Law, Music, and the Internet

William Fisher

iLaw 3 July 2, 2002

Senate Judiciary Committee“E-Commerce and Intellectual Property Agenda for the 107th

Congress” – 2/16, 2001“Building on the Digital Millennium Copyright Act, the Digital Performance

Right in Sound Recordings Act, and other landmark legislation developed in the committee to promote the availability of popular entertainment in digital form, the committee will examine the roles, rights, and responsibilities of the artists, the audience, and the entities, which serve to bring them together. As new technical issues and business models develop, basic questions need to be asked anew about the relationships between the artists and the media companies that market and distribute their product; about the rights of consumers and fans to use works in new ways; about the ability of technology companies and other mediators to deploy new products and services to facilitate those uses; and about the accessibility of works to scholars, teachers, students, or others for legitimate purposes.”

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

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

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

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

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

TechnologiesDownloading: Transmission over the Internet of a

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

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

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

Internet Distribution of Unsecured Digital Files

Benefits(1) Cost Savings(2) Eliminate

Overproduction and underproduction

(3) Convenience & precision

(4) Increase number & variety of musicians

(5) Semiotic Democracy

Dangers:

(1) Threaten Revenues of Musicians

--fairness

--incentives

(2) Threaten Revenues of Music Industry

--production

--promotion

Internet Distribution

Retailer

RecordCompany

Manufacturer

Composer & Recording Artist

Distributor

Internet Distribution

Retailer

RecordCompany

Manufacturer

InternetProvider

Composer & Recording Artist

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

Copyright in Music

Objects of ProtectionMusical WorksSound Recordings

EntitlementsReproductionDerivative WorksFirst Distribution

Public Performance

Managed in USABy ASCAP, BMI, SESAC

Exceptions and LimitationsFair Use (§107)Cover License (§115)

Fair Use Doctrine1) Purpose and Character of the Use

commercial use disfavored transformative uses preferred parody strongly preferred propriety of defendant’s conduct relevant

2) Nature of the Copyrighted Work fictional works/factual works unpublished/published

3) Amount and importance of the portion used4) Impact on Potential Market

rival definitions of “potential market” only substitution effects are cognizable

Compensation System for Network Broadcasts of Copyrighted Programs

Networks

StudiosAdvertisers

Public

Sony

price of ads

higher pricesfor products

broadcastlicenses

license fees

free programming(with embedded ads)

cost of VCRs

VCRsVCRs

$?

Holdings of Sony

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

Timeshifting copyrighted programs is a fair use

Compulsory (Mechanical) Licenses (§115)After phonorecords of a musical work have

been distributed to the public: Any person may make additional phonorecords

for distribution to the public Provided she pays a compulsory royalty And doesn’t alter the melody or character

Applies to reproduction and distribution rights of the musical work

Audio Home Recording Act (1992)

Serial Copyright Management SystemTax and Royalty SystemSafe Harbor for Noncommercial Coping

AHRA 1008

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

Encryption Initiatives

DVDs: CSS SDMIRealMedia

copy-protection switch

Ebook reader

CircumventionDeCSS;

SmartripperFeltenStreamripperSklyarov

Anti-Circumvention: §1201Prohibitions:

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

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

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

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

circumvention – §1201(a)(1)(C)

Anti-Circumvention: §1201Civil Remedies:

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

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

Streambox (WD Wa 2000)

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

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

Links to Illegal Material

Site #1

advertising

Webpage

Webpage

DecryptionProgram

2600 Magazine

advertising

Visitor

Webpage

Webpage

Plaintiff

?

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

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

Claim that purpose was to create Linux DVD player not credible

§1201 trumps fair useReverse-engineering exemption does not

justify public sharing of the information

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

Content neutral Advances a “substantial governmental purpose”:

assisting copyright owners in preventing access to their “property”

Does not burden more speech than necessary for that purpose

Other constitutional challenges were not properly raised at trial:

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

§1201 unconstitutionally curtails “fair uses”

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

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

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

controversy”

SklyarovAdobe’s eBook Reader prevents copying of electronic

booksSklyarov developed for ElcomSoft a program that

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

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

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

Lockers

MyMP3.com Beam-it Service Instant Listening Service

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

1) Copying was for a commercial purpose; not transformative

2) Copied material is highly creative

3) Songs copied in their entirety

4) Undermines legitimate “potential market”

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

Copyright in Music

Objects of ProtectionMusical WorksSound Recordings

EntitlementsReproductionDerivative WorksFirst Distribution

Public Performance

Managed in USABy ASCAP, BMI, SESAC

Exceptions and LimitationsFair Use (§107)Cover License (§115)AHRA (§1008)

digital audio transmission

DPRA Limitations (§114)

Types of Digital Audio Transmissions of Sound Recordings

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

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

Level 1: Exempt transmissions

Level 1: Exempt TransmissionsNon subscription broadcast

transmissions licensed by FCCLimited set of “retransmissions”“Feeds” incidental to exempt

transmissionsStorecastingTransmissions to business

establishments

11/12/2000:CopyrightOfficerules n.a.to webcastsof radiostations;8/2001:District Court in Philadelphiaaffirms

Level 2: Statutory LicensesSubscription transmissions:

Noninteractive Diverse programming No advance programming schedule Contains copyright management information

Level 2: Statutory Licenses“Eligible nonsubscription transmissions”:

Primary purpose is to provide audio entertainment Noninteractive Diverse programming No advance programming schedule Contains copyright management information Minimum duration rules Must use all available technologies to frustrate

copying

Level 3: Freely Negotiated Licenses“Interactive” services:Pay-per-listen systemsServices that transmit digital audio

programs “specially created for the recipient”

Copyright in Music

Objects of ProtectionMusical WorksSound Recordings

EntitlementsReproductionDerivative WorksFirst DistributionDPDPublic Performance

Managed in USABy ASCAP, BMI, SESAC

Exceptions and LimitationsFair Use (§107)Cover License (§115)AHRA (§1008)

digital audio transmission

DPRA Limitations (§114)

CARP Ruling, 2/20/2002Per Performance Fee

Ephemeral License

Webcasters: retransmission of radio 0.07¢ 9% of performance fee

Webcasters: all other webcasts 0.14¢ 9% of performance fee

Commercial Broadcasters: simulcasts

0.07¢ 9% of performance fee

Commercial Broadcasters: all other webcasts

0.14¢ 9% of performance fee

Noncommercial Broadcasters: simulcasts

0.02¢ 9% of performance fee

Noncommercial Broadcasters: all other webcasts

0.04¢ 9% of performance fee

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

Performance fee: $1,839,600 per yearEphemeral fee: $165,564 per yearTotal: $2,005,164 per year

CARP Ruling, 2/20/2002

Napster Website

UserUser1Library

Directory

UserUser2Library

Inde

x

UserUser6Library

UserUser7Library

UserUser8Library

UserUser4Library

UserUser3Library

UserUser5Library

UserUser9Library

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

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

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

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

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

Peer-to-Peer Copying SystemsParent technology:

GnutellaAimster/Madster Kazaa/Morpheus-

Music City/ Grokster/Altnet

80,000,000 downloads 3.6 billion downloads in

January 2002

Audiogalaxy 30,000,000 downloads

Japan MMO

MPAA/RIAA suit MPAA/RIAA suit

(Cal) Dutch court enjoins

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

RIAJ & JASRAC suit; April 2002 injunction

RIAA suit in NY; settlement

User 1

User 3

User 2

CentralServer

SuperNode

SuperNode

SuperNodeUser 7

User 8

User 9

User 6User 5

User 4

Adapted from Webnoize

Fasttrack

Authorized ServicesMusicNet

EMI, AOL Time Warner, BMG, RealNetworks

Pressplay Sony, EMI, Vivendi

Universal (MP3.com), Yahoo

Listen.com Subscription streaming,

$10 per month [Ongoing civil

investigation by USDOJ]

Secure (nontransferrable) short-term digital downloads and streaming

Subscription fees, $10-$25 per month

Limits on permanent downloads and CD burning slowly lifting

Copy-Protected CDs

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

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

technology, protests deviations from Red Book standards

Likely shift toward DVD-Audio

Internet Distribution of Unsecured Digital Files

Benefits(1) Cost Savings(2) Eliminate

Overproduction and underproduction

(3) Convenience & precision

(4) Increase number & variety of musicians

(5) Semiotic Democracy

Dangers:

(1) Threaten Revenues of Musicians

--fairness

--incentives

(2) Threaten Revenues of Music Industry

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

music remain highNo “celestial jukebox”Encryption and ephemeral downloads

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

Continued concentration of music industry reduces consumers’ choices

Limited effectiveness: P2P threatens artists’ revenues

Theory: Clarify and enforce the property rights of the

creators of music; Rely upon Coasean bargains and the emergence

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

Private Property

Features of Private Property

In Real PropertyRight to exclude

Injunctive Relief

Criminal Trespass

Prohibition of burglary tools

In Recorded MusicAdd full public-

performance right for sound recordings

Eliminate compulsory licenses

No Electronic Theft Act

DMCA; SSSCA

Clarify treatment of streaming buffers Public performances Not reproductions or incidental DPDs

Clarify treatment of downloads Reproductions and DPDs Not public performances

Remove royalty payments in 112(e)

Private Property

§112(e)

Creates a compulsory licensing system for the making of multiple ephemeral copies

Copyright Office recommends repeal of the compulsory license on the ground that it has no economic justification

CARP Ruling (2/20/2002): agree with the recommendation, but leave it to Congress

SSSCASecurity Systems Standards and Certification Act Would make it “unlawful to manufacture, import,

offer to the public, provide or otherwise traffic in any interactive digital device that does not include and utilize certified security technologies that adhere to the security system standards”

Private sector has 12 months to agree on a standard

If fail, standard selected by National Institute of Standards and Technology

SSSCA“The term ‘interactive digital device’ means any

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

Benefits:Music companies, confident in their ability to

make money in the new environment, would accelerate Internet distribution

Associated socioeconomic advantages and cost savings

Emergence of refined and flexible private licensing societies (cf. ASCAP) would overcome transaction-cost barriers to licensing (Merges)

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

Disadvantages

Increased Concentration of Music Industry duopoly of MusicNet & Pressplay

Oligopolistic pricing and associated welfare losses

Encryption and anti-circumvention retard semiotic democracy

Ancillary costs of SSSCA

ASCA

Automobile Standards and Certification ActIt shall be unlawful to manufacture, import,

or sell an automobile capable of driving more than 70 miles per hour

ASCA

Drawbacks: Widespread evasion and resistance Prevent socially beneficial activities

• Emergency trips to hospitals• Passing slow automobiles safely

Frustrate long-standing socially acceptable, though technically illegal, custom (driving 65 mph)

Forfeit ancillary benefits of technological innovation of building fast cars

“End-to-end” Architecture

Intelligent, multi-purpose, variegated devices located on the “ends” of the Internet

Simple, open pipes connecting the ends, allowing the transmission of all types of content and all types of applications

Advantages: Foster competition and innovation

Server Server

Server

Server Server Server

Server

Server

PC PC PC PCPC

PC

PC

PC

PC

PC

PCPC PC PC PC PC PC

PC

PC

PC

PC

PC

PCPC

Router

Router

Router

Router

Threats to “End-to-end”

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

modem systemStandardization and “dumbing down” of the

computers located on the endsResults:

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

Regulated IndustryTheory: Increased

governmental involvement necessary to:

Respond to oligopolistic structure of the industry

Calibrate more finely the balance between incentives and public access

Equalize bargaining power between artists and record companies

Reject the “propertization”of copyright; Reinstatethe utilitarian balance

Theory ofcompulsoryterms

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

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

Terms and conditions for eachRoyalty rates for each

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

boundarieswill shift asconsumptiontechnologieschange

ReplaceASCAP,BMI,SESAC

Regulated Industry

Preserve and extend prohibitions on file-sharing and encryption circumvention

Enforcement at ISP level NET prosecutions of operators of SuperNodes

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

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

Likely ResultsBenefits:

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

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

Intellectual Products are “Public Goods”

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

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

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

Possible Responses to Public-Goods Problem

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

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

3) Government issues prizes• cf. Shavell & Ypersele on patents

4) Government assists private parties in keeping information secret

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

Alternative Compensation SystemWatermark music, movies, books, etc.

Simple watermarks sufficient, because no incentive to break Tax things used to consume music, etc.:

ISP access -- rates proportional to speed of Internet access CD burners Blank CDs Portable MP3 players

Estimate consumption of each workDistribute revenues in proportion to frequency of use

Cf. ASCAP, BMI, AHRA, European blank-tape taxesEliminate prohibitions on file-sharing, encryption circumvention, and

Internet distribution (downloads and streaming) of published recorded music

Estimate Consumption

For streaming, require webcasters to supply data

For downloads, require suppliers to provide data

For CD copying, extrapolate from CD salesFor P2P copying

Require services to supply data sample Internet traffic at router or ISP level

MeritsLarge cost savingsLower transaction costsElimination of deadweight loss (music priced at

marginal cost of replication)Creators compensated in proportion to consumer

demand for their productsConsumer convenienceReverse concentration of the music industrySemiotic democracy

Practicability?

Risk of “ballot stuffing” International application