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. Read More »

The coming battle over used e-books (Updated)

On Thursday, Google announced during the Frankfurt Book Fair that its long-planned e-commerce platform for digital books will launch by June 2010. Christened Google Editions, represents a major departure from most current e-book offerings in that it won’t be confined to any particular reading device or desktop viewing application. Instead, Google will cache users’ purchases in a “cloud library,” which can be accessed from anywhere using any device with a Web browser

“It will be a browser-based access,” Google Books’  Tom Turvey said.  “The way the e-book market will evolve is by accessing the book from anywhere, from an access point of view and also from a geographical point of view.”

home-bookstoreUsers will be able to search for e-books on Google Editions (and presumably be served ads) and then buy them from Google, directly from the publisher or from one of dozens of partner retailers. Turvey said he expects the majority of Google Editions customers will go to retail partners, not to Google, to make purchases. “We are a wholesaler. A book distributor,” he said.

Given Google’s general bent toward moving content and applications off the desktop (or device) and into the cloud, turning e-books into Web apps is a logical strategy (GigaOm Pro subscribers can read my take on Google’s overall e-book strategy here). But it’s one that represents more than simply competition for Amazon’s Kindle. Google Editions is going to raise a host of new questions about the nature of an e-book.

For instance: How long before Google or one of its partner retailers sets up a used e-book exchange on the platform?

Up to now, used e-books have not really been an issue. Kindle books, for instance, remain locked to device they were acquired on. If you want to give a copy of a Kindle book to a friend, you have to hand over the whole Kindle. Other services let you transfer your e-books to a limited number of devices but unless you had the foresight to register your friend’s computer as an authorized device you’re out of luck. Selling the e-book to a stranger would be even more problematic.

The issue is not limited to e-books, of course. Any piece of DRM-protected content faces the same limitation. And it has long been a source of some controversy. Under the so-called first sale doctrine (Section 109 of the Copyright Act), the owner of a physical book is entitled to do whatever she wants with that particular copy — short of making another copy — including giving it as a gift, loaning it to a friend or re-selling it to a stranger. Ditto a CD, or a DVD. In principle, the same is true of any “lawfully made copy,” including digital copies. As a practical technical matter, however, sending a digital copy to a friend involves making another copy of the file, something the first sale doctrine does not permit.

For years now, we’ve simply lived with the inherent tension between the first sale doctrine and the practical realities of digital reproduction, in part because its main commercial implications were largely limited to business–online resellers like iTunes, Amazon or CinemaNow–which could be manage-ably licensed by content owners. Individual consumers bent on sharing their digital files had plenty of unauthorized file-sharing networks to turn to.

Google Editions works on a very different principle from Kindle or iTunes, however. Instead of transferring a copy of a file at the time of purchase, Google Editions will cache the  copy on a server, which is then accessed remotely. “Giving” a copy to friend, therefore, or even selling it to a stranger, does not need to involve a subsequent file transfer and its concomitant reproduction. All that would need to happen is for the seller’s access to the cached copy be disabled and the buyer’s accessed enabled at the time of the transaction.

I can see the issue arising first within a licensed context such as a “gift exchange.” Some Google Editions retailer will create a system allowing users to purchase e-books as a gift for someone else. The buyer (gift-giver) would be able to use her account to give a friend access to an e-book via the recipient’s account.

Publishers will love the idea at first because it will increase sales of e-books. But at some point, someone will hit on the idea of an independent re-sale exchange. Users who have purchased and finished with an e-book would be able to make it available to other buyers based on the same simultaneous disable/enable mechanism as the gift exchange.

used-bookstorePublishers will like that a lot less because prices on the exchange will be lower than the prices set by publishers for the same title (it wouldn’t work otherwise). Readers will be drawn to lower prices on the exchange because digital files don’t degrade from wear and tear the way physical copies do: “used” copies are just as good and fresh as “new” copies. Sellers will see it as a way to recapture a portion of the original purchase price, having first extracted value from the e-book by reading it.

Publishers, of course, will respond that your original e-book “purchase” was not in fact an actual purchase of a copy; it was the purchase of a license to use the e-book in certain ways and not others. The terms of service you agreed to by clicking “I agree” will preclude any sort of unauthorized re-sale.

We’ll then have a neatly framed question, suitable for litigation: If a transaction walks like a purchase and quacks like a purchase, is it a purchase even if the vendor insists otherwise? It won’t be the first time the issue has come up (see Vernor v. Autodesk, among others). But a case involving e-books is likely to capture the imagination of the public more than cases involving computer software (where most of the previous  litigation has occurred) because of our deep cultural history with trade in used, rare and antiquarian books.

I give it six to 12 after the launch of Google Editions.

Update: Looks like 6-12 months may be too long a timetable. According to the NYTimes, the new Barnes & Noble Nook, “will permit readers to lend their digital books to friends and download books wirelessly.”

Asking the wrong questions on e-books

The New York Times published a story the other day asking,Will Books be Napsterized? It’s conclusion? Probably, now that e-book readers are going mainstream and file-hosting sites like RapidShare are making it easier than ever for people to post pirated e-books online (speaking on a network filtering panel at the Future of Music Coaltion Policy Summit in Washington on Monday, Daniel Klein of London-based cyber-security firm Detica Group gave it 12 months before RapidShare becomes the new Public Enemy No. 1 among copyright owners).

napster-logoWhile the article, written by Randall Stross, professor of business at San Jose State University, is never explicit as to what it means to be “Napsterized,” it’s pretty clear it is referring to the loss of legitimate e-book sales–and perhaps even hardcover sales–due to people downloading for free illicit electronic editions of books rather than paying for the licensed product–much as the recorded music industry has suffered a sharp decline in CD sales since the advent of Napster and other peer-to-peer file-sharing networks.

“We are seeing lots of online piracy activities across all kinds of books — pretty much every category is turning up,” said Ed McCoyd, an executive director at the [Association of American Publishers]. “What happens when 20 to 30 percent of book readers use digital as the primary mode of reading books? Piracy’s a big concern.”

[snip]

We do know that people have been helping themselves to digital music without paying. When the music industry was “Napsterized” by free file-sharing, it suffered a blow from which it hasn’t recovered. Since music sales peaked in 1999, the value of the industry’s inflation-adjusted sales in the United States, even including sales from Apple’s highly successful iTunes Music Store, has dropped by more than half, according to the Recording Industry Association of America.

Read More »

More to chew on over breakfast

As I noted in my last post, The Media Wonk will be hosting the first Digital Breakfast DC panel discussion on Oct. 1 on the topic of Technology and IP Enforcement, including the role of the White House IP Enforcement Coordinator, a new position created by the PRO-IP Act last year. Today, President Barack Obama named former head of Intellectual Property and Innovation at the Office of the U.S. Trade Representative Victoria Espinel to be the first to fill the new post.

victorial-espinel2The nomination, who must be approved by the Senate, drew praise from both sides of the IP aisle. “Today’s appointment is the welcome culmination of many months of work toward a more streamlined approach to intellectual property enforcement by the federal government,” the Copyright Alliance said in a statement. “This appointment and its locale within the Office of Management and Budget is a strong sign by the Administration that it believes in the importance of creators’ rights and seeing those rights are enforced here and abroad.”

Public Interest group Public Knowledge, which is often at odds with the Copyright Alliance over IP issues, said in a statement, ““We congratulate Victoria Espinel on her nomination to be the Intellectual Property Enforcement Coordinator. She is well qualified for the position, having served as the assistant U.S. Trade Representative for Intellectual Property and Innovation. We look forward to working with her upon confirmation by the Senate. We believe she will be fair in her approach to intellectual property enforcement issues.”

Discussion the appointment at the breakfast will be panelistsRick Cotton, general counsel of NBC Universal, Prof. Peter Jaszi of Washington College of Law at American University, Jon Baumgarten, partner with Proskauer Rose, Bill Rosenblatt of GiantSteps Media and entertainment attorney Chris Castle, who represents music artists and songwriters.

Those interested in attending can register here.

Join me at the first Digital Breakfast DC on Oct. 1

The Media Wonk will be hosting the first Digital Breakfast DC conference on Oct. 1 in, not surprisingly, Washington, DC. The topic for the panel is Using Tech to Safeguard Content and IP. Panelists include Rick Cotton, general counsel of NBC Universal, Prof. Peter Jaszi of Washington College of Law at American University, Jon Baumgarten, partner with Proskauer Rose, Bill Rosenblatt of GiantSteps Media and the irrepressible Chris Castle an entertainment attorney from LA who is appearing on behalf of Arts + Labs.

digital-breakfastDebating points will include the implications of the FCC’s net neutrality rulemaking for filtering and other online anti-piracy efforts, the French three-strikes law, Veoh’s recent court victory and its implications for UGC and the over/under line on when we’ll see the new White House IP Czar named. All packed into a fast-paced one hour. Plus bagels.

Click here to register today!

Authors Guild doesn't like the sunrise, blames the rooster

The Authors Guild is not impressed with Amazon’s opposition to the Google Books settlement.

In a 49-page brief (pdf) filed with Judge Denny Chin on Tuesday, the Kindle-maker warned of the potentially anti-competitive effects both of the blanket license in the agreement for Google to scan and sell orphan works and of the price-fixing power of the proposed Book Rights Registry, which Amazon described as a “cartel of authors and publishers” operating with “virtually no restrictions on its actions.”

The Authors Guild fired back the next day in a statement on the group’s web site:

Amazon’s hypocrisy is breathtaking.  It dominates online bookselling and the fledgling e-book industry.  At this moment it’s trying to cement its control of the e-book industry by routinely selling e-books at a loss.  It won’t do that forever, of course.  Eventually, when enough readers are locked in to its Kindle, everyone in the industry expects Amazon to squeeze publishers and authors.  The results could be devastating for the economics of authorship.  

Amazon apparently fears that Google could upend its plans.  Amazon needn’t worry, really:  this agreement is about out-of-print books.  Its lock on the online distribution of in-print books, unfortunately, seems secure.

Well now.

While authors and publishers have ample reason to be wary of Amazon’s market power, as I’ve argued in previous posts, the Guild is drawing an apples and bananas comparison in this case. It’s not as if Amazon came by its market power through nefarious, or even non-transparent means. Read More »

Orphans in the storm

Pity Judge Denny Chin, the federal district court jurist in New York presiding over the Google Book Search case (The Authors Guild, et. al. v. Google, Inc.). Having steered the long, complex class action to within sight of the finish line he suddenly finds himself the object of an intense last-minute lobbying campaign from interests that were not party to the case and at the center of budding international incident.

google-books-imagen1In my previous post, I discussed the commercial interests that began lining up last week in support or opposition to the proposed settlement between Google and the class-action plaintiffs, including Amazon, Microsoft, Yahoo and Sony. Now, foreign nations, and perhaps whole continents, are throwing down markers.

On Tuesday, lawyers for the government of Germany filed a strongly worded brief (pdf) with the court declaring that the settlement, if approved, would “run afoul of the applicable German nationallaws,” “irrevocably alter the landscape of internationalal copyright law” and potentially violate U.S. treaty obligations.

Some European Union officials, meanwhile, have come out in favor of the settlement’s terms (if not its legal implications) and have suggested importing it to Europe. A meeting on the issue is scheduled for Sept. 14 in Brussels.

How did it come to this? Read More »

The studios just say 'no'

The studios and the DVD Copy Control Assn. (DVD-CCA) are on a legal roll. On successive days last week they won a preliminary injunction against RealDVD and a reversal on appeal in the Kaleidescape case (The Media Wonk has been on another assignment so I’m only just getting aroundto blogging this now). The two courts found, inter alia:

  • The CSS license and technical specifications “unambiguously rule out” (RealDVD) the making of permanent digital copies of DVDs and prohibit the playback of the DVD’s content without the original disc in the tray.
  • The technical specifications in the CSS license are indeed part of the CSS license agreement and it was the “unambiguous intent” of the parties that those specifications barred the creation of permanent digital copies  (Kaleidescape).
  • The anti-circuvention provisions of the DMCA clearly and plainly tipped the balance of copyright law in favor of copyright owners and trumped any fair use analysis (RealDVD).

The studios really couldn’t have asked for more.

Kaleidescape-collection-to-systemSo, now what? Now that the studios have won most of the key legal points and preserved the integrity of the CSS license  (at least for now), what will they do with them?

Alas, probably nothing very useful.

As long-time readers of The Media Wonk know, the DVD-CCA has been attempting to devise a comprehensive system for allowing “managed copying” of DVDs for the better part of four years–a process that has thus far produced little apart from the Kaleidescape and RealDVD litigation. Based on the most recent discussions, in fact, Media Wonk’s sources suggest, negotiators seem farther than ever from a comprehensive solution. Read More »

Finally singing the right tune

For those with a deterministic view of digital technology’s impact on information economies, Brad Stone’s piece in the NYTimes this morning is a good read. Stone reports on the efforts of Polyphonic Music, the new venture formed by Radiohead manager Brian Message to invest directly in the careers of budding musicians.

recording-studioPolyphonic typically invests a few hundred thousand dollars in unsigned artists and then helps them create direct links to their audience, mostly over the Internet. Each act then functions as its own small business, funding its own recordings and using outside contractors to handle promotion, merchandising and touring. The musicians and investors then share in all revenue from sales and touring.

It’s essentially a complete reversal of the traditional music-industry arrangement, in which an artist is signed exclusively to a record company, which handles all sales, promotion and merchandising while paying the artist a royalty on record sales.

In an even more critical reversal of the traditional model, the artists Polyphonic invests in retain ownership of their own copyrights and master recording, rather than assigning those to the record company for up to 35 years, as is standard industry practice now. Read More »

Missing data points in the IIPA copyright study

A couple of data points I would have liked to have seen but could not find in the study released Monday by the International Intellectual Property Alliance on the copyright industries’ $1.5 trillion contribution to U.S. GDP:

1)  What portion of the economic activity in what the report classify as “non-core” copyright industries is being counted toward that $1.5 trillion? Following classifications established by the World Intellectual Property Organization in 2004, the report divides Copyright-symbolthe copyright industries into four categories: Core industries (movies, TV, books, newspapers, recorded music, computer software); Partial copyright industries (industries in which a portion of their output is eligible for copyright protection, e.g. fabric, jewelry, furniture); Non-Dedicated Support industries (transportation, telecommunications, etc.); and Interdependent industries (CE manufacturers, wholesalers and retailers, blank media etc.). Together, the four make up the report’s “total copyright industries.”

According to the report the core industries contributed $889 billion to U.S. GDP in 2007, the last year for which data are available, while the non-core industries contributed $636 billion. Not all economic activity in those related industries is related to copyrighted works, however, as the authors of the report acknowledge. So how much are they assigning to the copyright category? “A portion,” according the report. How big a portion? The report doesn’t say. Read More »

Pandora's memory hole

By now, even Amazon would acknowledge mishandling the remote deletion of George Orwell’s 1984 and Animal Farm from hundreds of unsuspecting Kindles last week in response to a dispute over the rights to the works in the U.S. Apart from the near criminal lack of irony required to send 1984 — of all books — down the memory hole, Amazon had never bothered to disclose in its terms of service that such a capability existed, or that it retained the right to use it without warning.

big-brotherBut as Glenn Fleishman points out in his excllent overview of the case for TidBITS, Amazon was trying to avoid any and all liability for distributing unauthorized copies of the two books, and thus took every step available to it to disassociate itself from the infringing copies — including un-distributing them — apparently without thinking through the PR implications of the move.

My question is: Why would Amazon want that capability in the first place?  The Media Wonk is not an attorney, so I may be wrong on any or all of these points (I would certainly welcome feedback from actual attorneys). But it seems to  me that Amazon is asking for a trouble on a number of possible fronts: Read More »

Owning more of the news

gridlock-economyIn thinking some more about Judge Richard Posner’s controversial suggestion the other day that Congress might need to expand copyright law to prohibit linking and paraphrasing news stories without permission in order to “save” newspapers from the ravages of bloggers and aggregators, I was reminded of a talk given last month at the World Copyright Summit by Columbia University law professor Michael Heller. Heller is the author of The Gridlock Economy, which describes a phenomenon he calls the tragedy of the anti-commons.

The coinage is a twist on the classic problem in economics known as the tragedy of the commons, in which resources held in common are notoriously over-used and under-developed economically because everyone has an incentive to use as much of the common resource as possible and no one has incentive to invest in its long-term preservation and development.

The solution, in classic economic theory, is property rights. Allow individuals to have private property rights in the resources — i.e. the right to exclude others from using it — they will have incentive to invest and develop the resource, ultimately making the fruits of that development available to others at a profit through the market. In theory, everyone wins.

The idea has formed the intellectual foundation for much of Western, and in particular American, economic policy, which has been heavily biased in favor of extending private property rights wherever possible as a mechanism for promoting the general welfare. In general, more property rights have been viewed as essential to increasing private investment and ultimately wealth creation.

Intellectual property policy has been no exception to the rule, as Congress’s repeated extension of term of copyright protection makes clear.

.Heller argues, however, that there is obverse to the classic problem, and it arises when too many individuals claim property rights in the same thing, or where rights are highly fragmented. If 100 individuals each has a property right in a resource, and any one can prevent its use by withholding consent (or demanding too high a payment) the resource does not get used and wealth is not created. This is the tragedy of the anti-commons.

rheinmapIn his book, Heller recounts the history of shipping along the Rhine River at the time of the Holy Roman Empire. During the Middle Ages, merchant ships could travel the 90-mile length of the Rhine from Bonn to Bingen safely by paying a single modest toll to the emperor for protection. By the 13th Century, however, as the empire weakened, freelancing barons — the original “robber barons” — began building their own castles along the river and imposing their own tolls on passing ships. Eventually, the tolls got so high and so burdensome that boatmen stopped using the Rhine to transport goods and commerce along the spine of the old empire collapsed.

A surfeit of property claims, Heller argues, can destroy markets and lead to a net decrease in wealth.

It can also act to prevent the development of new markets. Heller relates the story of a major pharmaceutical company that developed a compound its researchers were convinced would be highly effective against Alzheimer’s Disease. Before they could begin testing it in earnest, however, the company needed to secure the rights to dozens of separate biotech patents owned by dozens of individuals or entities. Unable to secure them all on reasonable terms the company eventually gave up and reallocated its research budget to developing spin-offs of existing drugs for which it already controlled the intellectual property rights. The Alzheimer’s drug was never brought to market.

Anyone who has ever tried to license music for novel or innovative uses will be familiar with such rights “gridlock,” as Heller terms it. With rights highly fragmented among composers, publishers, recording companies and artists, securing the necessary cooperation from each on reasonable terms has daunted even such formidable innovators as YouTube, which remains in litigation with music publishers over the use of recorded music in home-made videos uploaded to the Web site.

Heller’s analysis is not completely on point for Judge Posner’s plan for saving newspapers. Posner is not suggesting fragmenting rights, or creating a new class of rights holder but investing existing copyright owners with additional rights. But it serves as a useful cautionary tale about the potential unintended consequences of blindly (ideologically) ratcheting up property rights to spur wealth creation. Especially at a time when wealth creation is less dependent on the accumulation of market power and production efficiencies and more on innovation and the transformation of industries.

As I argue in my previous post on the subject, the fundamental problem facing newspapers today is not insufficient property rights, it is the structure of the industry and an (probably) irreversible shift in reader behavior.

Simply investing publishers with additional intellectual property rights –by itself– will do little to address the industry’s underlying problems, let alone advance any reasonable public policy goal. You could jail every blogger tomorrow and outlaw every search engine and newspaper publishers would be no better off than they are today.

Their problems are the loss of monopoly rents from advertising and the legacy cost structure those rents used to pay for. Those problems weren’t caused by linking (or paraphrasing), and they won’t be solved by turning the linked structure of the Internet into a an anti-commons.

Cablevision case puts kibosh on collection society claims

supreme-courtThe Supreme Court’s denial of cert. in the Cablevision remote-DVR case has launched countless column inches of commentary and analysis already, much of it focused on the problems it poses for the Hollywood studios and TV networks worried about its impact on ad-skipping (see here, here and here). But the studios and networks aren’t the only losers in the case.

By letting the Second Circuit’s opinion stand, at least for now, the court has dealt a serious set back to the designs of the performance rights societies like ASCAP and BMI to bring cloud recording and playback within the scope of public performances subject to performance royalties.

According to the plaintiffs in the Cablevision case, the playback of programs stored in MSO’s head-end servers constituted a performance of the work by Cablevision that was not authorized by its basic distribution agreements with program provided and thus needed to be separately licensed.

The Second Circuit disagreed, however, finding that as a legal matter the customer “performed” the work since the copy used for playback was accessible only to that customer.:

In sum, we find that the transmit clause directs us to identify the potential audience of a given transmission, i.e., the persons “capable of receiving” it, to determine whether that transmission is made “to the public.” Because each RS-DVR playback transmission is made to a single subscriber using a  single unique copy produced by that subscriber, we conclude that such transmissions are not performances “to the public,” and therefore do not infringe any exclusive right of public performance. We base this decision on the application of undisputed facts; thus, Cablevision is entitled to summary judgment on this point.

 In other words, according to the Second Circuit, there is indeed such a thing as a non-infringing private performance of a work transmitted over the Internet. Assuming the reasoning applies to musical works as well, the ruling is going to make it much harder for ASCAP and BMI to compel providers of online music lockers and other types of user-directed cloud storage facilities to take out licenses and pay royalties on transmissions.

(Although not directly on point, it probably doesn’t help ASCAP’s efforts to license mobile-phone ring tones, either). — TMW

I linked the news today, oh boy

newspapersI’m assuming a judge and scholar as smart as Richard Posner of the Seventh Circuit Court of Appeals doesn’t really believe copyright law should be extended to cover the paraphrasing of news reports without the permission of the copyright owner, as he seemed to suggest in a recent blog post (h/t TechCrunch). Instead, I’ll assume he simply meant to be provocative.

Posner’s subject was the parlous condition of the newspaper business in this twilight of the print era. After surveying the declines in hardcopy readership and ad revenue, and the baleful effects of cuts in the ranks of professional journalist (I feel your pain), he comes to this conclusion:

Imagine if the New York Times migrated entirely to the World Wide Web. Could it support, out of advertising and subscriber revenues, as large a news-gathering apparatus as it does today? This seems unlikely, because it is much easier to create a web site and free ride on other sites than to create a print newspaper and free ride on other print newspapers, in part because of the lag in print publication; what is staler than last week’s news. Expanding copyright law to bar online access to copyrighted materials without the copyright holder’s consent, or to bar linking to or paraphrasing copyrighted materials without the copyright holder’s consent, might be necessary to keep free riding on content financed by online newspapers from so impairing the incentive to create costly news-gathering operations that news services like Reuters and the Associated Press would become the only professional, nongovernmental sources of news and opinion.

Others have already discussed the obvious First Amendment problems with this suggestion (the reason I think Posner is not really serious), as well as Posner’s  misdiagnosisof all that ails the newspaper business (he doesn’t even mention the impact of Craigslist, which has nothing to do with free-riding on copyrighted content). I would raise another objection: his assumption that news-gathering must necessarily be financed by newspapers. Read More »