage of digital music delivered with and without encryption is the revenue that record labels get from music through these various modalities.  For this, we turn to numbers compiled by the RIAA.  Here’s what they tell us:

DRM-free percent

Percentage of recorded music industry digital revenue from DRM-free vs. encrypted delivery modalities. Source: RIAA.

This chart shows the percentages of total digital recorded music revenues that come from DRM-free vs. encrypted modalities.  DRM-Free includes downloaded singles, downloaded albums, kiosk sales, and ringtones (even though some of the latter may be DRM-protected).  Encrypted categories include SoundExchange distributions (all forms of digital radio), Paid Subscriptions (paid on-demand services and premium Internet radio such as Pandora One and Rhapsody unRadio), and Ad-Supported On-Demand Streaming (YouTube, Vevo, Spotify Free).

The chart starts in 2009, when iTunes went fully DRM-free.  2008 was a transitional year as two of the major labels (first EMI, then UMG) began to go DRM-free on iTunes, and Amazon launched its completely DRM-free MP3 store.  Before then, perhaps 5% of digital music revenue was from DRM-free sources.

The trend began to reverse in 2011, when Spotify launched and the major labels completed deals with YouTube in which they allow most of their material to be shown in exchange for a share of ad revenue, resulting in “hockey stick” growth in listenership to on-demand services that continues to this day.

From this data it’s fair to predict that the lines will cross, that encrypted modalities will represent the majority of recorded digital music revenue by 2016.

As a footnote, the fastest-growing category of recorded music revenue is neither on-demand nor Internet radio; it’s vinyl.  Vinyl has come back from near death in 2010; its revenue growth is at 50% per year and accelerating; it now contributes more revenue to record labels than YouTube.  Now here’s a rather metaphysical question: should we count vinyl records as DRM-free or not?  You decide, but look here first.

E-Books: Subscription Services vs. Libraries April 30, 2015

Posted by Bill Rosenblatt in Publishing, Rights Licensing, Services, United States.

My latest article on Forbes is a look into the future of subscription e-book services.  Oyster, a New York-based startup that offers a Netflix-like e-book subscription service, recently launched a “standard” e-book retail site with titles from all major and many indie trade publishers.  In the Forbes piece, I wondered whether this might be a sign that subscription e-book services might be slow to catch on — particularly since none of the three subscription e-book providers in the United States market (Scribd and Amazon as well as Oyster) have licenses to content from all of the “Big Five” trade publishers.  In addition, a comparison of sales figures for e-books and digital music suggests that consumers are, at least for now, more interested in “owning” e-books than music downloads.

Then I got into an online debate with Ava Seave, a noted media industry strategy consultant, adjunct professor at Columbia Business School, and co-author of an excellent book about the media industry called The Curse of the Mogul.  She raised an important point that I hadn’t considered: aren’t subscription e-book services hemmed in by competition from public libraries?

This led me to look at the latest data on Big Five trade publishers’ policies on e-book library lending.  It turns out that they have liberalized their policies over the past couple of years.  Now all of the Big Five license at least some of their frontlist titles for library e-lending, though most of them still impose restrictions on license durations (such as one year or up to 26 loans).  In other words, the quiet war that has been going on between major trade publishers and public libraries for years has simmered down.

This means that public libraries could indeed be serious competition for subscription e-book services.  (Subscription music services like Spotify, Rhapsody, and Beats Music don’t have this problem, because public libraries typically do not have large music collections for lending, nor do most people think of libraries as a place to discover recorded music.)

For publishers, public libraries and subscription services are best understood as revenue sources with two different models.  Here is a table that summarizes the differences:

Public Libraries E-Book Subscription Services
Big Five catalogs Most frontlist and backlist, according to library acquisitions 3 out of 5 majors (Scribd & Oyster), backlist only, limited titles
Revenue Fixed, up to 3-4x consumer hardback Royalty per user read, plus analytics data
License volume Per unit; libraries license N units each Unlimited units
License term Often limited to 1-2 years or 26 loans N/A

Public libraries thus have bigger catalogs potentially available for e-lending, but individual libraries must “acquire” individual titles.  They can acquire as many as they want, according to their budgets and the number of “copies” that they predict will satisfy their patrons without excessive waiting lists, but they must pay prices that range up to four times the consumer hardcover price.  Subscription services get access to thousands of titles in unlimited “quantities,” but only — at this time — from limited backlist selections and not at all from Hachette or Penguin Random House (and Amazon’s Kindle Unlimited has no Big Five titles at all).  On the other hand, subscription services can offer publishers lots of data about subscribers’ reading habits — data that’s unavailable to publishers from libraries, often by law.

The behavior that Big Five publishers have exhibited towards both public libraries and online services suggests that they will move slowly and gradually as these models take hold with the public.  Publishers haven’t licensed their material to startups unless and until they have amassed large audiences; Scribd, for example, had grown to 80 million visitors when it finally got a deal with HarperCollins.  Similarly, publishers have been slow and deliberate in licensing material to libraries through library platform providers such as OverDrive, 3M, and Baker & Taylor, which have been operational as far back as the early 2000s.

Contrast this with subscription music services: the first independent subscription music service was Rhapsody, which took less than two years to sign all of the (then) five major labels in 2002; and nowadays it would be commercial suicide for a digital music service to launch with anything less than all major-label content, minus the few remaining digital holdouts.

When viewed in this light, trade publishers’ dealings with public libraries don’t look like the kind of moral or public policy issue that many in the library community would like to portray it as (though there certainly are public policy implications, not least of which is libraries’ First Sale rights to lend material).  Instead, the future of e-book access through both libraries and subscription services will depend on their effects on publishers’ bottom lines.

P.S. I predict that this competition will lead e-book subscription service providers to push for “freemium” models, a la Spotify or Hulu; some indie publishers might agree to this, as they have already done with Amazon’s Kindle Owners Lending Library, but the Big Five are likely to resist mightily.  For one thing,this would require advertising revenue, an idea that has gotten severely limited traction in the world of e-books.

USPTO Public Meeting on Identifiers for Automating Content Licensing March 17, 2015

Posted by Bill Rosenblatt in Events, Rights Licensing, Standards, United States.
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The U.S. Patent and Trademark Office (USPTO) is holding a public meeting on Wednesday, April 1 to gather input on how the U.S. Government can facilitate the development and use of standard content identifiers as part of the process of creating an automated licensing hub, along the lines of the Copyright Hub in the UK.

This meeting is the second one that the USPTO is holding after the publication of the “Green Paper” on Copyright Policy, Creativity, and Innovation in the Digital economy by it and the National Telecommunications and Information Administration (NTIA) in July 2013.  The first meeting, in December 2013, addressed several other topics as well as this one.

(For those of you who are wondering why the USPTO is dealing with copyright issues: the USPTO is the adviser on all intellectual property issues, including copyright, to the Executive Branch of government, i.e., the president and his cabinet.  The U.S. Copyright Office performs an analogous function for the Legislative Branch, i.e., Congress.)

The April 1 meeting will focus tightly on issues of standard identifiers for content — which ones exist today, how they are used, how they are relevant to automation of rights licensing, and so on.  It will also focus on specifics of the UK Copyright Hub and the feasibility of building a similar one here in the States.

As usual for such gatherings, all are welcome to attend, the meeting will be live-streamed, and a transcript will be available afterwards.  It’s just unfortunate that notice of the meeting was only published in the Federal Register last Friday, less than three weeks before the meeting date.  I was asked to suggest panelists on the subjects of content identifiers and content identification technology (such as fingerprinting and watermarking).  There are several experts on these topics who would undoubtedly add much value to such discussions, but many of them — located in places from LA to the UK — would be unable to travel to Washington, DC on such short notice and possibly on their own nickels.  It would be nice to get input on this very timely topic from more than just the “usual suspects” inside the Beltway.

Establishment of reliable, reasonably complete online databases of rights holder information is of vital importance for making licensing easier in an increasingly complex digital age, and it’s encouraging to see the government take an active role in determining how best to get it done and looking at working systems in other countries that are further ahead in the process.  That’s why it’s especially crucial to get as much expert input as possible at this stage.

Perhaps the USPTO can do what it did for the December 2013 meeting: reschedule it for several weeks later.  If you are interested in participating but can’t do so at such short notice (as is the case with me), then you might want to communicate this to the meeting organizers at the PTO.  Otherwise, the usual practice is to invite post-meeting comments in writing.

Forbes: The Myth of Cord Cutting February 8, 2015

Posted by Bill Rosenblatt in Business models, Uncategorized, United States, Video.
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In my latest piece in Forbes, I examine the idea of “cord cutting” in light of recent announcements from Viacom, Time Warner, and DISH Network of over-the-top (OTT) streaming video services that enable people in the US to watch pay TV channels without a pay TV subscription.  Cord cutting means cancelling one’s subscription to cable or satellite TV and just getting TV programming over the Internet (or broadcast).

My research turned up two findings that were surprising (at least to me) and support a conclusion that cord cutting is mostly a myth.  The first finding is that most people are unlikely to save money on programming if they pay for the increasing number of subscription OTT video services at their expected monthly prices.  The second is that most American broadband subscribers get their TV and Internet services from the same company, and there isn’t really such a thing as a broadband Internet company that doesn’t also provide TV; therefore “cord cutting” in most cases really means “calling your cable or phone company and changing to a cheaper service plan.”  I also conclude that, economically, cord cutting is a wash for everyone involved, particularly if the FCC is unsuccessful in its new attempt to pass meaningful net neutrality regulations.

As always, I eagerly welcome your feedback.

Why Does Apple Want to Halve the Price of On-Demand Music? October 26, 2014

Posted by Bill Rosenblatt in Business models, Music, Services, United States.
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Apple is asking record labels to agree to a $5/month subscription price for its Beats Music on-demand service, instead of the going rate of $10/month that it and others (Spotify, Rhapsody, etc.) charge in the US market.  This development started as rumor a few weeks ago, then rose to specific evidence of record label conversations confirmed by musician and artists’ rights champion David Lowery at the recent Common Ground intellectual property conference at George Mason University near Washington DC.  As of this past Friday, the evidence became strong enough for the Wall Street Journal to treat it as fact.

Re/code also reports that despite the major labels’ apparently cool reception to the new pricing, Spotify is already responding by offering a family plan in which additional family members can add their own subscriptions to a $10/month plan for $5/month.  (Beats Music has been offering discounted family plans through AT&T wireless accounts for a while.)  As Re/code reports, one reason that Apple has given for the change to $5/month is that it has found that its best iTunes customers spend about $60/year on the service.  Given that music download revenue has begun to drop rapidly, Apple apparently believes that it can entice iTunes users to an all-you-can-eat subscription service at the same spending level, instead of losing those users to free music services (or illegal downloads).  In other words, $5/month subscriptions are being offered to labels as a way to shore up revenues at $60 ARPU (annual revenue per user) from people who actually still pay for music .

This reasoning is clearly designed to appeal to record labels, which are known to be unhappy about the accelerating decline in purchases.  But is it Apple’s real motivation for halving the price of on-demand subscriptions?  I don’t think so.

The first thing to understand about on-demand music services is that despite all the talk about monthly subscription fees, the vast majority of users do not pay for them.  Research from Edison Research and Triton Digital has determined that the use of YouTube as a de facto on-demand music streaming service draws a US audience of four times all other on-demand services combined — including Spotify (paid and free).  Put another way, only about 8% of US users of on-demand music services actually pay for them.  Spotify’s percentage of paying US users has stabilized at 25% — which I am proud to say that readers of this blog predicted three years ago — while Google Play, Rhapsody, Rdio, and Beats Music do not offer free tiers for on-demand music.

On-demand music use is growing rapidly, but Apple only has a tiny piece of the market.  Beats Music has merely a few hundred thousand users, compared to the estimated 60 million who use YouTube as an on-demand music service and Spotify’s 12 million total US users.  Even when one counts only paying users, Beats Music still accounts for well below 10% of the market.

Apple clearly must do something dramatic to become a serious contender.  Integrating Beats Music into iTunes (and thereby marketing it heavily to the enormous iTunes audience) by itself isn’t going to expand the market enough to be meaningful to Apple.  And even if Apple thinks it can increase the paying user base disproportionately by halving the price, that’s not much of an increase in audience size — especially since the vast majority of the on-demand audience already gets it for free.

No, my view is that Apple’s primary purpose in halving the price is to throw the on-demand market into disarray.  Services like Spotify and Rhapsody have been operating their businesses based on the expectation of $10/month revenue for years.  Obviously, if Apple comes out with a rebranded Beats Music (iTunes On Demand, iTunes Beats, iTunes Unlimited, iTunes Jukebox, or whatever they end up calling it) at $5/month, all of the other on-demand services will have to offer the same price.  Spotify, Rhapsody, and Rdio would find themselves with unsustainable financial structures and/or the necessity of renegotiating their record label deals.  The best that any of these “pure play” services could hope for is to become acquisition bait for companies that are big and diverse enough to be able to cross-subsidize them (Yahoo and AOL come to mind).  A move to $5/month could even cause Google to rethink its plan to launch a paid subscription music service associated with YouTube.

In short, I predict that if Apple gets record companies to agree to $5/month for on-demand music, we will see a repeat of the shakeout that occurred around 2007-2008, which left only a handful of on-demand services in the market.  When the smoke clears, Apple could well find itself with a much larger chunk of the on-demand music market than if it were to try to grow its share organically.

The remaining mystery is whether Apple intends to add a free tier to Beats Music, such as a limited on-demand capability under the iTunes Radio banner.  The advent of free, legal on-demand music from Spotify and (effectively) YouTube in 2011 did cause the on-demand model to grow from a niche product for music geeks to a mainstream offering.  On-demand is still not quite as popular as Internet radio — I estimate the on-demand audience to be about 60% of the size of the audience for Pandora, iHeartRadio, etc. — but it has surpassed the user base for paid digital downloads.

On-demand is clearly a big part of the music industry’s digital future.  Apple is behind in the transition from downloads to access-based models and needs to catch up.  Only dramatic, disruptive gestures can make this happen, and halving the price is certainly one of them.

Now, since you were so good at predicting Spotify’s percentage of paying US users, let’s see how you do with this one.  Here’s a poll: 

UPDATE 29 March, 2015: It looks like we were wrong.  Although the majority of respondents to the poll predicted that Apple would succeed in lowering the price of subscription music to $5/month, the major labels are holding the line at $10/month.  That’s the pricing that Apple expects to maintain when it launches its rebranded on-demand streaming service later this year.

That Old Question Again September 28, 2014

Posted by Bill Rosenblatt in DRM, Economics, Music, Services, United States.
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I’m looking at the U.S. music revenue numbers that the RIAA just released for the first half of 2014; at the same time, I’m reading Download: How Digital Destroyed the Record Business, a 2013 book by the noted UK music journalist Phil Hardy, who tragically passed away in April of this year.  For “numbers guys” like me, the book is a bonanza of information about the major labels’ travails during the transition from CDs to purely digital music. It’s a compendium of zillions of hard facts and opinions delivered with Hardy’s typical dry British wit  — though (like his other books) it would have benefited from a copy editor and, occasionally, fact checker.

One of the statements in Hardy’s book that sits somewhere between fact and opinion is his assertion — as recently as last year! — that the elimination of DRM from music downloads boosted sales.  Sigh… that old question again.

The question of whether DRM-free music download sales helped or hindered the music industry (no doubt it was good for consumers) served as a sort of Rorschach test back in the late 2000s after Apple and Amazon started selling DRM-free downloads — rather like the Rorschach test of Radiohead’s “pay what you wish” experiment in 2011.  If you hated DRM, DRM-free was going to usher in a bright new era of opportunity for everyone; if you liked it, removing DRM was going to spell the end of the music business.

So I thought that with the RIAA revenue statistics database in hand, I could put the old question to rest.  Here is what I found:

U.S. Digital Music Revenue, millions of 2013 dollars.  Source: RIAA.

U.S. Digital Music Revenue, millions of 2013 dollars. Source: RIAA.

In this chart, “Downloads” includes singles plus albums; “Streaming” includes both paid and ad-supported on-demand services (Spotify, Rhapsody, YouTube, Vevo)* as well as Internet radio (Pandora, iHeartRadio, Slacker, TuneIn Radio), plus satellite radio and a few other odds and ends.  I estimated totals for 2014 by taking the RIAA’s newly released numbers for the first half of this year and applying growth rates from the second half of 2013 to the first half of this year.

The relevant dates are:

  • April 2003: Apple opens the iTunes Music Store.
  • May 2007: Apple launches iTunes Plus, selling tracks from EMI without DRM for $1.29.
  • January 2008: Amazon launches AmazonMP3 with DRM-free MP3s from all labels.
  • May 2009: iTunes goes completely DRM-free in the US.
  • 2011: Spotify launches its “freemium” model in the US; major labels complete ad revenue share deals with YouTube, so that virtually all major-label music is available on YouTube legally.

Before we get into the analysis, let’s get one thing out of the way: the biggest change in music industry revenues from 2003 onwards was, of course, the dramatic drop in revenues from CDs.  Those numbers aren’t shown here; for one thing, they would dwarf the other numbers.  This is all part of the move from physical products to digital products and services, which has affected both downloads and streaming.

Now let’s look at what happened after 2007.  Growth in download sales began to slow down a bit, while streaming remained fairly flat.  Starting in 2008, growth in paid downloads remained virtually unchanged until the ad-supported on-demand year of 2011.  2008 was a transitional year for DRM, as Apple only offered a small amount of music DRM-free (and at higher prices), while Amazon offered all DRM-free music but had only a single-digit share of the market.  The real post-DRM era for paid downloads started in May 2009.

So, to see what happened after the major labels agreed to sell digital files without DRM, we need to look at the period from May 2009 to the start of 2011, which is highlighted in the chart.  What happened then?  Not much of anything.  Growth in download sales was essentially unchanged from the preceding two years.

One could argue that if streaming hadn’t ever existed, download revenues might have grown after January 2009, given that streaming revenues from 2009-2011 started to grow faster.  But given that streaming growth didn’t accelerate immediately after January 2009, I wouldn’t make that causality.

So there you have the answer to the old question: removing DRM from music files had little or no effect on download sales.

As a postscript, my 2014 projections included an interesting factoid: vinyl album sales, if current growth rates continue, should reach about $340 million this year.  That takes the resurgence of vinyl from a mildly curious hipster phenomenon to almost 5% of total music revenue.  For comparison purposes, it makes vinyl almost as valuable as ad-supported on-demand streaming (YouTube, Spotify Free, Vevo) and puts it on track to exceed that segment in 2015.  Vinyl could even end up equaling CD revenue sometime around 2016-2017 — for the first time since the late 1980s!

*Paid subscription on-demand services include download features, which use DRM to tie files to users’ devices and make them playable as long as the user pays the subscription fees. But the RIAA reports these as part of “subscription services,” lumping them in with streaming on-demand music.

Improving Copyright’s Public Image September 3, 2014

Posted by Bill Rosenblatt in Law, United States.
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The Copyright Society of the USA established the Donald C. Brace Memorial Lecture over 40 years ago as an opportunity to invite a distinguished member of the copyright legal community to create a talk to be given and published in the Society’s journal. The list of annual Brace Lecture givers is a Who’s Who of the American copyright community.

Last year’s lecture, which made it into the latest issue of the Journal of the Copyright Society, is well worth a read.  It was given by Peter Menell, a professor at Berkeley Law School who co-directs the Berkeley Center for Law and Technology.  It’s called This American Copyright Life: Reflections on Re-Equilibrating Copyright for the Internet Age.  Since giving the lecture at Fordham Law School in NYC, Menell has been touring it (it has music and visual components) around various law schools and conferences.

Two things about Menell’s talk/paper caught my attention.  First was this sentence, early on in the paper, regarding his love for both copyright and technology during the outbreak of the Copyright Wars in the 2000s: “I was passionately in the middle, perhaps the loneliest place of all.”  Second was his focus on the public reputation of copyright and how it needs to be rehabilitated.

Menell’s basic thesis is that no one thought much about copyright when the limitations on copying media products were physical rather than legal; but when the digital age came along, the reason why you might not have made copies of your music recordings was because it was possibly against the law rather than because it took time and effort.  He says: “‘My Generation’ did not see copyright as an oppressive regime. We thrived in ignorant bliss well below copyright’s enforcement radar and
were inspired by content industry products.  The situation could not be more different for adolescents, teenagers, college students, and netizens today. Many perceive copyright to be an overbearing constraint on creativity, freedom, and access to creative works.”  (The latter category apparently includes Menell’s own kids.)  In other words, copyright law has appeared in the public consciousness as a limiter of people’s behavior instead of as the force that enables creative works to be made.

Here’s a figure from his paper that captures the decline in copyright’s public approval:

Menell -- Figure 3

The icons in the figure refer respectively to the 1984 Universal v. Sony  “Betamax” Supreme Court decision, the 2001 Ninth Circuit Napster decision, and the defeat of the Stop Online Piracy Act in 2012 from Silicon Valley-amplified public pressure.

Compare this with a slide from a guest lecture I gave at Rutgers Law School last year:

The Copyright Wars Rutgers

Menell provides a number of personal reflections about his engagement with technology and copyright over the years, including a story about how he and a friend created a slide show for their high school graduation ceremony with spliced-up music selections keyed to slide changes via a sync track on a reel-to-reel tape recorder.  This combination of hack and mashup ought to establish Menell’s techie cred.  In fact, the “live” version of the paper is itself a mashup of audio and video items.

He takes the reader through the history of the dramatic shift in public attitudes towards copyright after the advent of Napster.  My favorite part of this is a fascinating vignette of copyleft icon Fred von Lohmann, then of the Electronic Frontier Foundation (EFF), stating on a conference panel in 2002 that many users of peer-to-peer file-sharing networks were probably infringing copyrights and that the most appropriate legal strategy for the media industry ought to be to sue them, instead of suing the operators of P2P networks as the RIAA had done with Napster.  Menell’s reaction, including his own incredulity at the time that “EFF did not use its considerable bully pulpit within the post-Napster generations to encourage ethical behavior as digital content channels emerged,” is just as fascinating.

(Of course, the RIAA did begin doing just that — suing individuals — the very next year.  Five years after that, the EFF posted an article that said “suing music fans is no answer to the P2P dilemma.”  Fred von Lohmann was still there.)

He also provides examples of the general online public’s current attitudes towards copyright, which has gone long past “Big Media is evil”; he says that “the post-Napster generations possess the incredible human capacity for rationalizing their self-interest” by their implications that individual content creators should not get paid because they are “lazy” or “old-fashioned” or even “spoiled” — even while he admits that the sixteen-year-old Peter Menell might have fallen prey to the same sad rationalizations.

In the rest of the paper, Menell lays out a number of suggestions for how copyright law could change in order to make it more palatable to the public.  These include what for me is the biggest breath of fresh air in the article: some of the only serious suggestions I’ve ever seen from copyright academics about using technology as an enabler of copyright rather than as its natural enemy.  He touts the value of creating searchable databases of rights holder information and giving copyright owners the opportunity to deposit fingerprints of their content when they register their copyrights, in order to help prove and trace ownership.  He also mentions encryption and DRM as means of controlling infringement that have succeeded in the video, software, and game industries, but he does not claim that they are or should be part of the legal system.

Menell also makes several suggestions about how to tweak the law itself to make it a better fit to the digital age.  One of these is to establish different tiers of liability for individuals and corporations.  He says that the threat of massively inflated statutory damages for copyright infringement has failed to act as a deterrent and that courts have paid little attention to the upper limits of damages anyway.  Instead he calls for a realignment of enforcement efficiency, penalties, and incentives for individuals: “Copyright law should address garden variety file-sharing not through costly and complex federal court proceedings but instead through streamlined, higher detection probability, low-fine means — more in the nature of parking tickets, with inducements and nudges to steer consumers into better (e.g., subscription) parking plans.”

Another topic in Menell’s paper that brought a smile to my face was his call for “Operationalizing Fair Use” by such means as establishing “bright-line ‘fair use harbors’ to provide assurance in particular settings.”  (I’ve occasionally said similar things and gotten nothing but funny looks from lawyers on all sides of the issue.)

One suggestion he makes along these lines is to establish a compulsory license, with relatively fixed royalties, for music used in remixes and mashups.  That is, anyone who wants to use more than a tiny sample of music in a remix or mashup should pay a fee established by law (as opposed to by record labels or music publishers) that gets distributed to the appropriate rights holders.  The idea is that such a scheme would strike a pragmatic and reasonable balance between rampant uncompensated use of content in remixes and unworkable (not to mention creativity-impeding) attempts to lock everything down. The U.S. Copyright Office would be tasked with figuring out suitable schemes for dividing up revenue from these licenses.

It goes without saying that establishing any scheme of that type will involve years and years of lobbying and haggling to determine the rates.  Even then, several factions aren’t likely to be interested in this idea in principle.  Although musical artists surely would like to be compensated for the use of their material in remixes, many artists are not (or are no longer) in favor of more compulsory licenses and would rather see proper compensation develop in the free market.  And the copyleft crowd tends to view all remixes and mashups as fair use, and therefore not subject to royalties at all.

In general, Menell’s paper calls for changes to copyright law that are designed to improve its public image by making it seem more fair to both consumers and content creators.  Changing behavioral norms in the online world is perhaps better done in narrowly targeted ways than broadly, but the paper ought to be a springboard for many more such ideas in the future.


Mobile Phone Unlocking Legislation Leads to Renewed Interest in DMCA 1201 Reform August 10, 2014

Posted by Bill Rosenblatt in DRM, Law, Uncategorized, United States.
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President Obama recently signed into law a bill that allows people to “jailbreak” or “root” their mobile phones in order to switch wireless carriers.  The Unlocking Consumer Choice and Wireless Competition Act was that rarest of rarities these days: a bipartisan bill that passed both houses of Congress by unanimous consent. Copyleft advocates such as Public Knowledge see this as an important step towards weakening the part of the Digital Millennium Copyright Act that outlaws hacks to DRM systems, known as DMCA 1201.

For those of you who might be scratching your heads wondering what jailbreaking your iPhone or rooting your Android device has to do with DRM hacking, here is some background.  Last year, the U.S. Copyright Office declined to renew a temporary exception to DMCA 1201 that would make it legal to unlock mobile phones.  A petition to the president to reverse the decision garnered over 100,000 signatures, but as he has no power to do this, I predicted that nothing would happen.  I was wrong; Congress did take up the issue, with the resulting legislation breezing through Congress last month.

Around the time of the Copyright Office’s ruling last year, Zoe Lofgren, a Democrat who represents a chunk of Silicon Valley in Congress, introduced a bill called the Unlocking Technology Act that would go considerably further in weakening DMCA 1201.  This legislation would sidestep the triennial rulemaking process in which the Copyright Office considers temporary exceptions to the law; it would create permanent exceptions to DMCA 1201 for any hack to a DRM scheme, as long as the primary purpose of the hack is not an infringement of copyright.  The ostensible aim of this bill is to allow people to break their devices’ DRMs for such purposes as enabling read-aloud features in e-book readers, as well as to unlock their mobile phones.

DMCA 1201 was purposefully crafted so as to disallow any hacks to DRMs even if the resulting uses of content are noninfringing.  There were two rationales for this.  Most basically, if you could hack a DRM, then you would be able to get unencrypted content, which you could use for any reason, including emailing it to your million best friends (which would have been a consideration in the 1990s when the law was created, as Torrent trackers and cyberlockers weren’t around yet).

But more specifically, if it’s OK to hack DRMs for noninfringing purposes, then potentially sticky questions about whether a resulting use of content qualifies as fair use must be judged the old-fashioned way: through the legal system, not through technology.  And if you are trying to enforce copyrights, once you fall through what I have called the trap door into the legal system, you lose: enforcement through the traditional legal system is massively less effective and efficient than enforcement through technology.  The media industry doesn’t want judgments about fair use from hacked DRMs to be left up to consumers; it wants to reserve the benefit of the doubt for itself.

The tech industry, on the other hand, wants to allow fair uses of content obtained from hacked DRMs in order to make its products and services more useful to consumers.  And there’s no question that the Unlocking Technology Act has aspects that would be beneficial to consumers.  But there is a deeper principle at work here that renders the costs and benefits less clear.

The primary motivation for DMCA 1201 in the first place was to erect a legal backstop for DRM technology that wasn’t very effective — such as the CSS scheme for DVDs, which was the subject of several DMCA 1201 litigations in the previous decades.  The media industry wanted to avoid an “arms race” against hackers.  The telecommunications industry — which was on the opposite side of the negotiating table when these issues were debated in the early 1990s — was fine with this: telcos understood that with a legal backstop against hacks in place, they would have less responsibility to implement more expensive and complex DRM systems that were actually strong; furthermore, the law placed accountability for hacks squarely on hackers, and not on the service providers (such as telcos) that implemented the DRMs in the first place.  In all, if there had to be a law against DRM hacking, DMCA 1201 was not a bad deal for today’s service providers and app developers.

The problem with the Unlocking Technology Act is in the interpretation of phrases in it like “primarily designed or produced for the purpose of facilitating noninfringing uses of [copyrighted] works.”  Most DRM hacks that I’m familiar with are “marketed” with language like “Exercise your fair use rights to your content” and disclaimers — nudge, nudge, wink, wink — that the hack should not be used for copyright infringement.  Hacks that developers sell for money are subject to the law against products and services that “induce” infringement, thanks to the Supreme Court’s 2005 Grokster decision, so commercial hackers have been on notice for years about avoiding promotional language that encourages infringement.  (And of course none of these laws apply outside of the United States.)

So, if a law like the Unlocking Technology Act passes, then copyright owners could face challenges in getting courts to find that DRM hacks were not “primarily designed or produced for the purpose of facilitating noninfringing uses[.]”  The question of liability would seem to shift from the supplier of the hack to the user.  In other words, this law would render DMCA 1201 essentially toothless — which is what copyleft interests have wanted all along.

From a pragmatic perspective, this law could lead non-dominant retailers of digital content to build DRM hacks into their software for “interoperability” purposes, to help them compete with the market leaders.  It’s particularly easy to see why Google should want this, as it has zillions of users but has struggled to get traction for its Google Play content retail operations.  Under this law, Google could add an “Import from iTunes” option for video and “Import from Kindle/Nook/iBooks” options for e-books.  (And once one retailer did this, all of the others would follow.)  As long as those “import” options re-encrypted content in the native DRM, there shouldn’t be much of an issue with “fair use.”   (There would be plenty of issues about users violating retailers’ license agreements, but that would be a separate matter.)

This in turn could cause retailers that use DRM to help lock consumers into their services to implement stronger, more complex, and more expensive DRM.  They would have to use techniques that help thwart hacks over time, such as reverse engineering prevention, code diversity and renewability, and sophisticated key hiding techniques such as whitebox encryption.    Some will argue that making lock-in more of a hassle will cause technology companies to stop trying. This argument is misguided: first, lock-in is fundamental to theories of markets in the networked digital economy and isn’t likely to go away over costs of DRM implementation; second, DRM is far from the only way to achieve lock-in.

The other question is whether Hollywood studios and other copyright owners will demand stronger DRM from service providers that have little motivation to implement it.  The problem, as usual, is that copyright owners demand the technology (as a condition of licensing their content) but don’t pay for it.  If there’s no effective legal backstop to weak DRM, then negotiations between copyright owners and technology companies may get tougher.  However, this may not be an issue particularly where Hollywood is concerned, since studios tend to rely more heavily on terms in license agreements (such as robustness rules) than on DMCA 1201 to enforce the strength of DRM implementations.

Regardless, the passage of the mobile phone unlocking legislation has led to increased interest in the Unlocking Technology Act, such as the recent panel that Public Knowledge and other like-minded organizations put on in Washington.  Rep. Lofgren has succeeded in getting several more members of Congress to co-sponsor her bill.  The trouble is, all but one of them are Democrats (in a Republican-controlled House of Representatives not exactly known for cooperation with the other side of the aisle); and the Democratically-controlled Senate has not introduced parallel legislation.  This means that the fate of the Unlocking Technology Act is likely to be similar to that of past attempts to do much the same thing: the Digital Media Consumers’ Rights Act of 2003 and the Freedom and Innovation Revitalizing United States Entrepreneurship (FAIR USE) Act of 2007.  That is, it’s likely to go nowhere.

Copyright and Technology London 2014: Registration Open; Panel Change July 13, 2014

Posted by Bill Rosenblatt in Law, United States, Video.
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Registration for Copyright and Technology London 2014 is now live.  An earlybird discount is in place through August 8. Space is limited and we came close to filling the rooms last time, so please register today!

I am particularly excited about our two keynote speakers — two of the most important copyright policy officials in the European Union and United States respectively.  Maria Martin-Prat will discuss efforts to harmonize aspects of copyright law throughout the 28 EU Member States, while Shira Perlmutter will provide an update on the long process that the US has started to revise its copyright law.

We have made one change to the Law and Policy track in the afternoon: we’ve added a panel called The Cloudy Future of Private Copying.  This panel will deal with controversies in the already complex and often confusing world of laws in Europe that allow consumers to make copies of lawfully-obtained content for personal use.

The right of private copying throughout Europe was established in the European Union Copyright Directive of 2001, but the EU Member States’ implementations of private copying vary widely — as do the levies that makers of consumer electronics and blank media have to pay to copyright collecting societies in many countries on the presumption that consumers will make private copies of copyrighted material.  Private copying was originally intended to apply to such straightforward scenarios as photocopying of text materials or taping vinyl albums onto cassette.  But nowadays, cloud storage services, cyberlockers, and “cloud sync” services for music files — some of which allow streaming from the cloud or access to content by users other than those who uploaded the content — are coming into view regarding private copying.

The result is a growing amount of controversy among collecting societies, consumer electronics makers, retailers, and others; meanwhile the European Commission is seeking ways to harmonize the laws across Member States amid rapid technological change.  Our panel will discuss these issues and consider whether there’s a rational way forward.

We have slots open for a chair and speakers on this panel; I will accept proposals through July 31.  Please email your proposal(s) with the following information:

  • Speaker’s name and full contact information
  • Chair or speaker request?
  • Description of speaker’s experience or point of view on the panel subject
  • Brief narrative bio of speaker
  • Contact info of representative, if different from speaker*


Finally, back over here across the Atlantic, I’ll note an interesting new development in the Aereo case that hasn’t gotten much press since the Supreme Court decision in the case a couple of weeks ago.  Aereo had claimed that it had “bet the farm” on a court ruling that its service was legal and that “there is no Plan B,” implying that it didn’t have the money to pay for licenses with television networks.  Various commentators have noted that Aereo wasn’t going to have much leverage in any such negotiations anyway.

As a result of the decision, Aereo has changed tactics.  In the Supreme Court’s ruling, Justice Breyer stated that Aereo resembled a cable TV provider and therefore could not offer access to television networks’ content without a license.  Now, in a filing with the New York district court that first heard the case, Aereo is claiming that it should be entitled to the statutory license for cable TV operators under section 111 of the copyright law, with royalty rates that are spelled out in 17 U.S.C § 111(d)(1).

In essence, Aereo is attempting to rely on the court for its negotiating leverage, and it has apparently decided that it can become a profitable business even if it has to pay the fees under that statutory license.  Has Barry Diller — or another investor — stepped in with the promise of more cash to keep the company afloat?  Regardless, in pursuing this tactic, Aereo is simply following the well-worn path of working litigation into a negotiation for a license to intellectual property.


*Please note that personal confirmation from speakers themselves is required before we will put them on the program.

Supreme Court’s Aereo Decision Clouds the Future July 3, 2014

Posted by Bill Rosenblatt in Law, United States, Video.
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The Supreme Court has rendered various decisions that serve as rules of the road for the treatment of copyrighted works amid technological innovation.  Universal v. Sony (1984) established the legality of “time shifting” video for personal viewing as well as the “substantial noninfringing uses” standard for new technologies that involve digital media.  MGM v. Grokster (2005) took the concept of “inducing infringement” from patent law and applied it to copyright, so that services that directly and explicitly benefit from users’ infringement could be held liable.  UMG v. Veoh (2011) taught that network service operators have no duty to proactively police their services for users’ infringements.  These rulings are reasonably clear signposts that technologists can follow when contemplating new products and services.

Unfortunately, Justice Stephen Breyer’s ruling last week in ABC v. Aereo won’t be joining that list.  He ruled against Aereo in a 6-3 majority that united the Court’s liberals and moderates.  Justice Antonin Scalia’s forceful dissent described the problems that this decision will create for services in the future.

Several weeks ago, at the Copyright Clearance Center’s OnCopyright conference in NYC, Rick Cotton — former General Counsel of NBC Universal — predicted that the Supreme Court would come down against Aereo in a narrow decision that would avoid impact on other technologies.  He got it right in terms of what Justice Breyer may have hoped to accomplish, but not in terms of what’s likely to happen in the future.

Instead of establishing principles that future technology designers can rely on, the Court simply took a law that was enacted almost 40 years ago to apply to an old technology, determined that Aereo resembles that old technology, and concluded that therefore the law should apply to it.  The old technology in question is Community Access Television (CATV) — transmissions of broadcast television over cable to reach households that couldn’t receive the broadcasts over the air.

Justice Breyer observed that Congress made changes in the copyright law, with the Copyright Act of 1976, in order to stop CATV providers from being able to “free ride” on broadcast TV signals; he found that that Aereo was similarly free-riding and therefore ought to be subject to the same law.

Just in terms of functionality, the decision makes little sense: CATV was created to enable broadcast television to reach new audiences, while Aereo (nominally, at least) enabled an existing audience for broadcast TV to watch it on other devices and in other locations.  In that respect, Aereo is more like the “cloud sync” services for music like DoubleTwist and MP3Tunes that popped up in the late 2000s, which automatically copied users’ MP3 music files and playlists across all of their devices.  More on that analogy later.

More broadly, the Court’s decision is unlikely to be helpful in guiding future technologies; all it offers is a “does it look like cable TV?” test based on fact-specific interpretations of the public performance right in copyright law.  Justice Breyer claimed that his opinion should not necessarily have implications for cloud computing and other new technologies, but that doesn’t make it so.

As Justice Scalia remarked in his dissent, “The Court vows that its ruling will not affect cloud-storage providers and cable television systems … , but it cannot deliver on that promise given the imprecision of its result-driven rule.”  Justice Scalia felt that Aereo exploited a loophole in the copyright law but that it should be up to Congress instead of the Supreme Court to close it.

In fact, Justice Scalia agreed with the Court’s opinion that Aereo probably violates copyright law.  But he stated that the decision the Court was called upon to make — regarding Aereo’s direct infringement liability and whether the TV networks’ request for a preliminary injunction should be upheld — wasn’t an appropriate vehicle for determining Aereo’s copyright liability, and that the Court should have left well enough alone.  Instead, Justice Scalia offered that Aereo should be more properly held accountable based on secondary liability — just as the Court did in Grokster — and that a lower court could well reach such a finding later in the case after the preliminary injunction issue had been settled.

Secondary liability means that a service doesn’t infringe copyrights itself but somehow enables end users to do so.  Of course there have been many cases where copyright owners have sued tech companies on the basis of secondary liability and forced them to go out of business (e.g., Napster, LimeWire), but there have been many others where lawsuits (or threats of lawsuits) have resulted in mutually beneficial license agreements between copyright owners and the technology companies.

And that brings us back to “cloud sync” services for music.  DoubleTwist was built by Jon Lech Johansen, who had become notorious for hacking the encryption system for DVDs in the late 1990s. MP3Tunes was developed by Michael Robertson, who was equally notorious for his original MP3.com service.  Cloud sync services enabled users to make copies of their music files without permission and didn’t share revenue (e.g., from advertising or premium subscriptions) with copyright owners. DoubleTwist, MP3Tunes, and a handful of similar services became moderately popular.  In addition to their functionality, what MP3Tunes and DoubleTwist had in common was that they were developed by people who had first built blatantly illegal technology and then sought ways to push the legal envelope more gently.

Later on, Amazon, Apple, and Google followed the same latter path.  They built cloud sync capabilities into their music services (thereby rendering small third-party services like DoubleTwist largely irrelevant).  Amazon and Google launched their cloud sync capabilities without taking any licenses from record companies; record companies complained; confidential discussions ensued; and now everyone’s happy, including the consumers who use these handy services.  (Apple took a license for its iTunes Match feature at the outset.)

The question for Aereo is whether it’s able to have such discussions with TV networks; the answer is clearly no.  The company never entertained the possibility that it would have to (“there is no Plan B“), and its principal investor, video mogul Barry Diller, isn’t going to pump more money into the company to pay for licenses.

Of course, TV networks are cheering the result of the Supreme Court’s decision in Aereo. But it doesn’t help them in the long run if the rules of the road for future technologies are made cloudier instead of clearer.  And Aereo would eventually have been doomed anyway if Justice Scalia had a majority.


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