By Neil Munro and Drew Clark, National Journal
© National Journal Group Inc.
Friday, July 27, 2001

Dinosaur was one of the Walt Disney Co.'s biggest hits in 2000. The story of a dinosaur with a teenager's voice who saves his herd, the movie is worth at least $500 million in revenue to Disney, says company President Bob Iger. In the past, movie studios made their big money from one source -- box-office ticket sales -- but now, "there is really no such thing anymore as a primary market," according to Iger. Dinosaur's release in movie theaters generated $355 million in revenues, but "we only got a piece of that," because theater owners also get a slice, Iger said. The domestic and foreign video market generated total revenue of almost $400 million, television distribution brought in another $35 million, and $85 million came from related consumer products, including copyright-protected music, software games, and books.

Technology has made it easier to copy and share movies, music, and software. How far can -- and should -- copyright protections reach into this brave new world?

To keep the revenue flowing, Iger said, strong copyright protection is vital, especially because digital technology makes it easy to mass-produce perfect copies of movies, TV shows, digital video disks, and software. Without strong copyright enforcement, digital pirates can rush out ahead of Disney's marketing staff and sell bootleg videos and software to customers who would otherwise have to buy the products from Disney.

And Hollywood executives make a larger economic argument: If copyright is not adequately protected by law and technology, producers won't be able to sell and distribute the movies, music, and other entertainment they say is needed to jump-start the stalled Internet economy.

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But how far can companies and the federal government go to protect content owners' copyrighted property from theft and misuse, and at the same time preserve such fundamental rights as freedom of speech and of the press? The tension between the two sets of interests requires a difficult balancing act, and the ease with which information can be transmitted and accessed in the digital age has raised the stakes. Congress has only begun to grapple with the economic and legal issues raised by the new information technologies. Internet-driven economic growth may stay in the doldrums, content owners say, until the government strikes a workable balance between the rights of content owners, content sellers, and content users.

How The Internet Changed Everything
Internet technology has made copying copyrighted materials much easier. The danger to content owners became apparent in the case of Napster, a service enabling consumers to easily swap compact computer files of copyrighted music via ordinary links to the Internet. So far, the Recording Industry Association of America has sued successfully to stop copyright infringement via Napster, though the service is still allowed some limited operations under the latest court decision. And according to Jack Valenti, the president of the Motion Picture Association of America, the movie industry has "been triumphant in all their cases" seeking to protect copyright. U.S. Internet companies, he said, are "very cooperative" in shutting down Web sites that offer pirated versions of movies such as Gladiator.

As technology advances, software companies will also want to distribute their software over the Internet, creating new copyright challenges, said Jay Cohen, the San Francisco-based director of publishing for Ubi Soft Entertainment Inc., an international firm that builds software games. Under contract to Disney, Ubi Soft developed software games based on several of Disney's movies, including Dinosaur.

Advances in software are also making it easier to share copies of digital products. New "peer-to-peer" software -- which has no central computer company or parent company that can be dragged into court -- will help users swap music and movies using wireless signals or high-speed Internet links. Once consumers have installed the software in their computers, they can freely share music, movies, or software files with similarly equipped computers. "It is outright theft [and] must be aggressively policed," said Iger.

Disney argues that without legal and technological protections, it won't let its best entertainment be sold or viewed online or through over-the-air digital transmissions. "Creating content is expensive, risky, and fragile," Iger said. "We must create some means of protecting copyright to justify the investment; otherwise the investments won't and can't be made.… The economic risk would not be justifiable."

In mid-July, Disney's movie-producing rivals in Hollywood, Sony Corp.'s Sony Pictures Entertainment and AOL Time Warner's Warner Brothers, agreed to back a consortium of five equipment manufacturers -- Intel Corp., Matsushita Electric Industrial Co., Toshiba Corp., Sony, and Hitachi Ltd. The companies are designing a copyright-protection system that uses "digital watermark" technology to make digitally copying cable and satellite broadcasts more difficult.

Disney has not yet signed on, because it wants extra protections for over-the-air broadcasts of its TV programs. Even if the company can get a deal that it likes, it will also likely seek legislation requiring electronics manufacturers to build technology into their compact disk players, their digital video disk players, and their Napster-compatible computers that would make copying nearly impossible. But the electronics firms have fought successfully for more than 20 years against the added cost and liability risk created by such technology. Iger says he is confident that consumers' desire for Hollywood's products will eventually force the firms to install the "anti-circumvention" gear. The market "opportunity will be so vast that the [electronics firms] will see the opportunity for themselves as well," he said.

However, because there is "not enough agreement on what needs to happen, how, and when, we may end up needing the help of the legislative process to ultimately force an agreement," Iger said. Disney has already persuaded Senate Commerce Committee Chairman Ernest F. Hollings, D-S.C., to consider supporting its approach in exchange for backing Hollings's bill on Internet privacy. The industry won a key victory with the 1998 passage of the Digital Millennium Copyright Act, which requires Internet companies to knock down any of their customers' Web sites that are distributing copyright-infringing content. The act also curbs technology that allows users to circumvent copyright protections.

Call Out the Copyright Cops?
But how far can authorities go, beyond civil lawsuits, in enforcing copyright laws? "Is the next step sending a squad car to someone's house to check if their 5-year-old is stealing the software? I don't think so," Iger said.

But in Hong Kong, the authorities do send squads of specialized police to break down the doors of software pirates, said Jeffrey Hardee. He is the enforcement cop in Asia for the Business Software Alliance, an association of software companies, including Microsoft Corp. The squads target fly-by-night factories that can spew out tens of millions of optical disks containing pirated movies, office software, and pop music. The factories are often hidden, protected by armored doors and criminal gangs, he said. Sometimes the plants are run by legitimate firms that surreptitiously produce a few million illegal disks on the side. This industrial-scale production is compounded by widespread "corporate piracy" -- companies giving their workers copies of office software. Even in law-abiding Singapore, Hardee said, roughly 50 percent of all software in use has been pirated.

Based on the 37th floor of a Singapore skyscraper, Hardee has been pressing Asian governments to crack down on piracy. His wins are often offset by losses. For example, the copying factories moved to Hong Kong to escape crackdowns in China, but now, as Hong Kong toughens enforcement, they are migrating to Malaysia, the Philippines, and other Asian countries. Governments throughout Asia are gradually adopting tougher laws, Hardee said, partly because of pressure from the U.S. government and the World Trade Organization, but also because local technology firms are lobbying their national governments for laws to protect their own new products.

Back in Washington, Hardee's boss, software alliance President Robert Holleyman, focuses on the growing problem of digital copying via the Internet. "The challenge is, in addition to private enforcement actions … we definitely need at least two, three times the effort [from the FBI and local governments] we have now, for starters," Holleyman said. If that does not happen, he believes, "legitimate business will not survive on the Internet."

Jamie Shorey, a graduate student in electrical engineering at Duke University, looks at the copyright debate from the consumer-rights point of view. "The people who distribute the music have created this problem for themselves" by overcharging for CDs, she said. "If the record producers started making records at a good value" -- and if they would sell them for about $8 instead of $18 and include additional material, such as background information on musicians -- "then people would stop copying them and start buying them," she said.

Shorey recently modified a TiVo digital TV recorder to enable it to store up to 91 hours of TV shows, instead of the original 14 hours allowed by the manufacturer. Other hackers, she said, have disassembled the TiVo software and sent recorded TV programs via the Internet to other consumers.

Seeking a Technical Fix
Content owners' desire for a technical means of protecting their copyrights has spurred investment in "digital rights management" technology. This software scrambles and encrypts content to keep it from being viewed or copied by anyone who hasn't paid for it. The digital watermark deal between Sony, Warner Bros., and the five equipment manufacturers is one example of such technology.

Microsoft has been one of the key advocates of technical fixes, partly to protect its own software, but also to create a new business. Microsoft's Media Player software allows computers to display high-resolution video and to play audio files. The player will be bundled with the Windows XP operating system, which is scheduled for release in October, and it will be used in the vast majority of home computers. The software allows content owners to specify how many times -- if any -- a computer user can copy their movies, songs, or software. "Our goal is to create tools that give content creators flexibility," said Brad Smith, deputy general counsel for Microsoft. "The content creator can permit two extra copies of music, no copies, or 45 additional copies."

But Hollywood studio executives and their technology partners have yet to shed their "irrational fear of Microsoft," said Scott Sander, the CEO of SightSound Technologies, a company that struck a test deal with Disney's Miramax unit to offer movies online to consumers -- for a fee. SightSound's Web-based system for selling movies online relies on Microsoft's Windows operating system because the system is closed and can hide encryption keys from average users. Iger dismissed any plan that would require Disney or other content owners to buy protection from Microsoft and other companies with a share of their movie revenues: "Forget it. I don't think the providers of content are going to allow that to occur."

Microsoft's Smith remains optimistic. "Technology cannot be applied in a way that stops [all] illegal activity or eliminates fair use, but it can stop a lot of unauthorized reproduction," he said. "There probably are a lot of ways to put the genie back in the bottle."

What The Gear Makers Want
Dave Arland works in Indianapolis, directing the government affairs operation for Paris-based Thomson multimedia Inc., a company that makes TVs, videocassette recorders, and other home-entertainment products for RCA and General Electric. A fan of Star Trek, Arland happily programs his RCA UltimateTV receiver and his satellite dish to find episodes of the show and then record up to 35 hours of them on a digital hard disk that allows him to bypass irritating commercials. That's the kind of technology that many consumers will open their wallets for, Arland believes. But his business plans are increasingly complicated by the fast-changing digital environment.

For example, the hacker-modified TiVo can effectively broadcast copyrighted products on the Internet -- potentially creating a swarm of free movies, and a horde of consumers eager to buy new devices to watch those pirated movies. That would boost sales of Arland's products, just as Napster prompted consumers to buy music-storage devices and faster computers.

But the Napster case also created a blizzard of copyright infringement lawsuits. Arland would like to avoid such troubles.

In 1996, Arland and his fellow executives created a technology to prevent copying of digital video disks. This technology -- now under technical and legal attack by hackers and their free-speech allies -- allowed the content providers and the electronics firms to offer a bonanza of new products that sparked a mini-boom in DVD gear. Arland wants to replicate this success on a broader scale with RCA's "smart-card reader," which can be installed in the boxes used to link televisions to cable TV wires, satellite channels, and the Internet.

But Arland also believes content owners' public concerns about piracy often mask their business agenda, which includes the desire to charge consumers whenever they record TV shows, even if it's just so they can watch them later. "People who record the soap operas or Oprah or ER are not doing so to infringe, but to watch on their schedule," and they can legally do so, Arland noted, because of the Supreme Court's 1984 decision in Sony Corp. v. Universal City Studios Inc., which permits consumers to use VCRs to "time-shift" their TV viewing.

Arland also worries that copyright-protection devices could scare away consumers: "Our greatest fear as we go from analog to digital is that we are going to leave the consumers behind, and they are going to say, 'Forget it.' "

The Fair-Use Faction
Some of the most vocal groups in the copyright debate are library associations. They have vigorously demanded "fair-use" rights from book publishers, the motion picture industry, the recording industry, newspaper publishers, and database owners. They are also urging the Library of Congress to affirm those rights in a forthcoming report on digital copyright. "There is a gap between the price of information and the ability to pay, [so] the problem with the sole focus on economic interests is that it comes at the expense of society," said Prue Adler, the assistant executive director of the Association of Research Libraries.

Fair use gives consumers -- including librarians -- the legal right to distribute limited numbers of copies of copyrighted material, within strict guidelines. For example, an author can reprint parts of another author's writings, or a TV documentary producer can include a clip from the Dinosaur movie. But new anti-piracy technology cannot easily differentiate between fair use and illegal copying. That's why free-speech advocates fear the technology will produce many legal threats to authors and producers, thus stifling free speech.

Librarians want to be able to lend out copyrighted material without having to pay a fee to the content owners each time. While they failed to get a library exemption to the anti-circumvention provisions of the digital copyright act, they did have some success last month when the Senate passed a bill that would permit educational institutions to post copyrighted material on the Internet -- without additional payment -- for instructional purposes.

Free Speech Versus Copyright
The fair-use concept provides a practical political compromise between free-speech advocates and proponents of intellectual-property rights. But some believe that the right to free speech should trump copyright. Edward Felten, a Princeton University computer scientist, is one such believer. He wants portions of the digital copyright act struck down as unconstitutional because they infringe on free speech.

Felten's particular target is the act's ban on efforts to break or circumvent any technology -- such as encryption -- designed to lock up copyrighted content. The act also criminalizes the making of or trafficking in technologies designed to circumvent copyrights. Under that provision, the FBI recently arrested a Russian who had developed software that permits users to bypass technology preventing digital books from being read on any computer other than the one on which they were purchased.

Felten, who has been threatened with legal action by the recording industry and is being represented by the Electronic Frontier Foundation, argues that the industry is using the law to stifle the scientific research he and others have conducted into the weaknesses of the industry's encryption and digital watermarking schemes. Music industry lawyers want to stop Felten from publishing what they believe is a mechanism for stealing their clients' property. Felten responds: "The record companies want to place music in a digital straitjacket, [and] they are attempting to make it illegal to talk about whether those straitjackets work or not. We are not going to change the weaknesses in this technology, [and] we think the public -- musicians, songwriters, and the music industry -- ought to know they are being asked to buy into a system that is not going to work."

The movie industry is fighting a similar legal battle against a publication that provided links on its Web site to a software program that can crack the code used to prevent copying of DVDs. The case against 2600: The Hacker Quarterly is pending before the U.S. Court of Appeals for the Second Circuit. Losing this and other such legal fights would deliver a blow to the industry's technology-intensive plans to protect copyright, and would perhaps prompt the content owners to ask the federal government to step up its anti-piracy policing.

Congress Wades In
This tangled debate will likely come back to Capitol Hill this year. Two of the interested lawmakers are Rep. Chris Cannon, R-Utah, and Rep. Rick Boucher, D-Va., who say they will soon put forward a variety of proposals to change copyright law. Rarely a day goes by that Boucher doesn't have something to say about copyright or patent law. "Twenty years ago, it was kind of an intellectual backwater," said Boucher, co-chairman of the joint Congressional Internet Caucus and a technology aficionado. "Today, people wait in line to sign up for intellectual-property law classes because it is so fundamental to the information-technology sector."

Cannon felt strongly enough about the difficulties in bringing digital musical to the Internet that he persuaded Sen. Orrin Hatch, a fellow Utah Republican who was then chairman of the Senate Judiciary Committee, to give him a speaking slot during the committee's hearing on Napster and digital music this past spring. Cannon said he sees "troubling signs that the recording industry may have intentionally chosen not to license music to new entrants to the marketplace." He added, "The copyright model the recording labels have come to rely upon will almost certainly require adjustment."

Like many consumers, Cannon would like to see the prices for digital goods plummet; he points out that the cost of information has steadily dropped during his lifetime. "I am hoping the video industry will learn from the music business and expand the market by lowering its prices," he said.

For his part, Boucher looks favorably upon the music industry deals that have combined the five major recording labels into two joint ventures that will offer subscription-based, copyright-protected Internet music services. But he says any industry-backed legislation to protect copyright must also create a "safe harbor" against copyright infringement claims, require the cross-licensing of music between the two music services, and allow Internet sites to obtain the rights to publish other companies' music on fair terms.

Boucher expects support from the copyright industry for his digital-music bill, but he certainly won't get it for his next effort: repealing the criminal sanctions for cracking encryption so long as the cracking effort is not for the purpose of infringing on copyright. Boucher, who said he has deliberately avoided using infringing technologies such as Napster, nonetheless takes the fair-use doctrine to heart and makes his own CDs that combine sound tracks from CDs sold by Irish folk musicians with tracks by the British singer Sting. Boucher's approach to copyright questions could help all parties reach an agreement. At the invitation of Jack Valenti, he played a key behind-the-scenes role in helping Hollywood and electronic equipment manufacturers inch closer to an agreement to permit over-the-air broadcasting of digital content.

But Boucher also agrees with Disney's Iger that piracy is a real threat: "Why should Disney put Dinosaur on the networks and [let it be] broadcast digitally in the clear by local broadcast stations, and [so] be made freely available on digital recording devices?" The trick, he says, is to use the marketplace to evolve an improved copyright creature that can survive against the threat of predatory pirates.

Drew Clark is a senior writer for National Journal's Technology Daily.

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