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1 I. The quest for better business models
2 II. DRM-based business models
3 A. Anti-copyright model
4 B. Beyond copyright models
5 C. Copyright based models
6 1. Statutory license models
7 2. Models giving copyright owners
discretion and control
8 III. ISPs as Digital Retailers Model
9 A. The role of control
10 B. How the Digital Retailer Model would
work
11 1. Enabling DRM technologies
12 2. Implementation of technology by
ISPs
13 3. Statutory license
14 C. The Digital Retailer Model compared
to the Tax and Royalty System
15 D. Objectives satisfied
16 E. Problems requiring solutions
17 1. Spamming
18 2. Intra-industry conflicts
19 3. Privacy
20 4. Pay-per-use, fair use and
non-infringing uses
21 5. Unregulated royalty rates
22 IV. Conclusion
23 I. The quest for better business
models
24 Better
business models are the Holy Grail of the digital age. Even Alex Doonesbury has
joined the quest.[1]
“Alex” is the daughter of “Mike Doonesbury” in Garry Trudeau’s syndicated comic
strip, so her search can take as long as Trudeau likes. Things are more urgent
for those in the real world, especially for those in the entertainment industry.
Digital reproduction and distribution have shattered traditional music industry
business models, and are on the verge of doing the same to movie industry
models. The question is what, specifically, can be done about it; and it’s a
difficult question to answer.
25 Proof that
the question is difficult (if proof be necessary) can be found in the pages of
the nation’s leading business periodical, The
Wall Street Journal. In an editorial (triggered by a U.S. Naval Academy investigation
of midshipmen suspected of downloading MP3 files), the The Wall Street Journal recently advised the record industry, quite
unhelpfully, that it “needs a new business model.”[2] The
editorial pages of the Journal
usually trumpet the interests of big business. But this particular editorial
criticized the record industry as one “still wedded to an LP-era business model”;
and it was dismissive of “MusicNet” and “pressplay,” the record industry’s
maiden tests of new models based on digital distribution.
26 The Wall
Street Journal did not, however, offer particulars for any business model
it would find praise-worthy. And therein lays the rub. It’s one thing to say a
new model is “necessary.” It’s quite another to suggest how that model might
work. The devil – as many have noted – is in the details.
27 Mindful
that seemingly attractive concepts are often undone by their necessary details,
I nevertheless suggest a business model that in my view has promise: Internet
service providers (ISPs) should become digital retailers. They should license
digital works of all kinds – music, movies, television programs, photographs
and other graphic images, books and periodicals, and even software – from the owners
of the copyrights to those works, at wholesale prices set by copyright owners.
And ISPs should sell those works to their subscribers, at retail prices set by
ISPs themselves.
28 The profit
potential for ISPs should give them reason to embrace this model. Consumers should
embrace it too, because it would give them the choice and convenience they
crave, though they’d have to pay for what they buy. Moreover, digital middlemen
– like website operators, P2P networks, newsgroup and chat room hosts, Internet
search engines, and online radio and television stations – would be able to
serve as promoters and distributors, for love or money or both, free from
potential copyright liability of any kind (direct, contributory or vicarious).
And computer and consumer electronics manufacturers and software companies would
be able to invent and innovate to the best of their abilities, without regulation
of their products’ designs.
29 Digital
Rights Management technology (DRM) makes this model possible. In a conference
devoted to “The Law & Technology of DRM,” it may not be necessary to defend
the use of DRM or persuade people of its value. But some particular
applications of DRM have been controversial, so two preliminary comments are
warranted.
30 First,
though DRM is young, it and its legal status are formally recognized already,
worldwide, in at least 39 nations that have become parties to the WIPO
Copyright Treaty.[3]
The Treaty refers to DRM as “technological measures” used to exercise rights
and restrict unauthorized acts, and as “copyright management information” used
to identify authors, rights holders and the terms of authorized use. And the
Treaty requires adhering nations to provide legal protection for both.[4]
31 Second,
DRM will be at the foundation of whatever business models actually succeed in
the digital age. Though The Wall Street
Journal didn’t offer the record industry any particulars for a new business
model, others have; and at least some DRM features have been at the heart of
all of the suggested models.
32 II. DRM-based business models
33 Digital
business models – those that have been tried already, and those that have been suggested
– exhibit a phenomenal breadth of opinion, ranging from what I refer to as
“anti-copyright” to “beyond copyright” models. To appreciate the details of a
business model that would make ISPs into digital retailers, it will helpful to
locate that model along the “anti-copyright” to “beyond copyright” spectrum.
34 A. Anti-copyright
model
35 The
anti-copyright model would eliminate copyright entirely, in the online digital
domain.[5] DRM may play a role even in this model, but
only to identify works’ authors who audiences may choose to compensate with
“tips.” In this model, DRM would not be used (or even legal) to prevent
unlicensed copying or redistribution of works.
36 B. Beyond
copyright models
37 At the
other extreme is a model that would go beyond copyright. Publishers would use
DRM to control access to works, even those in the public domain, and to prevent
unauthorized copying and redistribution of those works. Access would be
controlled by passwords, and unauthorized uses would be prevented by encryption
and watermarks. Circumvention would be banned and punished by law. The public
domain status of these works would be recognized, by allowing others to
digitize and distribute their own versions of those works, at their own
expense, without liability. But this model would prevent others from copying
existing digital versions – would prevent them, in other words, from taking a
free ride on the investments made by other companies that previously digitized
works, even those in the public domain.
38 Another
business model also goes beyond copyright, but not quite as far. It is a model
that uses DRM to control access to public domain materials, but doesn’t control
copying or redistribution of those works. In this model, digital versions of
public domain works are distributed to subscribers, unencrypted; and copying
and redistribution is controlled, if at all, merely by contract. This model is
used by Westlaw and Lexis, and even by the United States government in its pay-per-page
PACER system for the digital distribution of federal court judicial decisions.[6]
39 C. Copyright
based models
40 Between
the “anti-copyright” and “beyond copyright” models are two batches of models,
both of which recognize and respect copyright. One batch would impose statutory
licenses that authorize digital uses of copyrighted works. The other would give
copyright owners discretion over licensing terms, and control over unauthorized
uses of their works.
41 1. Statutory
license models
42 One
statutory license model is Neil Netanel’s proposed “Noncommercial Use Levy.”[7] It would
permit noncommercial copying, distribution, performance and even adaptation of
copyrighted works, in return for levies collected from providers of those products
and services whose value is enhanced by file swapping. Collected levies would
be allocated among copyright owners by category (record companies, movie
producers, book publishers, and so forth), and then among individual copyright
owners within each category. The amount of the levy would vary among products
and services, and would be determined in Copyright Office arbitrations (unless
affected industry segments agreed on levies themselves). Allocations among
those entitled to receive levies would be in proportion to the extent to which their
works were used. Disputes about allocations presumably would be determined by
Copyright Office arbitrations as well.
43 A
second statutory license model called the “Tax and Royalty System” has been
proposed by Terry Fisher (apparently with more enthusiasm lately than at first).[8] Under
this system, a “tax” would be assessed on ISP access and on technologies used
to perform music, including MP3 players, hard drives and even computers; and
the revenues from these assessments would be distributed to copyright owners in
proportion to which their works are accessed. (Professor Fisher focuses on the
recorded music industry in particular; but there is no reason his Tax and
Royalty System couldn’t be used to compensate copyright owners in other
industries too.)
44 The
“Noncommercial Use Levy” and the “Tax and Royalty System” both use DRM to
determine the extent to which particular copyrighted works are used. Digital
copies of works would be embedded with watermarks; ISPs would detect and record
those watermarks as files flow through their servers; lists of detected works
would be compiled periodically, along with the frequency with which they were
detected; and that data would be used to allocate collections proportionately
among copyright owners.
45 The two
key features of both the “Noncommercial Use Levy” and the “Tax and Royalty System”
– royalty setting and royalty allocation – are based on well-established
elements of existing copyright law. Statutory license fees already are set, and
collected fees allocated, by Copyright Office arbitrations in connection with two
types of uses of four kinds of works: cable and satellite retransmissions of
copyrighted movies and television programs, and the musical compositions in
their soundtracks,[9]
and consumer duplication of digital music recordings.[10] The
license fees for certain online digital performances of music recordings also are
determined by Copyright Office arbitration[11] (though
allocations of digital performance royalties among those entitled to receive
them was done by Congress, in the Copyright Act itself, rather than by the
Copyright Office[12]).
46 Although
the “Noncommercial Use Levy” and the “Tax and Royalty System” are similar, they
differ in at least one important respect. The “Noncommercial Use Levy” would
permit users to create new versions of digital works, in addition to making and
redistributing copies. The “Tax and Royalty System” does not seem to contemplate
the creation of new versions; it would simply authorize copying and
redistribution. This means the “Tax and Royalty System” protects copyrights
somewhat more than the “Noncommercial Use Levy,” because the “Tax and Royalty
System” leaves more control in the hands of copyright owners, namely, the right
to license the creation of new versions of their works, on terms agreed to in
private negotiations.
47 2. Models
giving copyright owners discretion and control
48 Several
models give copyright owners discretion over licensing terms and control over
unauthorized uses of their works.
49 One
model gives copyright owners access control, using passwords as the only DRM
feature. Content is not encrypted, and this model does not control copying or
redistribution. Familiar examples of this model include the online editions of
the New York Times and Wall Street Journal. Both websites
require registration to obtain a password that is necessary for access. Use of
the Times site is free to anyone. The
Journal’s site, by contrast, requires
payment of a subscription fee (even by those who subscribe to the regular,
paper edition). Both companies enforce their password requirements using
technologies that run on their own servers. Users’ computers do not require
password-related design features or website-specific software.
50 A
second model gives copyright owners access control, plus copy and
redistribution control too. Control is accomplished with DRM, namely, encryption
that both restricts access and controls what may be done with materials by
those who are given access. Special software (provided by or on behalf of
copyright owners) is necessary to get access to the encrypted material. And
that same software enables authorized uses of it – but not unauthorized uses –
by those who are entitled to access. Familiar examples of this model include
publications in the Adobe eBook format, and audio and video materials in the
RealMedia and Windows Media formats.
51 A third
model gives copyright owners control over access, but not over copying or
redistribution, using encryption. This model requires authorized users to have specially
designed equipment to receive and decrypt materials. But companies that
manufacture the necessary equipment voluntarily incorporate the necessary
design features into their equipment; they are not compelled to do so by law.
This model is used by cable systems and satellite TV companies.
52 A
fourth model gives copyright owners control over access and over copying and
redistribution, using encryption. This model too requires authorized users to have
specially designed equipment to access and decrypt materials. Manufacturers of
this equipment incorporate necessary design features voluntarily; they are not
required by law to do so. This model is used in connection with movie DVDs
which are encrypted and then decrypted using the Content Scramble System
(commonly referred to as “CSS”).[13] The
record industry’s Secure Digital Music Initiative would have used this same
model.[14] And
though SDMI (as the initiative was commonly known) wasn’t implemented in
connection with commercially-released CDs, similar technologies now being used
by some record companies are based on the same model.[15]
53 Finally,
a fifth model uses DRM to give copyright owners access, copy and redistribution
controls over digital works that are not encrypted, but are watermarked with
authorized-use information. Because these works are not encrypted, this model
works only if computers and consumer electronics devices contain circuitry that
recognizes and responds to watermarks. (Without such circuitry, computers and
other devices would simply play unencrypted works, and permit them to be copied
and redistributed.) One example of this model is the Serial Copy Management
System, intended to permit record companies to control digital copying of
recorded music. This System is at the heart of the Audio Home Recording Act of
1992 which requires digital audio recorders to be equipped with circuitry that
prevents them from being used to make serial copies (that is, copies of copies)
of digital recordings.[16] The
commercial significance of that ban was largely undercut by the advent of MP3 technology
for storing recorded music, and consumers’ use of computers, rather than
digital audio recorders, to copy and redistribute MP3 files. MP3 technology
undercut the Serial Copy Management System, because the Audio Home Recording
Act exempts computers from the need to have anti-copying circuitry.[17]
54 Nevertheless,
this fifth model remains at the forefront of current debates, because
unencrypted digital television broadcasting is on the near horizon. The FCC has mandated the introduction of
digital television broadcasting, nationwide, by 2006.[18] But movie and television
producers aren’t going to provide expensive content for digital TV broadcasts,
if that content can easily be copied and forwarded over the Internet to
recipients around the world. As a result, the lack of effective copy protection
methods may hinder the development of digital TV broadcasting by greatly
reducing the amount of attractive programming that is made available for it.
55 The copy protection method
proposed for digital television broadcasts is called the “Broadcast Flag
System.” It was the centerpiece of a bill in the 107th Congress formally entitled
the “Consumer Broadband and Digital Television Promotion Bill.”[19] The bill – commonly
referred to as the “Hollings Bill” – would have required “digital media
devices” to provide “effective security for copyrighted works.” The 107th
Congress adjourned without enacting – or even voting on – the Hollings Bill.
But that doesn’t delay the effective date of nationwide digital TV
broadcasting.
56 With these developments in mind,
the FCC recently issued a Notice of Proposed Rulemaking by which the Commission
invited comments on whether it should adopt rules that would mandate the
incorporation of copy protection technology into television receivers and other
consumer electronics devices, such as digital TV recorders.[20] An alliance of copyright owners,
broadcasters, and entertainment industry unions has urged the FCC to adopt a
rule that would require devices to recognize and respond to “Broadcast Flags”
included in digital TV broadcasts – Flags that would indicate whether those
broadcasts may be redistributed outside the recipient’s home.[21] Broadcast Flags do not
encrypt digital TV signals, and those signals will be broadcast unencrypted. So
the Broadcast Flag System will work only if devices that receive and process
digital broadcasts are designed to recognize whether particular signals may be
redistributed outside the recipient’s home, and only if those devices do not
permit redistribution if a signal’s Broadcast Flag does not authorize it.
57 The following chart recaps these
business models (excluding the anti-copyright and beyond copyright extremes). Those
that protect copyright the most are at the top of the chart; those that protect
copyright the least are at the bottom. The chart also reflects the technology
required to implement each business model. Not coincidently, the chart shows
that in order to provide more control over copyright, more control over
technology must be provided too – under the business models discussed thus far.
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80 III. ISPs as Digital Retailers Model
81 A. The role of control
82 The ISP as Digital Retailer
model provides more control over copyright with less control over technology
than any one of the models just described. This balance should make the Digital
Retailer model more attractive than others, because copyright owners want to
control their copyrights while technology companies want to create their
products without legally mandated controls.
83 Controls over copyright and
technology are not ends in themselves, even for copyright owners. Instead,
control over whether works can be copied and redistributed is important to
copyright owners, because unauthorized copying and redistribution destroys
their ability to market their works, in two ways.
84 First, copyright industry
business models are based on the strategy of selling multiple copies of works,
or performing them multiple times, at per copy or per performance prices that
are just a tiny fraction of the cost of producing those works. Uncontrolled
copying and redistribution destroys this plan, because unauthorized digital
copies displace those sales and performances.
85 Second,
unauthorized copying and redistribution of copyrighted works prevents copyright
owners from pricing their works in ways they hope will maximize their incomes.
86 Pricing strategies are at the
core of the “marketing” portion of every thorough business plan. Ideally,
sellers – including copyright owners – would charge higher prices to those
customers who value the sellers’ goods or services most and are best able to
afford higher prices, and would charge lower prices to customers who value the
sellers’ goods or services less or are less able to afford them. Economists
refer to this as “price discrimination,” but it’s not “discrimination” in the
civil rights sense of the word. In business, price discrimination is a good
thing, because so long as sellers receive more than their marginal costs,
additional sales are profitable. Profits can be maximized in this fashion, if
but only if sellers aren’t required to reduce the prices they charge those who
value their goods and services the most, simply because sellers charge lower
prices to other less motivated or wealthy customers.[22]
87 It’s been argued that copyright
owners do not have the ability to engage in perfect price discrimination.[23] The same of course could
be said of sellers in every industry. (Even business travelers book plane
reservations in advance, or stay over a Saturday night, when they can, in order
to get lower fares intended for vacation travelers.) But successful business
plans do not require perfect price discrimination. They simply require the
ability to price discriminate a little, as in these familiar examples:
88 ·
Hardcover
books are published before, and cost more than, paperback reprints.
89 ·
Movies
are exhibited in theaters before they are available on DVDs, and movie theater
tickets cost more than DVD rentals (which cost more than viewing movies on
pay-TV, which cost more than watching them on advertiser supported TV).
90 ·
It
costs more to buy a DVD or videocassette than to rent it.
91 ·
New
albums by musical artists cost more than “greatest hits” compilations, which
cost more than multi-artist albums compiled by theme.
92 ·
Full-featured
versions of computer software cost more than “lite” versions, which cost more
than “trial” versions.
93 The
point is that business plans for the marketing of copyrighted works are based
on the ability to do sequential but separate releases of those works. And in entertainment
businesses, the sequence for successful works is spread over a long time.
Uncontrolled copying and redistribution of works interferes with this
sequential release.
94 Technology
companies have similar concerns, but for them, design innovations are central
to their business plans. They fear that legal regulation of their products’
features will interfere with product innovation, and thus with their business
plans.
95 B. How
the Digital Retailer Model would work
96 1. Enabling DRM
technologies
97 In
order for ISPs to become digital retailers, digital versions of copyrighted
works have to be identified, digitally, so their purchase can be tracked
electronically. This can be done, using two types of existing DRM technologies:
“watermarking” and “fingerprinting.”
98 Watermarks
are digital identifications inserted into digital copies of works at the time
they are manufactured.
99 Not all
digital works will have watermarks. Legacy (that is, older) works (including
older digital works) were created without watermarks. Digital copies of analog
works (such as music cassettes and video tapes, photographs, and texts) do not
have watermarks. Even digital copies of works that were watermarked originally may
have been stripped of their watermarks when they were converted to analog
copies and then redigitized.
100 Copyright
owners can create digital identifiers for unwatermarked copies of their works
by “fingerprinting” them. Fingerprinting converts the work’s own content into a
unique digital identification mark, by applying an algorithm (or mathematical
formula) to selected features of that content.[24]
101 Together, watermarking and fingerprinting can
be used to create digital identifications for every digital work that copyright
owners want to have identified. These identifications then can be used to recognize
works transmitted online from websites, over P2P networks, as email or instant
message attachments, and in any other way that involves digital files moving
through networks to which users connect through ISPs.
102 2. Implementation of
the technology by ISPs
103 Under
the Digital Retailer model, the technology to used to identify watermarked and
fingerprinted files would reside on ISPs’
servers, not on end-users’ computers or consumer electronic devices. This
is key, for three reasons.
104 First,
putting the technology on ISPs’ servers frees technology companies to innovate
at will, without legal regulation of their products’ designs.
105 Second,
putting the technology on ISPs’ servers makes circumvention less likely. (CSS,
Adobe eBook and SDMI – all of which are implemented on consumers’ computers –
were circumvented quite quickly.[25] And one
recent technical report persuasively argues that watermark detection technology
on users’ computers or electronic devices could be easily defeated, if
implemented in software, and would make computers and devices obsolete too
quickly, if implemented in hardware.[26])
106 Third, all
online service users connect to the Internet through ISPs, and thus can be
billed by their ISPs for whatever copyrighted works they access. (ISPs already are
able to meter the bandwidth usage of each of their subscribers. And it was announced
last year that ISPs may begin charging subscribers based on usage, rather than
flat monthly fees.[27])
107 ISPs
would monitor the flow of copyrighted works through their servers, looking for watermarks
and recording the recipients of watermarked files. A database would identify
the owner of the copyright to each watermarked file, as well as the wholesale price
the copyright owner decided to charge for its use.
108 Files
that were not watermarked would be checked against a fingerprint database,
which (like the watermark database) would identify the owner of the copyright
to each of those files, as well as the wholesale royalty the copyright owner
decided to charge for its use. In order for works to appear in a fingerprint
database, copyright owners would have to arrange for their works to be
fingerprinted and included in the database.
