INDUSTRY ANALYSIS
Digital Battleground: From Congress to the Marketplace

The battle between Hollywood and Silicon Valley over copyright issues heated up recently as two bills in Congress generated attention. Each side has a point, but consumers would be better off if the battleground were the marketplace, not the political stage.

How to protect intellectual property in a digital age is a question many are trying to answer. Technology makes music and movies increasingly easy to copy and transfer, yet somehow artists and those who help produce the works must be compensated.

One way that content producers hoped to ensure they'd be paid is through making it illegal for consumers to break copy-protection programs -- known as digital rights management (DRM) -- and such a provision was written into a law called the Digital Millennium Copyright Act (DMCA).

The problem, however, is that sometimes the consumer has a legitimate reason to circumvent DRM. For example, a user might want to change the format so a purchased song will play on a computer or portable music player. The DMCA also makes it illegal to traffic in tools that can help circumvent protections, and in the long run that provision could prove harmful by motivating innovators to pull useful wares from the Internet.

A proposal by Congressman Rick Boucher (D-Virginia) to fix these problems was in the news last week as it drew new support from a coalition called the Personal Technology Freedom Coalition (PTFC).

Members include Intel (Nasdaq: INTC), Sun Microsystems, Verizon, Quest, and Gateway, among others. Boucher's bill would alter the DMCA by making it legal for consumers to break copy-protection controls on CDs or movies as long as it is for personal use and not to infringe on copyright. Piracy would still be a crime.

This change seems sensible, given various incompatibility issues as well as the traditional "fair use" right to use intellectual products during various times and places, such as copying a legitimately purchased movie to one's hard drive to watch it on a flight.

But Hollywood, in its frenzy to protect its old business models, appears oblivious to this consumer demand.

Criminal iPod?

Indeed, the same day the PTFC coalition launched, the Recording Industry Association of America (RIAA) announced 482 new lawsuits against its potential customers for digital piracy. As if suing its customers weren't bad enough, tinsel town lobbyists are also pushing legislation known as the "induce bill" which would make it illegal to intentionally aid, abet, induce, or procure copyright violations.

On the surface, the induce bill doesn't sound so bad -- after all, few law-abiding citizens want individuals to be tricked into thinking that downloading music off of Kazaa is legal. However, a closer look at the bill reveals deeper issues. That is, because it could apply to many technologies, it could outlaw or have a chilling effect on innovation.

Producers of devices with a broad variety of uses could be held liable for inducing infringement. To demonstrate, the Electronic Frontier Foundation wrote a mock inducement complaint against Apple's (Nasdaq: AAPL) iPod.

"Apple advertises that its 40 GB iPod can hold up to 10,000 songs," they wrote. "This amount of capacity far exceeds the total CD collection of the vast majority of Americans. This suggests that Apple knew and intended that iPod owners would be getting their music from elsewhere, including P2P networks."

Would this mean the iPod could be illegal for inducing a crime? That would be up to the courts, but since it's a real possibility under this bill, the proposed legislation is potentially very dangerous to technological progress.

Well-Heeled Lobbyists

Intellectual property is extremely important and should be protected, but the way that current and potential laws have been written leaves a lot to be desired. Technology has forced a change in business models for the content industry, and trying to cling to old ways will help no one but well-heeled lobbyists in Washington.

How to protect intellectual property should be discovered in the marketplace, not in Congress. Content companies should experiment with different types of pricing, packaging and DRM to see what works. Sure, many of the ideas will fail, but in the long run everyone will be better off.

Consumers are not thieves. They are willing to pay for entertainment, but in a digital age it needs to be delivered in a different way. The challenge to Hollywood is to figure it out before the industry inadvertently stifles itself and harms consumers with the heavy hand of the law.