NBA 600 Session 14 Digital Goods and Music

NBA 600: Session 14 Digital Goods and Music Industry 6 March 2003 Daniel Huttenlocher

Today’s Class § Digital Millennium Copyright Act (DMCA) – de. CSS (breaking DVD encryption) – Breadth of DMCA § Music industry and digital goods – Drop in CD sales and industry response • Lack of justification for RIAA views – What may happen § Darknet – illicit distribution of digital goods – Strategies for a world where content can be shared easily 2

Flawed DVD Encryption § A fundamental problem with CSS made it relatively easy to duplicate keys – The keys were supposed to be stored encrypted so they could not be copied • A manufacturer accidentally released an unencrypted key - Should have been okay because single compromised keys can be “revoked” – A flaw in the scheme made it quite easy to create many keys given a single key • de. CSS - keys and software for de-scrambling DVDs were rapidly distributed on the Internet 3

DMCA and de. CSS § The web site for 2600 magazine linked to a Norwegian teenager’s site – He had published de. CSS program for decoding DVD’s on his web site § Major studios sued 2600 under DMCA – Accused them of video piracy simply for linking to the Web site • Court found against 2600 - Upheld on appeal in May 2002 § Proponents of tools like de. CSS decry decision as prohibiting fair use 4

DMCA and Freedom of Speech § Princeton CS professor Ed Felten found holes in a copyright protection scheme – Secure Digital Music Initiative § Recording Industry Assoc. of America (RIAA) threatened Felten with a lawsuit – If he presented at academic conference § Felten backed down – But media outcry led to RIAA saying it never intended to block him from speaking • So he presented in August 2001 conference § Injunction was sought against DMCA – Judge threw out because no case at issue 5

DMCA and E-Book Reader § Russian company Elcomsoft and programmer sued by US Attorney in S. F. – First criminal application of the law • Programmer taken from conference in handcuffs § For reverse engineering Adobe’s E-Book reader software – Permitting users to decrypt electronic books – Adobe dropped its support of case against programmer after protests § Jury acquitted company in Dec. 2002 – Based on company’s speedy removal of offending software upon Adobe’s request 6

DMCA and Reverse Engineering § Most devices today include digital computers and computer programs – These programs are protected by copyright § Thus DMCA can in principle be used – For the device to work properly particular computer code can be required • E. g. , code that identifies inter-connected devices – Such means appear to be covered by DMCA although this was clearly not original intent § Lexmark is suing toner cartridge manufacturer under this interpretation 7

DMCA Hasn’t Prevented Piracy § Bigger problem is easy distribution of plain (un-encrypted) digital content – Sharing of audio or video files • Via file sharing networks: Kazaa, Morpheus • Via web sites – Generally more compressed and hence lower quality than original • DVD video and even CD audio too large to share easily over internet § This content comes from many sources not just directly decrypting protected data 8

Serving the Consumer § The variety of content protection schemes is beginning to cause consumer unrest – Bills being discussed in congress that would require clear labeling • Devices and goods would have to disclose how they restrict copying or access § Consumers value flexibility § Device producers want to provide flexibility § Content producers focused on control which is in direct conflict with flexibility 9

Introduction of “Protected” CD’s § Sony and others introduced CD’s that won’t play in computer CD drives – But will play in most consumer audio devices § Essentially releasing flawed CD’s – Where flaw causes CD-ROM drives to read same data repeatedly, never getting to music § Philips, which owns trademark on CD’s, has objected that it violates the standard § Sony’s scheme can apparently be thwarted with a marking pen 10

Challenge for Digital Goods § Copying may not be preventable – Difficult to distinguish “legitimate” from “illegitimate” – Restrictions to prevent copying may drive consumers to illegitimate copies § How to make illegitimate copies more expensive than legitimate ones – Expense in time and risk not just money • Trusted sources without risk of viruses • Prosecution of widespread sharing – Disrupt content of illicit distribution networks • Flooding file sharing with damaged content 11

Digital Goods and Music Industry § Recording Industry Assoc. of America (RIAA) has been a major DMCA litigator – E. g. , suits against Napster and various ISP’s § Industry in a “panic” over digital copying – Yet evidence does not suggest reason for panic at the moment • Moreover, RIAA and major record label approach may be alienating their customers § CD sales down 10% in 2001 – Preliminary 2002 numbers show 9% drop • But some genres such as country way up – 12% 12

Music Industry Blames Copying § Industry assumes drop due to illegal copying via internet § Fail to take into account other factors – Weak economy – Price increases for CD’s of 3 -4% per year – Life cycle of CD medium • E. g. , cassettes dropped 10%/yr for a decade as CD sales grew – Substitute activities • Double digit increases in cell phone usage • Double digit increases in video game sales – Shorter radio station and MTV play lists 13

Forrester Study of Listeners § Survey of 1000 online consumers shows heavy downloaders still buy the most CD’s § Identified several groups – Offline and nonusers: never download or burn – Dabblers: have tried but do infrequently – Learners: download, rip or burn 3 -8 times/mo. – Lovers: over 9 times/mo. § Offline and nonuser make up 54% of population but buy only 39% of CD’s § Lovers and learners make up 22% of population and buy 36% of CD’s 14

More You Burn More You Buy § At the moment, more active downloaders also buy more CD’s – Difficult to determine the degree to which they might buy more if they didn’t download • Many report downloading actually increases their buying but may not be reliable § If burning was largely replacing buying would expect larger drops in sales – Sales of blank CD’s now 2 x that of music CD’s • If half used for replacement of music purchases CD sales should be off by much larger amounts - More like Encyclopedia Britannica’s dropoff 15

Why People Buy Music § Exposure to artists critical – Don’t buy what don’t know and like – Industry knows this, pays a lot for video and radio promotion § Critical question: when is downloading or copying exposure versus replacement – Music buying cycle not well understood § Convenience of format – Largely why cassettes replaced albums and CD’s replaced cassettes § Value of original over copy, e. g. , as gift 16

What Music Industry Should Do § Understand buying behavior of customers – Recognize that “hearing for free” has both positive and negative effects on sales • Try to limit lost sales without damaging positive aspects of unpaid listening § Recognize what customers want – Forrester study lists several “rights” consumers will demand in exchange for payment • Find music from any label • Control music by burning onto CD’s or copying to MP 3 player • Pay by song or by album not just subscription 17

Don’t Fight the Technology § New technologies need to be exploited to generate new kinds of revenue – Fighting a new technology is an uphill battle • With video recorders lost legal fight • Even with DMCA laws, not stopping copying § Video recorders actually generated revenue for content providers – Large movie rental market – More television watching through time shifting § Figure out how easier copying can lower costs and create new revenue sources 18

Forrester Report Predictions § Paid-for downloading will become so easy that it is a major source of revenue – At right prices people will use industry download services because • Easy to find content • Guarantees about quality and lack of viruses • Fast downloads – By 2007 will be $2. 1 B or 17% of industry revenue § Another possible direction is increasingly difficult-to-use protected content – Leading to accelerating sales drops 19

Emerging New Products § Microsoft’s Threedegrees – Creates online social group where people can chat, share photos, listen to music • Up to ten people at once in a given group – Comes out of “Net. Gen” division of MS • Products targeted at 13 -24 yr olds § Music is played from a participant’s hard drive rather than being shared – Can be heard by all participants but “belongs” to one of them – Group can have a playlist of up to 60 songs 20

Darknet and Content Distribution § People have always copied things – Even copyright law recognizes that some copying is not infringing on holder’s rights § Before digital age small-scale copying generally un-economic – Time and/or money to locate and make copy § Large-scale copying detectable and stoppable using legal means § With digital goods this picture is changing – Small-scale copying becoming much easier • Will be hard to prevent, even with new laws 21

Idea of Darknet § Three assumptions – Any widely distributed object will be available to some users in a form that permits copying • Protection systems will “leak” content – e. g. , from expert users who can overcome them – Users will copy objects if it is possible and interesting to do so – Users are connected by high-bandwidth channels • Fast enough that copying objects no harder than obtaining other ways § Object means any digital content § Widely distributed means mass market 22

Operation of Darknets § Requires several technologies, similar to those of legal distribution networks – Ability to inject new objects into darknet – Distribution network for carrying copies of objects to users – Ubiquitous rendering devices which allow users to experience objects – Search mechanism to enable users to find objects – Storage that allows objects to be kept in the darknet • For efficiency of access to objects 23

Darknets for Music § File sharing – CD RIPping enables widespread injection of content – Internet provides distribution network – Systems such as Napster, Gnutella, Kazaa enable search and retrieval – Media players render the material – Cheap disks allow content to be stored § Challenges to darknets – Technical means to prevent injection of content – Legal means to attack search and retrieval 24

Darknets Resilient § Digital rights management intended to prevent or delay content entering darknet – However experts can eventually inject content • New schemes pose a challenge – Once available will be rapidly copied if it is desirable material – DRM protection schemes thus mainly prove an inconvenience for legitimate users § Peer-to-peer networks pose particular problem, no central entity to challenge – P 2 P simply means direct communication between participants rather than central server 25

Limitations of P 2 P Darknets § Napster had centralized search engine while content was distributed among users – Legal challenges were effective because central database of song titles could be shut down § Gnutella and later systems decentralize the search as well – Harder to stop, no central entity to block § However, in practice these new services are also fairly centralized – A few hosts in P 2 P network provide most files • Free riding – most users download but don’t share for upload 26

Likely Evolution of Darknets § Large-scale file sharing will be limited – RIAA and labels will identify hosts that share lots of data • Shut down through court order or other means – File sharing will become more subject to viruses and corrupted files • As more mainstream will become target § However small-scale sharing hard to stop – Sharing only with friends • Can’t prohibit without alienating users • Less problem with trusting content – But harder for users to find new things 27

Revenue Opportunities § Make it easy for friends to share music, while still encouraging purchase – Systems such as Threedegrees do this by enabling shared listening but not copying – Perhaps reducing costs for radio/video promotion § Supplement with easy and ready purchase options – Problem, many purchasers of music under age 18 and don’t have credit cards • Could be good for Paypal and other payment services 28