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Obligatory RIAA bashing

Riaa_logo2 The Recording Industry Assn. of America announced this morning the latest wrinkle in its anti-piracy litigation campaign: it's going to target slightly older young people. OK, OK, that's a cheap shot. The major labels' trade group said its new emphasis would be file-sharing on college and university computer networks. And in fairness, I should dole out some credit before piling on the skepticism customary to any discussion of RIAA lawsuits.

First, one of the main problems with the current campaign is that it doesn't seem to be reducing the number of people sharing files illegally or the number of files being shared. That's not surprising, given the sense among file-sharers of safety in numbers. Despite the fact that more than 18,000 Internet users have been sued, few file-sharers know anybody who's been touched by the long arm of the RIAA. In the more closely knit environment of a college campus, 20 to 50 simultaneous infringement notices (all of which threaten a lawsuit) are likely to create a significant ripple.

Second, another problem with the campaign has been the collateral damage from imprecisely targeted claims. Too often, the RIAA has sued a parent or roommate instead of the actual file-sharer. Focusing on campuses, where individual students all have their own Internet accounts, could reduce such misfires -- especially if college administrators agree to serve infringement notices on students for the RIAA, enabling those responsible for the infringements to settle prior to being sued.

Still, it's far from clear that suing college students will have the intended effect, to wit, reducing piracy and promoting sales. Campuses are hotbeds of music sharing, at least some of which is actually good for the industry because it breeds interest in music and helps people discover songs and bands they like. Suing users of Kazaa and other file-sharing networks could simply drive students to other forms of sharing that aren't so visible to the RIAA's contractors -- dormatory LANs, iPod swaps, DVDs filled with MP3s.

The labels complain that students have cheap and legal sources of music on campus through such services as Ruckus and Napster, so they shouldn't be resorting to illegal downloads. But the services aren't giving many students what they want, which is the ability to load their iPods with tunes at little or no cost. Nor do many students -- or consumers in general -- see the value in subscription services like Ruckus and Napster that provide access to songs, not ownership of them. These are marketing and, to a degree, pricing problems that the labels have been curiously reluctant to address. Lawsuits don't make these problems go away. Litigation might serve some other purpose, but it doesn't take the major labels where they need to go on campus.

Live chat today with a married guy

Jhmeez That would be me. The Los Angeles Times' opinion section trots out one of its writers for a chat session each week, and today it's my turn. The topic will be entertainment and tech, the same ground covered by this blog. Please join in at 1 p.m. Pacific to trade insights (or, in my case, recycled viewpoints) about the XM-Sirius merger, the proposed Fair Use Act, the latest developments in the RIAA lawsuit campaign, new digital business models, DRM, HD DVD vs Blu-ray and anything else you'd care to discuss. You might also put in a last-minute bid for the Los Angeles Times or its corporate parent, the Tribune Company -- I happen to know the publisher, his office is right down the hall from mine. To participate, go to chat.latimes.com and follow the links.

KCRW and the price of success online

Kcrw_logo The Internet poses at least as many problems for radio stations as it does opportunities. Their business model -- selling advertising time to car dealers, realtors and other local ventures -- doesn't translate well to the global nature of the Web. Nor is the Internet a broadcast medium, really. Instead, each listener online typically is served by a unique stream of data. The more listeners, the more streams -- and the higher the bandwidth costs. Finally, music stations pay royalties only to music publishers (i.e., songwriters) for their over-the-air transmissions, but they also have to pay labels and recording artists when they stream online.

So you can imagine how much dicier the proposition is for public broadcasters, such as KCRW at Santa Monica College. According to general manager Ruth Seymour, each month the station is delivering more than 1.6 million hours of programming, nearly 1 million podcasts and half a million on-demand audio and video recordings to listeners online. You might think that advertisers -- "underwriters" in the lexicon of public broadcasters -- would pay more to reach this expanded audience, but it's actually a tough sell because the station can't tell them who or, in most cases, where those listeners are. For financial reasons, KCRW relies on other companies to host and transmit its online programming, so it doesn't collect data on that audience.

Nor are online listeners as motivated to become subscribers (that is, donors to the station) as local over-the-air listeners, particularly not when so many of the programs aired on public radio are available free on the Web. In a recent interview, Seymour said her "apocalyptic vision" is that "the online culture, the culture of free, will destroy the whole notion of public broadcasting in that it will erode the whole idea of subscriptions." She says this even though KCRW has attracted subscribers in all 50 states. Maybe it's the allure of the form-fitting T-shirts and other prizes....

Anyway, to help find ways to make its online audience self-sustaining, KCRW has landed a $600,000 grant from the Annenberg Foundation. It will use the money to fund a series of experiments, such as offering a bonus to those who subscribe or renew online. The first freebies: a set of downloads from the iTunes store or a subscription to Newsweek. On the whole, Seymour said, "It is a really daunting situation, and that’s if your successful online. And we are." Given the cost of reaching listeners, KCRW finds itself in the uncomfortable position of having to measure its online efforts in terms of their potential to generate income. "As a public broadcaster," Seymour said, "that isn't really why I'm in the business."

In YouTube's corner

Dmgi_banner Tuhin Roy is a top exec at the Digital Music Group Inc., a distributor of digital music and video that recently struck a revenue-sharing deal to put its wares onto YouTube. Ask him why, and he'll give you an answer straight out of the Willie Sutton playbook: it you're trying to make money in an advertiser-supported business, you have to go where the viewers are. Or, as he put it in a recent interview, "To the extent that there are going to be ad-supported video services (online), YouTube will be in a leadership position because they've aggregated so much audience."

YouTube isn't generating much money for anybody at this point, largely because the company has taken a minimalist approach to advertising. Paid spots are confined mainly to banners on the menu pages. This is a company that's incredibly well positioned to sell targeted ads, given how much its users reveal about themselves as they search for and comment on clips. And its users' hunger for video makes the site a natural for video advertising, which can be much more lucrative than banners and search ads. According to Roy, however, YouTube plans to run ads on video pages only if it has a licensing deal with the clip's copyright owner. That's why deals such as the one between DMGI and YouTube are important for both companies.

So why are the likes of Viacom and other major content providers rattling sabers at YouTube, rather than trying to tap the potential spigot of advertising dollars? It's tempting to say that Roy "gets it" and Hollywood doesn't, but that's too facile (even for me). Instead, it's a matter of upside vs. downside. The biggest brands have the largest revenue streams to manage, and they worry about YouTube eating into those streams by drawing viewers away from established outlets (like, say, broadcast TV). DMGI, on the other hand, is focused on building an audience, not preserving one, and YouTube can expose DMGI's fare (including such classic TV fare "I Spy" and "Gumby") to tens of millions of new viewers. In fact, the fencing match between Hollywood and YouTube may actually help smaller players like DMGI. The Viacom and company spend on the sidelines, the better chance DMGI will have to win over YouTube's faithful.

If you doubt YouTube's power to elevate brands out of obscurity, consider the new music video by Canadian hitmakers Barenaked Ladies. It features several amateur filmmakers made famous, at least within YouTube, by videos posted there. If you've spent little or no time on YouTube, you won't recognize any of them. But if that's the case, you really don't get it.

Viacom, Joost and YouTube

Viacom_logo_1 The Viacom-YouTube telenovela took another turn today when Sumner Redstone's firm announced a distribution deal with Joost, the online TV outlet that's built on a file-sharing network. Notably, Joost's network has little in common with its founders' first celebrated creation, Kazaa, or even with YouTube. Rather than letting people add their favorite content to the pool of shared material, Joost restricts users to the clips, TV programs and feature films supplied by the network's managers. In other words, it's like a cable TV video-on-demand service, only the bandwidth is supplied largely by users. It may not be piracy proof -- nothing is -- but at least it won't give bootleggers a global platform to redistribute copyrighted works.

Joost_logo_1 That's not a criticism of Joost or of the deal. Joost offers content owners the chance to reach more viewers and collect more advertising revenue, and the arrangement (whose terms were not disclosed) is probably more favorable to Viacom than the one offered by more established middlemen, i.e., cable and satellite TV operators. What Joost appears to lack, though, are the energy and viral power of sites such as YouTube, where users determine not just what's hot, but also what's available. Remember, what makes file-sharing networks popular isn't just the supply of free stuff, but the comprehensiveness that results when millions of users share everything they've got. Ditto for YouTube, which is transforming from a collection of relatively new video clips into an archive of noteworthy moments in TV history.

Youtube_logo2 Of course, cutting a deal with YouTube won't do Viacom's bottom line much good until Google finds a way to turn the site's popularity into currency. And Viacom probably has the luxury of waiting, given that its networks (particularly Comedy Central) are the source for some of the most popular video clips on the Web. With a presidential campaign starting to percolate, it's hard to see "The Daily Show" or "The Colbert Report" slipping into obscurity just because their highlights aren't available on YouTube. So the company can afford to try a little hardball, assuming it doesn't end up paying for all the non-Viacom videos it forced off of YouTube with imprecise takedown notices.

In the meantime, Viacom is flirting with a possible alternative to YouTube being pushed by News Corp. and NBC Universal. It's also letting fans of its programs grab clips from some of the sites it controls (e.g., comedycentral.com) and plant them on blogs and other websites they control. There are no ads attached yet, so this is more of a research project now than a revenue play. Ideally for Viacom, the clips will lead them to the next YouTube, or maybe just sites with a burgeoning demand for Sarah Silverman. The company can then explore distribution and advertising deals with those sites. IMHO, the biggest shortcoming here is the attempt to decide for viewers which clips to redistribute. The more control Viacom tries to wield, the less able it will be to tap the Internet's peculiar brand of bottled lightning -- that is, the stuff that enabled YouTube to go from zero to 100 million daily video streams in less time than it took "Seinfeld" to become a hit.

Blanket licenses, XM-Sirius and other tidbits

The members of this newspaper's editorial board take turns writing a bi-weekly column (because, frankly, we have more specious opinions than we can possibly fit into the editorial-page stack), and today the blathering comes from yours truly. Click here to read about the uphill battle waged by PlayLouder MSP, an ISP in England that wants to sell people high-speed Internet access bundled with the right to download and share an unlimited amount of music with other subscribers.

Meanwhile, Sirius and XM are making it official: they've proposed to merge their debt-laden, momentum-leaking operations. (The NY Post evidently broke this one; read Engadget's take here.) The Justice Department killed an effort to merge satellite TV operators a few years ago, so the outlook for the deal is questionable. Still, it's hard to see a combined Sirius and XM exerting market power over any area other than subscription radio services, and that hardly seems like a separate market. Rather, it's more like a competitive response to local radio (and, in the not-too-distant future, Internet radio in broadband-equipped cars).

HD DVD fans tired of all the news about hacked DRMs can take solace in this development: Doug Carson and Associates, a company that makes tools for producing optical discs, announced the successful production of the first 3X DVD. Such discs, which work only on HD DVD players, offer high-definition movies on conventional DVDs. Using a more powerful (and less long-in-the-tooth) codec than MPEG 2, the 3X DVD approach can squeeze up to 135 minutes of high-definition video onto a double-layer DVD (the same kind of disc used for many standard-definition movies). The format could give budget-conscious consumers a way to watch high-def videos without paying a huge premium for a player (entry-level HD DVD models sell for under $400, which is at least a hundred dollars less than the least expensive Blu-ray Disc player) or the discs themselves. And it certainly represents a cheaper solution for studios and disc manufacturers, who could use the same equipment and supplies they use for conventional DVDs. Still, with little or no room for extra features, 3X DVD may not appeal to many in Hollywood.

Another look at Apple and DRM

Long before Steve Jobs penned his anti-DRM screed, lots of people were telling the major record companies that slapping electronic locks onto 99-cent downloads was a dumb idea. The ranks include David Pakman of eMusic and Dave Goldberg, a soon-to-be-ex-Yahoo VP who has been questioning the use of DRM for more than three years. I remember Goldberg talking at the Jupiter Plug-in conference in July 2003 about the pointlessness of imposing DRM on one version of a product (downloads) but not another (CDs). Right then, right now.

Anyway, when I asked Apple what to make of the timing of Jobs' statement, the company said there was no real trigger other than the criticism Apple was getting in Europe about its non-interoperable DRM. Two sources in the online music biz, however, suggest that Jobs might have been influenced by something a bit closer to home. Last year, RealNetworks (the company behind the Rhapsody subscription service) came up with a proposal for switching to MP3s and circulated it among the major labels. In response to that, or maybe just motivated by its need for a cash infusion, EMI started offering online music stores the once-in-a-lifetime opportunity to pay the label an extra lump sum in exchange for the right to sell MP3s. The money was described as a way to reimburse EMI for the increase in piracy that was sure to come once it abandoned DRM. Not surprisingly, that proposal didn't go over well with executives at the online stores, whose margins are thin enough already. So EMI came back with a more acceptable offer, asking for an advance against future royalties.

The deal was apparently not offered to Apple, however; evidently, EMI wanted to build up momentum among the also-rans before making Jobs and offer he might otherwise refuse. Before EMI could sign on the dotted line with the likes of RealNetworks and Napster, however, Jobs dropped his DRM bombshell. Go straight to the head of the parade, Steve! Then the Wall Street Journal reported EMI's MP3 overtures, and suddenly the record company wasn't in such a hurry to announce its initiative.

Meanwhile, a survey by Jupiter Research found that more than 60% of European music executives believed that DRM was hurting sales. I'm guessing that the ones who don't are all at the C-level, plus the general counsel's offices. The irony of the whole thing is that one of the reasons the labels have soured on DRM is the incompatibilities caused by multiple proprietary sets of electronic locks -- most notably Apple's, which deter the tens of millions of iPod-toting music fans from shopping at stores other than iTunes or signing up for subscription music services (Apple doesn't offer one). So whaddya say, major labels? How about an experiment with 99-cent MP3s? You can start small -- say, Scandinavia.

Avast, ye statuette

Oscar_torrents_1 If you have a sense of humor -- and your shareholders haven't invested several hundred million dollars in a slate of movies this year -- you'll have to laugh at this (Thanks, Alex!). It's from those happy-go-lucky guys at The Pirate Bay, a copyright-flouting, MPAA-evading website operating out of the Netherlands that helps people download free (and, not coincidentally, illegal) copies of all things digital. They've put together what purports to be an easy-to-use pirate's guide to the movies nominated for this month's Academy Awards, with links to downloadable bootlegs of almost all the nominees in the 24 awards categories. At least, that's what it claims; I didn't test the links, honest! It also encourages visitors to come back and rate the nominees after they've finished watching. The biggest name missing is "Notes from a Scandal," whose evident unpopularity among bootlegged film buffs bodes ill for its four Oscar nominations.

The stunt comes complete with trash talk aimed at "intellectual property landlords," including this bit:

You haven't beaten us, so why not join us? Think of a new business model that doesn't involve overpriced pieces of plastic and skanky cinemas hawking cheap carbohydrates while relying on $6/hr projectionists who can't keep a film in focus -- not to mention insulting your audiences by (to pick a few examples) surveilling us with nightvision glasses, searching bags, 30 minutes of commercials and bombarding us with ridiculous anti-piracy propaganda. Take a look at yourselves. Is it really any wonder we're winning?

It's self-serving piffle, of course, but it comes at the same time that online bootleggers and other opponents of copy protection are celebrating yet another victory over Hollywood's anti-piracy technology -- this time, exposing one of the master keys to the software protecting high-definition movies. And it provides yet another reminder that online film pirates are more than just a bunch of geeks with lots of time on their hands; they're often film buffs whose hunger for movies isn't satisfied by the market's legitimate sources. Winning the battle with this crew requires a response in the marketplace, not just in the courts. But then, that's easy for me to say -- I don't have any films in production.

The beat(down) goes on

Morpheus_logo_1 The landmark MGM v Grokster case lives on, although the end might actually be in sight. Today, U.S. District Judge Stephen V. Wilson in Los Angeles rejected the entertainment companies' proposal for a permanent injunction against StreamCast, the sole remaining defendant in the case (the others have all settled with the major record companies, music publishers and Hollywood studios). Wilson said an injunction would be appropriate -- after all, he ruled last September that StreamCast Networks (the company behind the Morpheus P2P network) was liable because it induced users to copy songs and movies without the copyright owners' permission -- but the terms and scope need to be more, well, nuanced than the entertainment industry's lawyers sought.

StreamCast will probably be required to use the same kind of technology that competitors iMesh and Kazaa do to identify copyrighted material and control downloads. There are at least three other issues still to be hashed out, though, and all of them have implications for the industry's battles with other infringement-laden sites. First, today's filtering mechanisms are imperfect. Will copyright holders simply have to accept that, or can they use the shortcomings of the technology to force StreamCast to shut down (as they did with the original Napster)? Second, how far will StreamCast have to go to convert users to the new, filtered version of its software? Attorney Donald Verrilli Jr., speaking for the music and movie industries, urged Wilson to require Streamcast to use "all technologically feasible means" to impel a switch to the new software. For example, he said, they could force the old versions of the software to display a barrage of pop-up ads or other annoyances. StreamCast attorney Charles Baker said some of the previous versions won't display pop-ups, while others display pop-ups controlled by third parties. In other words, while it's in StreamCast's interests to persuade people to use the new software, there's only so much the company can do to make that happen. Finally, Verrilli asked Wilson to stop StreamCast from collecting ad revenue from previous, piracy-inducing versions of the software. But StreamCast's attorneys said afterward that the company couldn't simply stop those ads; it didn't have that much control over the various versions of the software.

Noting a key ruling on inducement in patent law, Wilson said he didn't believe the plaintiffs should have exclusive control over StreamCast's software given that it was capable of substantial non-infringing uses. That's one reason he rejected the injunction terms proposed by Verrilli. "I don't think this is necessarily that easy a question," he said as he dismissed the hearing, promising to issue a tentative order in a week that will seek comment from both sides on various approaches.

The entertainment industry has already won this case, but the worst outcome from its perspective is having StreamCast join Grokster in the dustbin of history. Instead, it needs more file-sharing companies developing ways to monetize the enormous global audience for these networks. Obviously, iMesh and Kazaa haven't found the magic formula that transforms millions free downloaders into paying customers. That's why the industry needs to find a way to keep StreamCast in the game.

The mother of all attorney-fees rulings

A new ruling by a federal judge in Oklahoma may have opened a can of worms for the RIAA and MPAA and their lawsuit campaigns against file-sharing piracy. On Tuesday, U.S. District Judge Lee R. West essentially ruled that the major record companies (and, by implication, the Hollywood studios) should pay the legal fees of the people they sue for indirectly violating copyrights if the only connection shown to the alleged infringement turns out to be their name on the high-speed Internet access account.

The case here followed much the same path as many of the lawsuits filed by the entertainment industry since the RIAA began going after file-sharers in bulk in September 2003. Its contractors targeted an anonymous Kazaa user ("fflygirl11") who was offering hundreds of copyrighted songs for others to download, then traced the user to a specific IP address. The RIAA filed a John Doe lawsuit against that user, then obtained a subpoena to force the Internet service provider associated with the address (the cable TV operator Cox) to reveal the name of the account holder to whom the address was assigned at the time. That turned out to be Deborah Foster, a nurse. The RIAA's "settlement" contractors -- a law firm -- contacted Foster and threatened to sue unless she paid several thousand dollars. She said she had no knowledge of the illegal downloading, and suggested that her estranged husband or daughter Amanda, who was in college, were responsible. The labels sued her anyway in November 2004, saying she was liable merely because it was her account; the following July, after the younger Foster offered to admit liability, they amended the suit to add Amanda as a defendant and accuse both Fosters of directly and indirectly infringing. Exasperated, Deborah filed a counterclaim asking the judge to declare that she had not violated the labels' copyrights and seeking payment of her attorney fees. But Amanda didn't respond to the amended complaint, and in November 2005 the judge issued what's known as a default judgment against her. In July 2006, a year after the amended complaint was filed and 19 months after the case began, West granted the labels' motion to dismiss the complaint against Deborah. He also ruled that she was the prevailing party in the lawsuit, which meant she could apply to the court for attorney fees. And so she did.

The Electronic Frontier Foundation, the ACLU, Public Citizen and the American Assn. of Law Libraries weighed in on behalf of Foster's motion for attorney fees, and the RIAA opposed it. The former argued that awarding attorneys fees to defendants like Foster would provide an important deterrent to overreaching by copyright holders. That deterrent is missing today, they argued, adding that the RIAA's tactics forced most defendants to knuckle under because the payment demanded -- several thousand dollars in most cases -- was far less than the cost of proving in court that they weren't pirates. The RIAA argued that its claims weren't frivolous -- someone was using Foster's account to make copyrighted songs available on Kazaa without the labels' permission -- and that courts around the country had dismissed claims for attorney fees from similar defendants.

Still, there's no settled legal doctrine that holds the person paying for an Internet access account  liable for any bad deeds done with it. On the contrary; as West says in his decision (and Foster says in her motion), merely supplying the means to violate copyrights doesn't make someone liable for indirect infringement. There has to be some evidence of knowledge and participation, or control and financial interest. West said the RIAA offered no such evidence. He also questioned the labels' motives, saying, "there is an appearance that the plaintiffs initiated the secondary infringement claims to press Ms. Foster into settlement after they had ceased to believe she was a direct or 'primary' infringer." In other words, they were just trying to shake her down.

A key difference between Foster's case and the ones where the defendants failed to recover their legal fees, West wrote, is that the labels expanded their initial claims to accuse her of indirect infringement -- as he put it, "a novel application of secondary copyright infringement claims." By hiring a lawyer (Marilyn Barringer-Thomson of Oklahoma City) and defending herself, Foster helped test this unusual theory, West wrote. That advanced the goals of the Copyright Act, which tries to balance the need to promote innovation while also making the fruits of that innovation available to the public.

The amount of fees to be paid remains to be determined. But the message from West is clear: unless an Internet account holder is the actual infringer, copyright holders can't squeeze them until they pop. Otherwise, they'll be paying the defense lawyers. Suing account holders may be a legitimate first step toward identifying the actual infringer, but copyright holders can't hound them after the trail leads somewhere else. It's a win for parents, and it could put the labels and studios in the position of having to focus their fire more squarely on youths -- with all the political and public-relations baggage that would bring.

(Thanks to TechDirt for putting this one on my radar screen.)



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Times editorial writer Jon Healey pens opinion pieces about a variety of business issues, and blogs about technologies that are changing the entertainment industry's business model.

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