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.

Top 10 trends: Ad infinitum

While digital technology continues to rock the music and film industries, major players in the advertising world are paying close attention and smartening up.

Madison Avenue is waking up to the limitless new opportunities in digital media.

While digital technology continues to rock the music and film industries, major players in the advertising world are paying close attention and smartening up.

Advertisers are devising innovative ways to target messages to specific audiences by embracing, rather than fleeing, new technologies. They are particularly keen, for instance, on understanding the role of commercial-skipping digital video recorders (DVRs) like TiVo, as well as the potential of placing ads on video games and throughout the Net.

One reason for the new interest: desperation. TV ads, once a stalwart of the brand-building community, no longer pay the same dividends. Younger people are watching less television than previous generations. According to October/November figures from audience monitor Nielsen Media Research, 7 percent fewer men between the ages of 18 and 34 were watching TV than in the same period of 2002. This is a new breed, raised on computers, movie rentals, dozens of cable channels, and video games.

Madison Avenue advertising executives won’t let this audience go without a fight. Why? Studies from sources including Advertising Age and the International Advertising Association indicate that consumer-buying habits of men under 35 are malleable and more receptive to advertising-inspired brand switching. (After 35, these studies say, brand loyalty is set in everything from deodorant to cars.)

Nielsen says the tune-out trend is highest among men between 18 and 24. That group is more likely to play video games or watch DVDs than kick back with TV programming. Advertisers are, in turn, adjusting their approach to fit the lifestyle of their audience. Case in point: as network TV ratings fell, annual video game sales have more than trebled from $6.5 billion in 2000 to a projected $20.8 billion in 2003, according to NPD Group and U.S. Bancorp Piper Jaffray. Agencies are in turn following the money beyond TV, collaborating with video game manufacturers to pay for product placements in the games. That is good news for video game makers, which are expected to rake in more than $700 million in advertising fees annually by 2005, according to data from Forrester Research and Jupiter Media. That is seven times more than in 2002.

Satellite and cable TV companies dependent upon TV viewers are also keeping a sharp eye on rapidly increasing DVR penetration (see chart). Many plan to provide the service in a two-pronged attack designed to both woo more customers and convince their current base to upgrade to premium services. This will further boost a mounting market; Nielsen says that DVR ownership grew by 50 percent over the last year to about 4 percent of U.S. households.

Advertisers are eager to tap into the underdeveloped potential of this growing audience. TiVo, one of the leading DVR platforms, is working with advertisers and audience measurement services to gauge viewer habits in extreme detail. Unlike Nielsen’s TV ratings, which measure viewing in 15-minute chunks, TiVo can break down data to the second. Advertisers get a clearer picture of ad campaign successes – and failures.

In 2004, advertisers utilize DVR technology to determine the specifics (houses, zip codes) of who watched, or skipped, their ads. They may also monitor which commercials are watched repeatedly, to better clue in on what is entertaining – and effective. With DVR technology, consumers can also request longer versions of commercials. It is an advertiser’s dream to spotlight special interest while increasing the cost-to-success ratio. Whether they are offering extended trailers of the next Lord of the Rings movie or ads for a new make of car, advertisers are managing DVRs as an advertisement delivery medium.

Meanwhile, the Internet will remain the king of targeted digital advertising in 2004. In a recent Forrester survey of 95 U.S. marketers and advertising agencies, Internet advertising captured the two highest planned growth areas next year with more than 60 percent of surveyors saying they planned to increase spending on digital advertising. More than 50 percent of respondents said they planned to spend more money on Web advertising, while only 20 percent planned to increase spending on traditional advertising print and broadcast.

The main driver is targeted search, a niche developed by Google, Goto.com, and Overture. Two years ago, advertisers were complaining that print-style Web banner advertising was ineffective. Today, they have been won over by the manner in which the Internet provides quick response from a targeted search, something neither print nor TV can offer.

The advertising industry is set to lead the media sector in 2004. Ad buyers at established firms are facing the global challenges of a digitally altered media landscape head on, intent on taking advantage of new opportunities to reach both specific niche and more broad-based target audiences.

PLAYERS

Google, Yahoo: The titans of targeted search should reap most of the benefits as this already-profitable business grows.

Comcast, EchoStar, Hughes Electronics/News Corp, Time Warner: Look for these cable and satellite TV providers to push DVRs and more digital programming services to boost revenues.

Scientific-Atlanta: Looks to be the big set-top box winner as the two top cablers, Comcast and Time Warner, push DVR technology in 2004.

Atari, Electronic Arts, Microsoft, Vivendi Universal Games: Video game makers are set to increase revenues from in-game advertising product placement.

ALSO IN MOTION

Anti-spam crusaders: The election year prompts state and federal lawmakers to press passage of tougher anti-spam laws.

Search turf wars: Google and Yahoo, the current leaders in search-based advertising, face new competition from Microsoft, which plans to launch a similar service.

Interactive marketing: Interactive TV has been promised for years, but now with DVRs, digital cable and satellite infrastructures have finally emerged.

Sarbanes-Oxley highlights risk management

Banking consultant examines the repercussions of last year’s far-reaching accounting law

As each week goes by, one of the newest federal laws affecting business continues to raise questions.

Born from the accounting scandals of 2001, Congress passed the far-reaching Sarbanes-Oxley Act (SOA) of 2002 in an attempt to regulate public companies and clean up messy accounting practices of the late 1990s.

In the true entrepreneurial spirit of the Silicon Valley, a group of consulting firms have sprung up to help companies address SOA, including BankVision Inc. of San Jose, which was founded this year and already has 45 clients.

BankVision managing director Chris McCulloch talked with Biz Ink reporter David Speakman about issues he faces with companies grappling with the new law.

When SOA was passed, do you think people were fully aware of its implications?
It is difficult to imagine that people understood the complete ramifications and implications of the Sarbanes-Oxley Act when it was signed into law in July 2002. The Act is so broad reaching that I think most corporate managers are still trying to digest its full impact. The topics addressed by SOA range across the corporate spectrum from governance standards to disclosure procedures.

What are some of the most common SOA issues you are seeing with your clients?
Our clients are financial institutions and, in many respects, they had a head start with respect to SOA. Even before SOA, they were operating in a heavily regulated, control-oriented environment, so SOA was not as traumatic as it might have been otherwise. For most financial institutions, compliance with SOA is really about formalizing and documenting many of the control processes and practices that already existed. In fact, our larger clients (banks with assets over $500 million) have been familiar with annually assessing the effectiveness of their internal control structure under Section 112 of the Federal Deposit Insurance Corporation Improvement Act (FDICIA) since the early 1990s. Proposed Section 404 of SOA regarding management’s assessment of internal controls looks very similar to FDICIA Section 112.
Ironically, in both cases, these regulations were direct responses to the well-published business challenges of their times. For instance, FDICIA was enacted in response to the savings and loan crisis of the 1980s, while SOA was a reaction to the corporate malfeasance and governance failures two decades later.
While financial institutions may have had a head start, compliance with SOA may be a real challenge for small manufacturing and service businesses that have not traditionally operated in heavily regulated environments.

What is the most important thing you tell companies to do because of this new regulation?
Develop a culture within the organization that fosters control awareness. An awareness of controls and risks will allow the organization to optimize the balance between risk and return. Business decisions can then be made with an understanding of the associated risks and thus minimize the type of corporate governance failures that plagued companies like Enron and WorldCom. This doesn’t mean that an organization should move to eliminate risk, because it would control itself out of business. Rather it should position itself to identify, measure and respond to risks that exist, as well as those that develop, as a function of environmental changes.
Once a general control awareness has been infused in the organization, it becomes a process of documenting the most significant risks, key controls and means by which these controls are periodically evaluated and validated by the organization. Risk-management professionals can help facilitate this process.
What are the benefits of risk management in regard to SOA?
The first has been a general increase in awareness regarding the importance of controls and risk-management processes. Another positive aspect of SOA has been the enhanced communication between senior managers and mid-level managers or supervisors regarding the control environment and financial reporting controls of their organization.
Section 302 of the act requires the written affirmation of the principal executive and financial officer (usually the CEO and CFO) that effective disclosure controls and procedures exist each time a periodic report is filed with the [Securities and Exchange Commission]. Well, these senior mangers are now asking very pointed questions about the control and disclosure procedures of the managers that report to them. This has improved communication between senior managers and mid-level managers regarding the controls and risk management processes of their business.

Have you noticed companies not originally targeted by SOA changing business practices because of it?
SOA was originally designed to address corporate governance responsibilities and transparency in financial reporting and disclosure at public companies. Any company that was an SEC reporter was covered by the act.
However, we have seen private companies take a keen interest in the act. Many of these companies have moved to comply with SOA even though they are not technically covered by it. The feeling is that there may come a day in the not-so-distant future when all companies will be covered by SOA or similar standards. These private companies are oftentimes enhancing their risk-management processes and control expectations in this context.

What ramifications of SOA did you find surprising?
That such sweeping change in U.S. securities laws could be precipitated by a few very large, visible companies such as Enron, WorldCom and Arthur Anderson. Unfortunately, the corporate malfeasance and fraud associated with these companies cast a shadow over the entire corporate world and undermined the public trust between companies and their stakeholders.
While we needed improvements in corporate governance and financial reporting transparency, SOA has been a significant burden for many companies that were already acting as responsible corporate citizens.