RealNetworks' real mistake

One week  after Judge Marilyn Hall Patel decisively threw out its antitrust claims against the studios and DVD CCA in the RealDVD case, RealNetworks appears to be imploding. On Wednesday COO John Giamatteo abruptly left the company, and on Thursday founder Rob Glaser stepped down as CEO (he’ll remain chairman). Although Glaser’s move had apparently been planned for some time, it came sooner than he expected and appears not to have been voluntary.

While it’s possible the timing of the events is just a coincidence I wouldn’t bet on it. Investors cheered the news of the Glaser move, sending the stock soaring 17 percent in its wake (ouch!), presumably in anticipation of a new strategic direction for the company–one not quite as provocative and confrontational with respect to the content owners.

The whole RealDVD saga, in fact, has been a disaster for Real. Not only has it been unable to distribute the product, thanks to a restraining order and temporary injunction by the court, but the litigation with the studios over the DVD copying software has produced an unending series of legal setbacks for Real, of which last week’s ruling is merely the latest.

According to Judge Patel, Real brought it’s trouble on itself:

The only injury Real has suffered in connection with its RealDVD product is the delay in the product’s release and accompanying lost profits. This delay is a result of this court’s decision to enjoin the distribution of a product which the court has found likely to violate federal law and to breach the terms of Real’s license agreement with the DVD CCA. Moreover, even if Real had the unimpeded right to copy CSS-protected DVDs, its product would nevertheless be subject to an injunction because it circumvents non-CSS copyright protection technologies. In the circumstances of this case, there is no allegation Real could make that would give it antitrust standing even if it could otherwise plead a plausible claim under Rule 8.

Actually, you could make a pretty good argument that Real’s self-inflicted damage began even earlier, when it took out a CSS license.

As Judge Patel notes:

The decision to develop RealDVD was based in part on a California trial court’s ruling that another provider of DVD management technology, Kaleidescape, Inc., did not violate the CSS license agreement by marketing a product that stored DVD content on its servers.

She then adds in a footnote that the California Court of Appeal has since reversed that ruling, suggesting, presumably, that Real drew the wrong lesson from the Kaleidescape case in concluding that the CSS license permitted the sale of DVD copying tools.

In fact, the real lesson of both the Kaleidesape and RealDVD cases is different from that drawn either by Judge Patel or RealNetworks. The lesson of both cases is that if you take out a CSS license before building your DVD copying tool you’ll get sued by the studios and/or DVD CCA, whereas if you don’t bother with a license, you won’t.

Consider non-CSS licensee  DViCo, which has been selling its Tvix Universal Jukebox, complete with DVD ripper, for some time now around the world, utterly unmolested by either the studios or DVD CCA. You can buy in the U.S. through Amazon.com and other fine retailers.

Or consider the Avonix MediaMax Server, or the PrimeArray Virtual Jukebox, or the Fusion Media Server, or any number of similar devices from other U.S. and overseas manufacturers that have neither been licensed nor sued.

Why sue only those who go to the trouble of paying for a CSS license and not those who don’t? Perhaps its simply a coincidence, but again, I wouldn’t bet on it. My guess is that the seemingly counterintuitive strategy has something to do with the studios’ desire to avoid a straight-up showdown over fair use in DVD copying.

When a licensed manufacturer enables DVD copying, the studios (or DVD CCA) can go after it for violating the terms of the CSS license agreement–fundamentally a simple contract matter. Where there’s no license to violate, however, the studios would have to bring a straight circumvention and copyright infringement action.

Though the studios would clearly have the law on their side with respect to circumvention, as Judge Patel noted in her ruling, they’ve never really wanted to face the infringement question, for fear a court might decide that consumers have a legal right to make copies of their own DVDs for personal use.

So they don’t. Instead, they challenge Real’s (and Kaleidescape’s) assertion that the CSS license gives it the right to design place-shifting DVD tools and thus any copying that occurs is, by definition, authorized. By knocking down that argument, as they’ve now done twice, the studios can effectively short-circuit any effort to get a court to rule on the more fundamental fair use question, while striking at least a symbolic blow against copying.

But really, wouldn’t it have been easier to simply do a deal with Real to include the RealDVD software on every DVD?