Top 10 trends: Copywronged

Hollywood fends for its meal ticket as consumer appetite for digital content grows.

How quickly have audiophiles taken to online downloading? Data from research firms Forrester Research and The Yankee Group show that one out of every five PC users in Europe and the United States regularly downloads MP3 music files. Peer-to-peer file sharing jumped 300 percent from the end of 2001 to 2003, according to Internet solutions provider Websense.

Now consumers want more. ISPs, like EarthLink and Comcast, claim that one of the primary factors driving the switch from dial-up to broadband Internet is the ability to download and stream Internet video.

This makes Hollywood nervous. Worse, the trend is leaning on ancient intellectual property (IP) copyright laws that are more than two centuries old. One major controversy stems from the Digital Millennium Copyright Act (DMCA), a 1998 U.S. law backed by the major music and movie studios.

The Electronic Frontier Foundation (EFF) says portions of the DMCA, like the provision that outlaws the copying of digitized media without owner consent, have been obsolete since day one. The statute also does not address technological abilities or changing consumer demand.

Big bucks are at stake. Five years since the DMCA was passed, 20 percent of U.S. consumers download music from the Internet, says Forrester. Half of those are buying fewer CDs. Statistics from the Recording Industry Association of America (RIAA) show retail recorded music sales’ shipments have taken a blow, falling 21 percent to $11.5 billion since 1999.

The $37.3 billion worldwide television and movie industry is expected to get hit next. The Motion Picture Association of America (MPAA) asserts that studios lost about $650 million because of DVD piracy in 2002.

Time Warner, owner of the behemoth Warner Music studio, estimates the music industry loses $10 billion annually, or about a third of its business, to piracy. With no end in sight to the downward trend of the business, Time Warner struck a deal to sell its music business for $2.6 billion in cash in November.

“We need to create a system for resale so that once a file is digital, it is not gone and free for the taking,” says Michael Cohen, an IP attorney with firm Heller Ehrman White & McAuliffe, which represents the Digital Media Association (DiMA), an industry group of Internet and tech companies offering digital media services.

Some legal experts say that with laws like the DMCA, America is inventing IP rights the rest of the world may never honor. “The DMCA needs to be revisited. It created IP rights for the digital world that never existed before in the real world,” says Mr. Cohen.

One sticking point: the DMCA imposes stricter regulations for digital media than those governing comparable material. For instance, owners of paperback books can make copies for personal use, and lend or sell books at will. But owners who did the same with those books in digital form, as e-books, risk a lawsuit for copyright infringement.

Ironically, consumers may address the economic realities of digital distribution before legislators do. Forrester says consumer interest in paying for digital music is growing. By 2008, Internet downloads will make up 33 percent of music sales. The firm expects the online music market to grow into a $1.4 billion industry by 2005.

A handful of online stores like Apple’s iTunes and Roxio’s Napster 2.0 are serving that market, but face a mishmash of Asian, European, Canadian, and U.S. copyright laws. For instance, the European Union (EU) has not standardized cross-border music licensing sales; its member countries have been unwilling to cede control of cultural property rights. Many are uncertain what legal fees and taxes should be paid if, say, a digital fan in Cyprus tries to download a German-produced MP3 file that is stored on a server in Ireland. And in an unusual move, the Copyright Board of Canada recently ruled it legal to download copyrighted music files (uploading is still illegal). U.S. laws, which can vary between states, offer little insight into this legal tangle.

Rights issues prevent iTunes from offering a complete catalog of major acts like the Beatles or Rolling Stones. Mr. Cohen says that unless U.S. and European laws become more business friendly, more users may leave iTunes for sites like Russia’s AllofMP3.com, which employs Russia’s loose IP laws to offer the Beatles catalog and thousands of other MP3 recordings for about 10 cents per song.

In 2004, expect record studios, Hollywood, and Internet commerce companies to renew pressure on federal and international lawmakers to tackle copyright problems.

PLAYERS:

Apple Computer, Buy.com, CNet, Microsoft, Roxio: These owners of online MP3 music download services will battle it out for market dominance.

NBC Universal, News Corp., Time Warner, Viacom, Walt Disney: Major TV and movie studios are lobbying Congress to strengthen anti-piracy efforts.

Apple Computer, Microsoft, Real Networks: Makers of digital audio and video players stand to gain from exclusive Internet broadcasting contracts as the online streaming media audience grows.

Digital Media Association, Electronic Frontier Foundation: Expect these industry groups to battle it out in the courtroom and in the press.

ALSO IN MOTION:

Broadcasting: The U.S. Federal Communications Commission (FCC) will try to enforce its new regulation requiring equipment manufacturers to install hardware to recognize a “flag” that will prevent recording or Internet transmission of broadcast-quality digital television video.

International laws: Industry and consumer lobbyists will push for a more cohesive set of international standards for IP law.

Software patents: As the EU debates software patents, American software companies face the possibility that their U.S.-granted patents will not be recognized in Europe.

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