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
Outline
I. Potential Benefits of Internet Distribution
II. Background: Copyright in Music circa 1990
III. 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 System
V. Where Do We Go from Here?
A. Private Property
B. Regulated Industry
C. An Alternative Compensation System
Technologies
 Downloading: 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
Composer &
Recording Artist
Retailer
Distributor
Manufacturer
Record
Company
Results: increased revenues for writers
and artists, decreased prices for consumers, or both
Internet Distribution
Composer &
Recording Artist
Retailer
Internet
Provider
Manufacturer
Record
Company
Copyright in Music
Objects of Protection
 Musical Works
 Sound
Recordings
Managed in USA
By ASCAP, BMI, SESAC
Entitlements
 Reproduction
 Derivative Works
 First Distribution
 Public Performance
Exceptions and Limitations
 Fair Use (§107)
 Cover License (§115)
Fair Use Doctrine
1) 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 used
4) Impact on Potential Market


rival definitions of “potential market”
only substitution effects are cognizable
Compensation System for Network Broadcasts of Copyrighted Programs
broadcast
licenses
Advertisers
price of ads
Networks
higher prices
for products
Studios
license fees
free programming
(with embedded ads)
$?
Public
VCRs
cost of VCRs
Sony
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 System
 Tax and Royalty System
 Safe 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
 SDMI
 RealMedia
copyprotection
switch
 Ebook reader
Circumvention
 DeCSS;
Smartripper
 Felten
 Streamripper
 Sklyarov
Anti-Circumvention: §1201
 Prohibitions:



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: §1201
 Civil 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
Visitor
2600 Magazine
Site #1
advertising
advertising
Web
page
Web
page
?
Web
page
Web
page
Decryption
Program
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 use
 Reverse-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”
Felten
 Sept. 2000: SDMI issues challenge to break watermark
prototypes
 Felten breaks codes, proposes to publish results
 RIAA 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 NJDCt
 Defendants insist they have no intention to sue
 August 2001: Felten presents results at a conference
 November 2001: Suit dismissed because of absence of
“case or controversy”
Sklyarov
 Adobe’s eBook Reader prevents copying of
electronic books
 Sklyarov developed for ElcomSoft a program that
enables the copying of eBook files
 Sklyarov (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 dropped
 Feb. 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 Protection
 Musical Works
 Sound
Recordings
Managed in USA
By ASCAP, BMI, SESAC
Entitlements
 Reproduction
 Derivative Works
 First Distribution
 Public Performance
Exceptions and Limitations
 Fair Use (§107)
 Cover License (§115)
 AHRA (§1008)
 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 Transmissions
 Non subscription broadcast
transmissions licensed by FCC
 Limited set of “retransmissions”
 “Feeds” incidental to exempt
transmissions
 Storecasting
 Transmissions to business
establishments
11/12/2000:
Copyright
Office
rules n.a.
to webcasts
of radio
stations;
8/2001:
District
Court in
Philadelphia
affirms
Level 2: Statutory Licenses
 Subscription 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 systems
 Services that transmit digital audio
programs “specially created for the
recipient”
Copyright in Music
Objects of Protection
 Musical Works
 Sound
Recordings
Managed in USA
By ASCAP, BMI, SESAC
Entitlements





Reproduction
Derivative Works
First Distribution
DPD
Public Performance
Exceptions and Limitations
 Fair Use (§107)
 Cover License (§115)
 AHRA (§1008)
 DPRA Limitations (§114)
CARP Ruling, 2/20/2002
Per Performance Ephemeral License
Fee
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
CARP Ruling, 2/20/2002
 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 year
 Ephemeral fee: $165,564 per year
 Total: $2,005,164 per year
Library
User
User5
Library
User
User7
User
User8
Library
Napster Website
Directory
User
User4
Library
Library
User
User3
Library
User
User1
Library
User
User9
Library
Index
User
User6
User
User2
Library
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 Systems
Parent technology:
Gnutella
 Aimster/Madster
 Kazaa/MorpheusMusic 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
Fasttrack
User 1
User 2
User 3
User 9
Central
Server
User 8
SuperNode
User 7
SuperNode
SuperNode
User 4
Adapted from Webnoize
User 5
User 6
Authorized Services
 MusicNet

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 Japan
 Consumer backlash
 Philips, 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 Regime
 High transaction costs
 Price to consumers of access to recorded
music remain high
 No “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
Private Property
 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)
Features of Private Property
In Real Property
In Recorded Music
 Right to exclude
 Add full publicperformance right for
sound recordings
 Eliminate compulsory
licenses
 No Electronic Theft
Act
 DMCA; SSSCA
 Injunctive Relief
 Criminal Trespass
 Prohibition of
burglary tools
Private Property
 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)
§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
SSSCA
 Security 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 Act
 It 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
PC
PC
PC
PC
Server
PC
PC
Server
PC
PC
Server
PC
Router
PC
Server
Router
PC
PC
Router
Server
PC
Router
PC
PC
PC
Server
Server
Server
PC
PC
PC
PC
PC
PC
PC
PC
Threats to “End-to-end”
 Proprietary control over the pipes

E.g., AT&T’s exercise of control over its cable
modem system
 Standardization and “dumbing down” of the
computers located on the ends
 Results:


Greater proprietary control over digital content
Curtailment of both competition and innovation
Regulated Industry
 Theory: 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;
Reinstate
the utilitarian
balance
Theory of
compulsory
terms
Compulsory Royalties
CARPs 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 each
 Royalty rates for each


For owners of copyrights in musical works
For owners of copyrights in sound recordings
boundaries
will shift as
consumption
technologies
change
Replace
ASCAP,
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 Results
 Benefits:





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 System
 Watermark 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 work
 Distribute revenues in proportion to frequency of use

Cf. ASCAP, BMI, AHRA, European blank-tape taxes
 Eliminate 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 sales
 For P2P copying


Require services to supply data
sample Internet traffic at router or ISP level
Merits
 Large cost savings
 Lower transaction costs
 Elimination of deadweight loss (music priced at
marginal cost of replication)
 Creators compensated in proportion to consumer
demand for their products
 Consumer convenience
 Reverse concentration of the music industry
 Semiotic democracy
Practicability?
 Risk of “ballot stuffing”
 International application