DRM AS AN ENABLER OF BUSINESS MODELS: ISPS
AS DIGITAL RETAILERS
By Lionel S. Sobel
I. THE QUEST FOR BETTER BUSINESS MODELS
Better business models are the Holy Grail of the digital age. Even Alex
Doonesbury has joined the quest.1
Alex is the daughter of Mike Doones-
bury in Garry Trudeau's syndicated comic strip, so her search can take as
long as Trudeau likes. Things are more urgent for those in the real world,
especially for those in the entertainment industry. Unauthorized digital
reproduction and distribution have shattered traditional music industry
business models and are on the verge of doing the same to movie industry
models. The question is what, specifically, can be done about it. This is a
difficult question to answer.
Proof that the question is difficult (if proof be necessary) can be found
in the pages of the nation's leading business periodical, The Wall Street
Journal. In an editorial triggered by a U.S. Naval Academy investigation
of midshipmen suspected of downloading MP3 files, The Wall Street
Journal recently advised the record industry, quite unhelpfully, that it
needs a new business model.2
This particular editorial criticized the record
industry as one "still wedded to an LP-era business model." It was also
dismissive of "MusicNet" and "pressplay," the record industry's maiden
tests of new models based on digital distribution.3
The Wall Street Journal did not, however, offer an alternative business
model it would find praiseworthy. Therein lies the rub. It is one thing to
say a new model is necessary. It is quite another to suggest how that
model might work. A general description of how a new model may work
is not enough, and The Wall Street Journal failed to provide even that. The
devil is in the details.
 2003 Lionel S. Sobel
 Editor, Entertainment Law Reporter; Distinguished Scholar, Berkeley Center for
Law & Technology; Lecturer, Boalt Hall School of Law, University of California, Berke-
ley.
1. Garry Trudeau, Doonesbury, SAN FRANCISCO CHRONICLE, Jan. 19, 2003, at
Sunday Comics 1.
2. Face the (Digital) Music, WALL ST. J., Dec. 2, 2002, at A18, available at http://-
www.freerepublic.com/focus/news/799006/posts (last visited May 3, 2003).
3. Id.
BERKELEY TECHNOLOGY LAW JOURNAL
Keeping in mind that seemingly attractive concepts are often undone
by their necessary details, I nevertheless suggest a business model that has
promise: Internet service providers (ISPs) should become digital retailers
for digital works of all kinds--music, movies, television programs, photo-
graphs, books, periodicals, and software. Under this model, ISPs would
license digital works from their copyright owners at wholesale prices set
by the owners. ISPs would then sell the digital works to their subscribers
at retail prices set by the ISPs.4
Many groups would benefit from this model. ISPs would embrace this
model because of its potential for great profit. Consumers would embrace
this model because it gives them the choice and convenience they crave
despite making them pay for digital works. Moreover, digital middle-
men--website operators, peer-to-peer (P2P) networks, newsgroup and
chat room hosts, Internet search engines, and online radio and television
stations--could serve as promoters and distributors without fear of direct,
contributory, or vicarious copyright liability. Computer and consumer
electronics manufacturers and software companies would be able to invent
and innovate to the best of their abilities without regulation of their prod-
ucts' designs. And although copyright owners would lose the right to pre-
vent the unauthorized digital redistribution of their works, they would gain
the ability to set their own wholesale prices in the form of royalties paid
by ISPs.
Digital Rights Management technology (DRM) makes this business
model possible. DRM encompasses a variety of technologies used to iden-
tify digitized works5
and to control their use.6
Although The Wall Street
Journal did not offer the record industry any suggestions for a new busi-
ness model, others have offered suggestions. All of these suggested busi-
ness models exhibit some DRM features.7
Thus, DRM appears to be at the
foundation of whatever business models will actually succeed in the digi-
tal age. Part II begins by describing a variety of these DRM-based busi-
ness models. Some are being used already.8
Others have been proposed
4. See infra Part III.A (giving a more detailed description of this model).
5. See, e.g., 17 U.S.C. § 1202(c) (2000) (defining "copyright management infor-
mation"); WIPO Copyright Treaty, Dec. 20, 1996, art. 12(2) (defining "rights manage-
ment information"), available at http://www.wipo.int/clea/docs/en/wo/wo033en.htm.
6. See, e.g., 17 U.S.C. § 1201(a)(3)(B) (2000) (defining technical measures that
"effectively control[] access to a work"); 17 U.S.C. § 1201(b) (2000) (prohibiting in most
cases technology that circumvents access controls on a copyrighted work); WIPO Copy-
right Treaty, supra note 5 (defining "rights management information").
7. See infra Part II.D.
8. See infra Parts II.C and II.D.2.
DRM AS AN ENABLER OF BUSINESS MODELS
but are not yet being used.9
These models employ several different DRM
technologies imposing a wide range of controls, from none to extensive,
over the design of equipment used by consumers and the ways in which
consumers may use the works they acquire. In a table, I place these mod-
els along this spectrum of control so that their relationship to each other
can be seen.10
I then describe the "ISPs as Digital Retailers" model and
place it along the spectrum of control so it too can be seen in relation to
others.11
Following this, I specifically compare the Digital Retailers model
to the "Tax and Royalty System," another promising and practical model
that has attracted some attention and support.12
I conclude that the Digital
Retailers model satisfies more objectives than the Tax and Royalty Sys-
tem.13
Finally, I acknowledge that the Digital Retailers model is not prob-
lem-free and identify several problems that would need to be solved in or-
der for the Digital Retailers model to be successful.14
II. DRM-BASED BUSINESS MODELS
A. The Role of Control
DRM's ability to give copyright owners the ability to control the use
of their works is both the beauty of DRM (from the point of view of copy-
right owners) and its bane (from the point of view of many consumers and
technology companies). As a result, it is useful to begin with a few words
about the role of control by copyright owners and technology companies.
Copyright owners value control over their works because unauthorized
copying and redistribution destroys their ability to market their works in
two ways. First, the copyright industry's business models envision selling
multiple copies of a work at per copy prices that are a fraction of the cost
of producing those works. Uncontrolled copying and redistribution de-
stroys this plan because unauthorized digital copies displace sales and per-
formances. Second, unauthorized copying and redistribution of copy-
righted works prevents copyright owners from changing the price of their
works over time in ways they hope will maximize their incomes.
The marketing section of every thorough business plan depends on
pricing strategies. Ideally, copyright owners should charge higher prices to
those customers who value the sellers' goods and are best able to afford
9. See infra Parts II.B and II.D.1.
10. See infra Part II.D.2.
11. See infra Parts III.A and III.B.
12. See infra Part III.B.
13. See infra Part III.C.
14. See infra Part III.D.
BERKELEY TECHNOLOGY LAW JOURNAL
higher prices. Similarly, owners should charge lower prices to customers
who do not value their goods as much or are less able to afford them.
Economists refer to this as "price discrimination." A successful business
model should not force copyright owners to charge the same price to all
buyers because the owners will lose the ability to maximize profits
through price discrimination.15
Some have argued that copyright owners do not have the ability to en-
gage in perfect price discrimination.16
But successful business plans do not
require perfect price discrimination. Copyright owners only need the abil-
ity to price discriminate a little, as in these familiar examples:
· Hardcover books come out before and cost more than paperback reprints.
· Most movies come out in theaters before they are available to rent on
DVDs and videocassettes. Movie theater tickets cost more than rentals;
rentals cost more than viewing movies on pay-TV; and viewing movies
on pay-TV generally costs more than watching movies on advertiser-
supported TV.
· Buying a DVD or videocassette costs more than renting one.
· New albums by musical artists cost more than "greatest hits" compila-
tions; these compilations cost more than multi-artist albums compiled by
theme.
· Full-featured versions of computer software cost more than "lite" ver-
sions; and "lite" versions cost more than "trial" versions.
In other words, business plans for the marketing of copyrighted works
are based on the ability to do sequential but separate releases of those
works. In entertainment businesses, the sequence of releases for successful
works spans a long time. Copyright owners seek control over the use of
their works because uncontrolled copying and redistribution of works in-
terferes with the success of long-term sequential release.
Technology companies have similar concerns, but not to the same de-
gree, because for them design innovations are central to their business
plans. They fear that legal regulation of their products' features would in-
terfere with product innovation, and thus interfere with their business
plans. For example:
15. See, e.g., ProCD v. Zeidenberg, 86 F.3d 1447, 1449-50 (7th Cir. 1996) (explain-
ing price discrimination).
16. Neil Weinstock Netanel, Impose a Noncommercial Use Levy to Allow Free P2P
File-Swapping and Remixing 19-20 (Nov. 2002) (unpublished manuscript, available at
http://www.utexas.edu/law/faculty/nnetanel/Levies_chapter.pdf).
DRM AS AN ENABLER OF BUSINESS MODELS
· Computers running text-only DOS operating systems were perfectly ade-
quate for word processing and spreadsheets. If legal regulation had pro-
hibited the implementation of graphical user interfaces on the grounds
that such interfaces could be used to infringe photograph copyrights or
display pornography, the computer and software industries may have
been frozen at their pre-Windows and pre-Macintosh stages of develop-
ment.
· Personal computers were widely used in business and by consumers be-
fore PCs could be used to access the Internet. If legal regulation had pro-
hibited the use of telephone modems on the grounds that modems can be
used to infringe copyrights or transmit pornography, email would not be
available today to businesses or consumers.
Therefore, the basic tension between the copyright and technology in-
dustries is the tension between the degree of control copyright owners
would like to have over their works and the extent to which technology
companies should legally be required to facilitate and respect that control.
Because control is so central to the significance of DRM, this article next
describes several digital business models that exhibit a different degree of
control over a phenomenal range. On one end of this spectrum, the "anti-
copyright"17
models advocate almost no control over the distribution of
copyrighted works. On the other extreme, the "beyond-copyright"18
mod-
els give owners even more control over copying and distribution than
granted by copyright protection. The "copyright-based"19
models occupy
the middle of this spectrum of control.
B. The "Anticopyright" Model
The anticopyright model would eliminate copyright entirely in the
online digital domain.20
DRM may play a role in this model, but only to
identify authors whom audiences may choose to compensate with "tips."21
No one seems to have suggested that eliminating copyright and replacing
it with tips would actually succeed in providing a living wage for anyone,
17. See infra Part II.B.
18. See infra Part II.C.
19. See infra Part II.D.
20. See, e.g., Mark S. Nadel, Questioning the Economic Justification for Copyright
3 (Feb. 21, 2003) (unpublished manuscript, available at http://papers.ssrn.com/sol3/-
papers.cfm?abstract_id=322120); Netanel, supra note 16, at 17.
21. See, e.g., TipJar LLC, Internet Treasury Home Page (website allowing online
tipping of recording artists), at www.tipjar.com (last visited Mar. 20, 2003); Musiclink,
Give It. Get It. Not For Profit (same), at www.fairtunes.com (last visited Mar. 20, 2003).
BERKELEY TECHNOLOGY LAW JOURNAL
and the current online tip-systems have so far given musicians only mod-
est compensation.22
C. The "Beyond-Copyright" Models
At the other extreme from the anticopyright model are two models that
would provide even more protection than current copyright laws.
The first beyond-copyright model allows publishers to use DRM to
control access to works, even those in the public domain, to prevent their
unauthorized copying and distribution. Although I could find no commen-
tary on this first model, the technology needed for the model seems to ex-
ist. Passwords would control access to works, and encryption and water-
marks23
would prevent unauthorized uses. Under this model, circumven-
tion would be a punishable offense, but everyone would be free to digitize
and distribute their own versions of works in the public domain, at their
own expense, without liability. This model, however, would prevent any-
one other than the publisher from copying existing digital versions. In
other words, the model would prevent users from free riding on a pub-
lisher's investment in digitizing a work--even a work in the public do-
main.
The second beyond-copyright business model does not go quite as far.
Companies practicing this model would use DRM to control access to
public domain materials, but would not control copying or redistribution
of these works. For example, Westlaw and LEXIS distribute digital ver-
sions of public domain works to subscribers, unencrypted, with copying
and redistribution controlled, if at all, merely by contract. The United
States government also uses this model in its pay-per-page PACER system
for the digital distribution of federal court judicial decisions.24
D. Copyright-Based Models
Between the anticopyright and beyond-copyright models are two sets
of copyright-based models. Both sets of models seek to extend existing
copyright law into the digital domain. One set would impose statutory li-
censes that authorize digital uses of copyrighted works. The other set
would give copyright owners discretion over licensing terms and control
over unauthorized uses of their works.
22. See, e.g., Chris Kelsey, Bandwidth: Passing the Virtual Hat, Onstage (Dec. 1,
2001), at http://onstagemag.com/ar/performance_bandwidth_passing_virtual (quoting a
band member saying that "Nobody every contributed" a tip through the voluntary pay-
ment systems until "someone gave us a contribution through Fairtunes . . . [of] $300!").
23. See infra Part III.A.2 (describing watermark technology).
24. PACER Service Center, Public Access to Court Electronic Records: Overview,
at http://pacer.psc.uscourts.gov/pacerdesc.html (last visited Mar. 14, 2003).
DRM AS AN ENABLER OF BUSINESS MODELS
1. Statutory License Models
Two statutory license models have been proposed, one by Neil
Netanel25
and the other by William (Terry) Fisher.26
Because both would
require amendments to the Copyright Act, neither has yet been put into
practice.
Professor Netanel has proposed a "Noncommercial Use Levy."27
This
model permits noncommercial copying, distribution, performance, and
adaptation of copyrighted works in return for levies paid by the providers
of products and services whose value is enhanced by file swapping.28
A
statutory license would allocate these collected levies among the catego-
ries of copyright owners (record companies, movie producers, book pub-
lishers, and so forth), and then among individual copyright owners within
each category.29
Those entitled to levies would receive them in proportion
to how often their works were used.30
Unless affected industry segments
themselves agreed on the levies, Copyright Office arbitrations would de-
termine the levy amount applied to each type of product or service.31
Pre-
sumably, Copyright Office arbitrations would also settle disputes over al-
location to copyright owners.
Professor Fisher has proposed a "Tax and Royalty System."32
Under
this system, the government would tax ISP access and any technology
used to perform music, including MP3 players, hard drives, and com-
puters. The collected revenues would be distributed to copyright owners in
proportion to how often their works are accessed. Professor Fisher's pro-
posal focuses on the recorded music industry in particular, but there is no
reason his Tax and Royalty System could not be used to compensate copy-
right owners in other industries as well.
The Noncommercial Use Levy and the Tax and Royalty System both
use DRM to monitor the frequency with which users access particular
25. Netanel, supra note 16.
26. William Fisher, Digital Music: Problems and Possibilities (Oct. 10, 2000) (un-
published manuscript, available at http://www.law.harvard.edu/Academic_Affairs/-
coursepages/tfisher/Music.html); see also Fisher @ FMC: Replace Copyright with Wa-
termarks, Taxes, available at http://www.corante.com/copyfight/20030101.shtml#17322
(Jan. 8, 2003).
27. Netanel, supra note 16.
28. Id. at 28-38.
29. Id. at 38-39.
30. Id. at 39.
31. See 17 U.S.C. §§ 801-803 (West 1996 & Supp. 2002).
32. Fisher, supra note 26.
BERKELEY TECHNOLOGY LAW JOURNAL
copyrighted works.33
Under both models, ISPs monitor the flow of copy-
righted files through their routers and record the frequency with which a
copyrighted work appears. The compiled data is used to allocate collec-
tions proportionately among copyright owners.
Royalty setting and royalty allocation, the two key features of these
models, are based on well-established elements of existing copyright law.
Copyright Office arbitrations already set statutory license fees and allocate
collected fees in connection with cable and satellite retransmissions of
copyrighted movies, television programs, the musical compositions in
their soundtracks,34
and with consumer duplication of digital music re-
cordings.35
The same arbitrations also determine the license fees for cer-
tain online digital performances of music recordings36
although Congress
itself has already specified the allocation of digital performance royalties
among those entitled to receive them.37
Although the Noncommercial Use Levy and the Tax and Royalty Sys-
tem are similar, they differ in at least one important respect. The Non-
commercial Use Levy permits users to create new versions of digital
works in addition to making and redistributing copies.38
The Tax and Roy-
alty System, on the other hand, does not contemplate the creation of new
versions; it simply authorizes copying and redistribution.39
Thus, the Tax
and Royalty System leaves more control in the hands of copyright owners,
namely the right to license the creation of new versions of their works on
terms agreed to in private negotiations.
2. Models Giving Copyright Owners Discretion and Control
Several other models give copyright owners discretion over licensing
terms and control over unauthorized uses of their works rather than im-
pose statutory licenses. These models are being used now (and what fol-
lows are my own descriptions of their key features).
33. See infra Part III.A.2 (describing watermarking and fingerprinting technologies
that can monitor the frequency with which individual works are used).
34. 17 U.S.C. § 111(d) (2000) (describing statutory license fees and allocation for
secondary transmission of copyrighted works by cable companies); 17 U.S.C. § 119(b)
(2000) (describing statutory license fees and allocation for secondary transmission of
television stations by satellite carriers); 17 U.S.C. § 122 (2000) (describing statutory li-
cense fees and allocation for secondary transmission of television broadcasts by satellite
carriers within local markets).
35. 17 U.S.C. §§ 1003-1008 (2000).
36. 17 U.S.C. § 114 (2000).
37. Id. § 114(g)(2).
38. Netanel, supra note 16, at 29.
39. See Fisher, supra note 26.
DRM AS AN ENABLER OF BUSINESS MODELS
One model gives copyright owners access control, using passwords as
the only DRM feature. This model does not control copying or redistribu-
tion, and thus does not require encrypting the distributed content. Familiar
examples of this model include the online editions of The New York Times
and The Wall Street Journal. Both websites require registration to obtain a
password that is necessary for access. Use of The New York Times' site is
free to anyone. By contrast, The Wall Street Journal's site requires all us-
ers, including those who subscribe to the paper edition, to pay an on-line
subscription fee. Both companies enforce their password requirements us-
ing technologies that run on their own servers. A user's computer does not
require password-related design features or website-specific software.
A second model gives copyright owners copy and redistribution con-
trol in addition to access control. Under this model, encryption restricts
access to those using special software provided by or on behalf of copy-
right owners. This software controls what those who are given access may
do with materials, allowing only authorized uses. Familiar examples of
this model include publications in the Adobe eBook format, and audio and
video materials in the RealMedia and Windows Media formats.
A third model gives copyright owners control over access, but not over
copying or redistribution, by using encryption instead of password protec-
tion. This model requires authorized users to have specially designed
equipment to receive and decrypt materials. Companies that manufacture
the necessary equipment voluntarily incorporate the necessary design fea-
tures into their equipment; they are not compelled to do so by law. This
model is used by cable systems and satellite TV companies.
A fourth model uses encryption to give copyright owners control over
access, copying, and redistribution. This model, like the previous model,
requires authorized users to have specially designed equipment to access
and decrypt materials. Manufacturers of this equipment also incorporate
necessary design features voluntarily; they are not required by law to do
so. This model is used in connection with movie DVDs which are en-
crypted and then decrypted using the Content Scramble System (CSS).40
The record industry's Secure Digital Music Initiative (SDMI) would have
used this model.41
Although SDMI was not implemented in connection
40. See Universal City Studios v. Corley, 273 F.3d 429, 436-37 (2d Cir. 2001);
Dean S. Marks & Bruce H. Turnbull, Technical Protection Measures: The Intersection of
Technology, Law and Commercial Licenses, 46 J. COPYRIGHT SOC'Y U.S. 563, 578-86
(1999).
41. Marks & Turnbull, supra note 40, at 592-95.
BERKELEY TECHNOLOGY LAW JOURNAL
with commercially released CDs, some record companies are now using
similar technologies based on this model.42
Finally, a fifth model uses DRM to give copyright owners access,
copy, and redistribution controls over digital works that are not encrypted,
but contain digital data that prevent unauthorized uses of those works. Be-
cause these works are not encrypted, this model works only if computers
and consumer electronics devices contain circuitry that recognizes and re-
sponds to the authorized use information. Without such circuitry, com-
puters and other devices would play unencrypted works and permit them
to be copied and redistributed. One example of this model is the Serial
Copy Management System, intended to permit record companies to con-
trol digital copying of recorded music.43
This system, which is at the heart
of the Audio Home Recording Act of 1992, requires digital audio record-
ers to be equipped with circuitry that prevents them from being used to
make serial copies (that is, copies of copies) of digital recordings.44
The
commercial significance of that ban was largely undercut by the advent of
MP3 technology for storing recorded music and consumers' use of com-
puters, rather than digital audio recorders, to copy and redistribute MP3
files. MP3 technology undermines the Serial Copy Management System
because the Audio Home Recording Act exempts computers from the need
to have anti-copying circuitry.45
Nevertheless, this fifth model remains at the forefront of current de-
bates about the proposed "Broadcast Flag System" for restricting the use
of unencrypted digital television broadcasts.46
These debates are the result
of an FCC mandate that digital television broadcasting be introduced na-
tionwide by 2006.47
Movie and television producers are not going to pro-
vide expensive content for digital TV broadcasts if that content can easily
be copied and forwarded over the Internet to recipients around the world.
42. See, e.g., Fat Chuck's, Corrupt CDs + News, at http://www.fatchucks.com/-
z3.cd.html (updated Nov. 9, 2002).
43. See Recording Indus. Ass'n, Inc. v. Diamond Multimedia Sys., Inc., 29 F. Supp.
2d 624, 631-32 (C.D.Cal. 1998), aff'd, 180 F.3d 1072 (9th Cir. 1999); Marks & Turnbull,
supra note 40, at 592-95.
44. 17 U.S.C. § 1002 (2000).
45. 17 U.S.C. § 1001(5)(B)(ii) (2000); Recording Indus. Ass'n, Inc., 29 F. Supp. at
631.
46. Digital Broadcast Copy Protection, MB Docket No. 02-230, FCC 02-231, at 2-3
(released Aug. 8, 2002) (Notice of Proposed Rulemaking), available at http://hraunfoss.-
fcc.gov/edocs_public/attachmatch/FCC-02-231A1.pdf (last visited May 5, 2003)..
47. Advanced Television Systems and Their Impact upon the Existing Television
Broadcast Service, MM Docket No. 87-268, FCC 97-116, at 43 (released Apr. 21, 1997)
(DTV Fifth Report and Order), available at http://www.fcc.gov/Bureaus/Mass_Media/-
Orders/1997/fcc97116.pdf (last visited May 5, 2003).
DRM AS AN ENABLER OF BUSINESS MODELS
As a result, the lack of effective copy protection methods may hinder the
development of digital TV broadcasting by greatly reducing the amount of
attractive programming that is made available for it.
The Broadcast Flag copy protection method was the centerpiece of a
bill in the 107th Congress formally entitled the "Consumer Broadband and
Digital Television Promotion Bill."48
The bill, commonly referred to as the
"Hollings Bill," would have required "digital media devices" to provide
"effective security for copyrighted works."49
The 107th Congress ad-
journed without enacting or even voting on the Hollings Bill, but that does
not delay the effective date of nationwide digital TV broadcasting.
With these developments in mind, the FCC recently issued a Notice of
Proposed Rulemaking by which the Commission invited comments on
whether it should adopt rules that would mandate the incorporation of
copy protection technology into television receivers and other consumer
electronics devices, such as digital TV recorders.50
An alliance of copy-
right owners, broadcasters, and entertainment industry unions has urged
the FCC to adopt a rule that would require devices to recognize and re-
spond to "Broadcast Flags" included in digital TV broadcasts. These
Broadcast Flags would indicate whether those broadcasts may be redis-
tributed outside the recipient's home.51
Broadcast Flags do not encrypt
unencrypted digital TV signals. Therefore, the Broadcast Flag System
would require devices that receive and process digital broadcasts to recog-
nize whether particular signals may be redistributed outside the recipient's
home. Additionally, those devices would not permit redistribution if a sig-
nal's Broadcast Flag does not authorize it.
The following chart recaps these business models (excluding the anti-
copyright and beyond-copyright extremes). Those that protect copyright
the most are at the top of the chart; those that protect copyright the least
are at the bottom. The chart also reflects the technology required to im-
plement each business model. Not coincidently, the chart shows that pro-
viding more control over copyrighted works requires more control over
technology under the business models discussed thus far.
48. S. 2048, 107th Cong. (2002), available at http://thomas.loc.gov/cgi-bin/query/-
z?c107:S.2048: (last visited May 4, 2003).
49. Id. § 3(d).
50. Digital Broadcast Copy Protection, MB Docket No. 02-230, FCC 02-231 (re-
leased Aug. 8, 2002) (Notice of Proposed Rulemaking), available at http://hraunfoss.fcc.-
gov/edocs_public/attachmatch/FCC-02-231A1.pdf.
51. Digital Broadcast Copy Protection, MB Docket No. 02-230 (released Dec. 6,
2002) (Joint Comments of the Motion Picture Association of America, et al.), available
at http://www.mpaa.org/Press/MPAA_Comments_02-230.pdf (last visited May 5, 2003).
BERKELEY TECHNOLOGY LAW JOURNAL
ControlsCopy-
right
Con-
trol
Business
Model
Enabling
Technology
Access Copy Redis-
trib.
Control
over
Tech-
nology
SCMS for
digital audio
music record-
ers; Broadcast
Flag System
for digital TV
broadcasts
Watermarks:
Equipment
must contain
legally man-
dated features
Yes Yes Yes
CSS for
DVDs; SDMI
for music
CDs
Encryption:
Equipment
must contain
voluntarily
installed fea-
tures
Yes Yes Yes
Adobe
eBook,
RealMedia,
Windows
Media
Encryption:
Requires only
special soft-
ware to read
Yes Yes Yes
Cable and
satellite TV
Encryption:
Equipment
must contain
voluntarily
installed fea-
tures
Yes No No
N.Y. Times/
Wall St. J.
online
Passwords:
No special
user technol-
ogy required
Yes No No
Tax and Roy-
alty System
Watermarks:
No special
user technol-
ogy required;
watermarks
used for roy-
alty allocation
only
No No No
More
Less
Noncommer-
cial Use Levy
Watermarks:
No special
user technol-
ogy required;
watermarks
used for roy-
alty allocation
only
No No No
More
Less
DRM AS AN ENABLER OF BUSINESS MODELS
III. ISPS AS DIGITAL RETAILERS MODEL
The birth of my Digital Retailers model occurred in connection with a
panel discussion on P2P computing sponsored by the Berkeley Center for
Law & Technology during the 2002 Spring semester. The discussion in-
cluded a debate between panelists who advocated unimpeded P2P comput-
ing even when P2P networks were used for unauthorized distribution of
digital files of copyrighted works and panelists who advocated imposing
liability on facilitators of P2P computing if they knew their technologies
were being used for unauthorized distribution of copyrighted works. The
debate took place in the wake of A&M Records, Inc. v. Napster, Inc.52
and
much of the discussion dealt with the nuances of vicarious and contribu-
tory infringement, and with "safe harbors" under the Digital Millennium
Copyright Act.53
The panel's organizers asked me to talk about whether there was a "so-
lution" to the "P2P problem." It occurred to me that since P2P computing
takes place on the Internet and all P2P users use ISPs to get access to the
Internet, ISPs could play an important role in a possible solution. But I did
not think that ISPs could solve the P2P problem at their own, un-
reimbursed expense. If ISPs are going to be used as de facto distributors of
copyrighted digital works, ISPs could be made legal distributors of these
works as well. ISPs could be persuaded to take on the role of authorized
distributors by giving them financial incentives. In the world of physical
goods, a retailer's financial incentive is the spread between the wholesale
and retail prices of those goods. It seemed to me that the same incentive
could be given to ISPs in return for their serving as digital retailers.
A. How the Digital Retailers Model Would Work
1. Overview
Under the Digital Retailers model, people would use the Internet much
as they do now. They would connect to the Internet through dial-up or
broadband accounts with ISPs. While online, they would visit websites,
newsgroups, chatrooms, email servers, and P2P peers. And while visiting
these destinations, they would download or stream digital content to their
computers. But for digital content containing copyrighted works, the own-
ers of the copyrights would have the right to digitally identify each work,
its owner, and the wholesale royalty price to be paid by ISPs for its trans-
mission to users.54
As content identified in that fashion passed through
52. 284 F.3d 1091 (9th Cir. 2002).
53. 17 U.S.C. § 512(d) (2000).
54. See infra Part III.A.2 (describing the technology by which this can be done).
BERKELEY TECHNOLOGY LAW JOURNAL
ISPs' routers to their users, ISPs would log those transmissions and bill
users' accounts monthly for the content they received, at retail royalty
rates set by ISPs, using the same billing methods by which ISPs now
charge users for Internet access.
To protect users from downloading unwanted works55
or incurring ex-
orbitant charges, ISPs could send pop-up notices before the actual files are
transmitted. These pop-up notices would inform users that files requiring
payments are about to be sent and would display the cost of sending the
file. These pop-up notices could look and work like virus warnings seen
today, and users would respond to them by clicking "Yes" or "No" but-
tons.
2. Enabling DRM Technologies
For ISPs to become digital retailers, they must be able to track each
user's access to digital versions of copyrighted works and record those
users who download and purchase these digital versions. ISPs can monitor
copyrighted file access using two types of existing DRM technologies:
"watermarking" and "fingerprinting."
Digital watermarks are digital identifications inserted into digital cop-
ies of works when they are manufactured.56
People cannot hear or see wa-
termarks, but computers and software can detect them.57
Few digital ver-
sions of works on the Internet contain watermarks because many digital
copies of copyrighted works are created without watermarks. For example,
when consumers digitally copy analog works from music cassettes, video
tapes, photographs, and texts, they do not insert watermarks into the cop-
ies they make. Consumers can also strip a watermark off a digital work by
converting the work to analog and then recording the work back into a
digital format.
In addition to watermarking, copyright owners can create digital iden-
tifiers for copies of their works by "fingerprinting" a digital version of
their work. Fingerprinting converts the work's content into a unique digi-
tal identification mark by applying an algorithm to selected features of that
content.58
55. See infra Part III.D.2.
56. See generally Digimarc Corp., Digital Watermarking Frequently Asked Ques-
tions, at http://www.digimarc.com/products/support/faqs.asp (defining and discussing
digital watermarking).
57. Id.
58. See generally Audible Magic Corp., Home Page, at www.audiblemagic.com
(describing one patented audio fingerprinting process).
DRM AS AN ENABLER OF BUSINESS MODELS
Together, watermarking and fingerprinting can provide digital identifi-
cations for every digital work that copyright owners choose to have identi-
fied. ISPs can use these identifications to recognize works transmitted as
digital files through networks connected to ISPs, which includes transmis-
sions from websites, over P2P networks, and as attachments to emails or
instant messages. Information about the copyright owner of each water-
marked and fingerprinted work could be stored in a database along with
the wholesale royalty price the copyright owner has decided to charge for
the work's transmission to the ISP's customer. As these works pass
through ISPs' routers, ISPs would identify the works and determine their
wholesale royalties by checking their watermarks or fingerprints against
the database. ISPs would then apply their retail markup and charge their
customers' accounts for works they download.
3. Implementation of the Technology by ISPs
Under the Digital Retailer model, the technology used to identify wa-
termarked and fingerprinted files would reside on ISPs' computers, not on
the end-users' computers or on consumer electronic devices. This distinc-
tion is important for four reasons.
First, putting the technology on ISPs' computers frees computer and
consumer electronics manufacturers and software companies to innovate
without legal restrictions on their products' designs. Although ISPs would
have to acquire, install, and use the enabling technology just described,
that technology would not have to be used by consumers or by operators
of websites, P2P networks, newsgroups, and chatrooms.59
Second, putting the technology on ISPs' computers makes circumven-
tion less likely. CSS, Adobe eBook and SDMI--all of which are imple-
mented on consumers' computers--were circumvented quite quickly.60
One recent technical report persuasively argued both that watermark de-
tection technology implemented in software on users' computers or elec-
tronic devices could be easily defeated and that detection technology im-
plemented in hardware makes the computers and devices obsolete too
quickly.61
59. See supra Part III.A.2.
60. See, e.g., Universal City Studios v. Corley, 273 F.3d 429, 436-37 (2d Cir. 2001);
United States v. Elcom Ltd., 203 F. Supp. 2d 1111 (N.D.Cal. 2002); Scott A. Carver et
al., Reading Between the Lines: Lessons from the SDMI Challenge, available at
http://www.usenix.org/events/sec01/craver.pdf (visited Mar. 14, 2003).
61. Peter Biddle, et al., The Darknet and the Future of Content Distribution, avail-
able at http://crypto.stanford.edu/DRM2002/darknet5.doc (visited Mar. 14, 2003).
BERKELEY TECHNOLOGY LAW JOURNAL
Third, all users of an online service connect to the Internet through
ISPs, and thus can be billed by their ISPs for whatever copyrighted works
they access. ISPs can already meter the bandwidth usage of each of their
subscribers, and several ISPs may begin charging subscribers based on
usage rather than flat monthly fees.62
Fourth, an Internet user could download many copyrighted works dur-
ing a single online session. Furthermore, the royalties requested for these
works could vary from fractions of a cent to hundreds of dollars. This pre-
sents both a problem and a potential solution.63
Many website operators
will likely use only royalty-free works to avoid driving away users unwill-
ing to pay for copyrighted content.64
To minimize the royalty and billing
data that has to be processed, ISPs may create two channels for Internet
access. One would allow access to royalty-bearing works; the other would
not. The no-royalty channel would display icons to indicate that royalty-
bearing works were available but blocked. Users would be able to switch
back and forth between the two channels with a mouse click to selectively
access royalty-bearing works or to avoid them.
4. Statutory License
The Digital Retailer model would require copyright owners, by statute,
to permit the copying and redistribution of their works, but would not re-
quire copyright owners to watermark or fingerprint their works. By choos-
ing not to watermark or fingerprint their works, owners would allow ISPs
and subscribers to freely transfer the works. In contrast, the statute would
require ISPs to pay royalty charges for each watermarked or fingerprinted
copyrighted work downloaded. This arrangement is thus equivalent to a
statutory license because it authorizes copying and redistribution of copy-
righted works without negotiated licenses from copyright owners. But
while this proposed license authorizes the use of copyrighted works, it also
requires ISPs to pay royalties at whatever rates copyright owners set.
All ISPs that have relationships with end users who access copyrighted
works would have to pay royalties. These ISPs would include:
· ISPs that provide Internet access to dial-up and broadband subscribers,
62. John Borland, ISP download caps to slow swapping?, CNET News.com (Nov.
26, 2002), at http://business2-cnet.com.com/2100-1023-975320.html.
63. See infra Part III.D (acknowledging and discussing other potential problems
with the Digital Retailer model).
64. See infra Part III.A.4 (discussing copyright owners' royalty options, including
the option not to charge a royalty).
DRM AS AN ENABLER OF BUSINESS MODELS
· colleges and corporations that provide Internet access to students and
employees,
· libraries that provide Internet access to patrons, and
· coffee shops, airports and other public places that provide Wi-Fi access
to customers and travelers.
Currently, most colleges, corporations, libraries, and Wi-Fi-equipped
coffee shops do not have billing relationships with their users.65
These
providers have two options: (1) create billing relationships with their users
or (2) allow users to access only the no-royalty channel described above.66
ISPs themselves would not have to bear the cost of copyright royalties.
Instead, they would be authorized to charge subscribers for the water-
marked and fingerprinted files they receive, presumably at a rate greater
than the copyright owner's fee. In most cases, a markup of 100% is likely.
That is, ISPs would retain about 50% of the retail price paid by subscrib-
ers, and would pay about 50% to copyright owners. This is the traditional
split between retailers and publishers in the book business, between retail-
ers and record companies in the music business, and between theater own-
ers and distributors in the movie business.
But a 100% markup from wholesale or a 50/50 split of retail would not
be required. In the world of physical goods, retailers are as varied as Ro-
deo Drive boutiques whose markups may exceed 100% to Main Street
warehouse-style discount stores whose markups may be 20% or less. In
the world of digital content, ISPs may use low retail prices as a competi-
tive tool to attract subscribers from ISPs that charge higher prices. Some
ISPs may offer subscribers bulk-purchase plans, just as cell phone compa-
nies offer local and long-distance packages as alternatives to minute-by-
minute charges.
B. The Digital Retailer Model Compared to Other Business
Models
If the Digital Retailer model were placed in the business model chart,
it would be slotted above the Tax and Royalty System, but beneath the
others:
65. But some Wi-Fi-equipped airports will have a billing relationship with its users.
See Reuters, AT&T Wireless to Provide Wi-Fi in Hotels, Airports (Jan. 28, 2003), avail-
able at http://www.azcentral.com/shopping/0128NET-TELECOMS-ATT-REPORT-DC.-
html.
66. See supra Part III.A.3.
BERKELEY TECHNOLOGY LAW JOURNAL
ControlsCopy
right
Con-
trol
Business
Model
Enabling
Technology
Access Copy Redist
rib.
Control
over
Tech-
nology
SCMS;
Broadcast
Flag Sys-
tem
Watermarks:
Equipment must
contain legally
mandated features
Yes Yes Yes
CSS; SDMI
Encryption:
Equipment must
contain voluntarily
installed features
Yes Yes Yes
Adobe
eBook,
RealMedia,
Windows
Media
Encryption:
Requires only spe-
cial software to
read
Yes Yes Yes
Cable and
satellite TV
Encryption:
Equipment must
contain voluntarily
installed features
Yes No No
N.Y.
Times/
Wall St. J.
online
Passwords:
No special user
technology
Yes No No
ISPs as
Digital Re-
tailers
Watermarks and
Fingerprints:
Requires monitor-
ing technology on
ISPs' computers;
watermarks and
fingerprints used
for royalty assess-
ment and payment
No No No
Tax and
Royalty
System
Watermarks:
No special user
technology; wa-
termarks used for
royalty allocation
only
No No No
More
Less
Noncom-
mercial Use
Levy
Watermarks:
No special user
technology; wa-
termarks used for
royalty allocation
only
No No No
More
Less
DRM AS AN ENABLER OF BUSINESS MODELS
The Digital Retailer model is similar to the Tax and Royalty System
because both rely on ISPs to collect royalties from their subscribers, both
use DRM to identify digital works accessed over the Internet, and both use
DRM-enabled identifications to allocate collections among copyright
owners entitled to receive royalties. In addition, because the Digital Re-
tailer model does not require access, copy, or redistribution controls, it al-
lows technology companies to innovate with new product designs as under
the Tax and Royalty System.
The Digital Retailer model, however, is preferable to the Tax and
Royalty System. The Tax and Royalty System deprives copyright owners
of the ability to determine the royalty value of their own works and to vary
their prices over time. By contrast, the Digital Retailer model allows copy-
right owners to do both. The ability to vary prices over time--quite likely
by reducing the royalties set for individual works as those works get
older--is the way in which copyright owners will be able to price dis-
criminate,67
even with uncontrolled copying and redistribution.
The Tax and Royalty System also requires expensive and time-
consuming legal proceedings, both to establish royalty rates and to distrib-
ute collected royalties.68
For the Copyright Office to determine the statu-
tory license fee for digital transmission of recorded music has required
many steps: an arbitration, a decision by the Librarian of Congress, a
Copyright Act amendment, a privately-negotiated interim agreement, and
a still-pending judicial appeal.69
One Copyright Office arbitration costing
more than $41,000 was necessary to resolve conflicting claims to digital
audio recording royalties totaling just $6.10 split between two songwriters
and a music publisher.70
Moreover, each of these proceedings involved
works of just one type: recorded music in the digital transmission proceed-
ing and musical compositions in the digital audio recording proceeding.
Under the Tax and Royalty System, rate setting and royalty distribution
67. See supra Part II.A.
68. See, e.g., Karen Fessler, Comment, Webcasting Royalty Rates, 18 BERKELEY
TECH. L.J. 399 (2003) (describing the shortcomings of the CARP process).
69. Rate Setting for Digital Performance Right in Sound Recordings and Ephemeral
Recordings, Docket No. 2000-9, Library of Congress: Copyright Office (Feb. 20, 2002),
available at http://www.copyright.gov/fedreg/2002/67fr4472.html; Determination of
Reasonable Rates and Terms for the Digital Performance of Sound Recordings and
Ephemeral Recordings; Final Rule, Library of Congress: Copyright Office, 67 C.F.R.
130 (July 8, 2002), available at www.copyright.gov/carp/webcast_regs.html; Small
Webcaster Settlement Act of 2002, H.R. 5469 (2002), available at www.copyright.gov/-
legislation; Rates and Terms Available to Certain Small Commercial Webcasters (Dec.
13, 2002), available at http://www.soundexchange.com/Rates_Terms.pdf.
70. Digital Audio Recording Royalty Proceeding was Much Ado About Very Little
. . . Measured in Dollars, 23 NO. 1 ENT. L. REP. 7 (2001).
BERKELEY TECHNOLOGY LAW JOURNAL
proceedings will be infinitely more complex than in those proceedings be-
cause digital works range from $600 computer programs to $1 recorded
music tracks. Leaving software out of the plan altogether does not solve
the problem: unlicensed MP3 files have been the most newsworthy, but
the problem encompasses unlicensed redistribution of computer programs
as well.
However, I acknowledge that tracking copyrighted works would be
less cumbersome under the Tax and Royalty System than under the Digital
Retailer model. The Tax and Royalty System does not require ISPs to de-
termine or track which users have accessed particular works. This system
may be able to allocate collections using data obtained by digital file sam-
pling in much the same way that ASCAP and BMI sample radio play of
musical compositions before allocating public performance royalties. The
Digital Retailer model, by contrast, requires complete file tracking and
end-user billing.
Nonetheless, technology already exists that can track individual wa-
termarked and fingerprinted files.71
Even if existing technology cannot yet
perform the tasks required for the Digital Retailer model to work, the issue
is one of scale rather than function. So while existing technologies may
have to be improved, it does not appear that any new technologies would
have to be invented.
The Noncommercial Use Levy system has all the drawbacks of the
Tax and Royalty System, plus one more: it would permit users to create
derivative works using downloaded digital works without the copyright
owner's consent.72
C. Objectives Satisfied
Having ISPs serve as digital retailers achieves several objectives.
First, copyright owners would receive payment for all uses of their
works--downloads, streams, and attachments--at royalty rates they set
themselves.
Second, consumers would have ready, legal access to digital versions
of copyrighted works, though they would have to pay for what they re-
ceive (just as we do in the physical world).
Third, website operators, P2P networks and users, emailers, instant
messengers, online indexes, and search engines would be able to legally
play whatever role they desire in the distribution of digital works without
getting further consent from copyright owners. Online indexes and search
71. See, e.g., Digimarc, Corp., supra note 56; Audible Magic Corp., supra note 58.
72. Netanel, supra note 16.
DRM AS AN ENABLER OF BUSINESS MODELS
engines would still be free to charge for their use or sell advertising space
on their display pages without sharing their revenues with copyright own-
ers. Copyright owners would be paid by ISPs if and when works are ac-
cessed. Websites and other online services that charge users for access
(like Westlaw and the online version of The Wall Street Journal) would
have to provide something of value to justify their fees because users
would be billed by their ISPs for access to copyrighted content itself. Sub-
scribers of a pay-for-access online service may not feel they are being
double billed if the service is well-organized, comprehensive, easy to use,
or otherwise earns its own access fee.
Fourth, computer and consumer electronics manufacturers and soft-
ware companies would be able to build and sell their products without any
legal constraints on how they are designed, and without any legal require-
ment that they contain, or not contain, certain features.
Fifth, ISPs would gain an incentive for potential customers to sub-
scribe to broadband service and a significant additional revenue source--
one that is likely to be equal in size to the revenues received by copyright
owners from the online distribution of copyrighted works.
D. Problems Requiring Solutions
Several obstacles stand in the way of successfully implementing the
Digital Retailer model.
1. Technological Measures Taken by Users to Avoid Being Billed
I have argued that the technology necessary to implement the Digital
Retailers model should be installed at the ISP level, rather than on users'
computers, to reduce the probability of user circumvention.73
I acknowl-
edge, however, that determined users could nevertheless circumvent the
technology.74
For example, watermarks or fingerprints in royalty-bearing
works can be hidden by encrypting those files before they are attached to
emails or transmitted over P2P networks,75
thereby preventing ISPs from
billing for those works. Users may also spoof their IP addresses,76
thereby
73. See supra Part III.A.3.
74. See supra Part III.A.2.
75. Ingemar J. Cox & Jean-Paul M.G. Linnartz, Some General Methods for Tamper-
ing with Watermarks, 16 IEEE J. SELECTED AREAS COMM. 587, 592 (1998) (explaining
how encryption can be used to defeat copy-control watermarks), available at http://debut-
.cis.nctu.edu.tw/~yklee/Research/Watermarking/Ingemar_J_Cox/IEEE-JSAC-1998-05.-
pdf.
76. Neil B. Riser, Spoofing: An Overview of Some the Current Spoofing Threats
(July 1, 2001), available at http://www.sans.org/rr/threats/spoofing.php.
BERKELEY TECHNOLOGY LAW JOURNAL
hiding their identities from their own ISPs and avoiding payment for
downloading royalty-bearing works.
The question is whether these and similar possibilities defeat the utility
of the Digital Retailers model. I conclude that they do not for three rea-
sons. First, this sort of behavior is a crime77
or can be made one. Second,
theft--for that is what this behavior would be--is a serious problem in the
physical world of retailing, but no one has suggested that we should elimi-
nate retail stores for that reason. Third, I believe that much unauthorized
digital distribution of copyrighted works is currently done by people who
suppose that it is legal. If users understood the illegality of encryption, IP
spoofing, and similar techniques to avoid paying for copyrighted works,
they would likely discontinue these practices.
2. Spamming
Since virtually all works transmitted online are eligible for copyright
protection and all copyright owners would be entitled to be paid at rates
they set themselves, unscrupulous authors may attempt to "game" the sys-
tem by spamming end-users with unwanted material in order to get royal-
ties. Technology may provide a solution to this problem; but if not, other
non-technical solutions may be available.
ISPs' routers would be alerted to the existence of copyrighted material
in files by watermarks or fingerprints before those files are transmitted to
Internet users. To prevent spamming, ISPs could send pop-up notices in-
forming users that files requiring payments are about to be sent for a cer-
tain cost before the actual files are transmitted. Users would then be given
an opportunity to click an on-screen button, indicating whether or not they
want the files sent. To users, the process would resemble virus warnings
seen today. Users would respond, the way they respond to virus warnings,
with a simple click of the mouse.
An alternate, non-technical solution may be drawn from the world of
credit card fraud. In order to receive copyright royalties under the Digital
Retailer model, identification information for materials sent by spammers
would have to be placed in watermark and fingerprint databases along
with the watermarks and fingerprints of other copyright owners. ISPs
could be authorized to suspend royalty payments to those against whom
spamming complaints are lodged, just the way banks suspend or revoke
the credit card merchant accounts of retailers if consumer complaints are
lodged against them.
77. 17 U.S.C. § 1204(a) (2000) (making it a crime to violate the anti-circumvention
provisions of §§ 1201 and 1202 for "commercial advantage or private financial gain").
DRM AS AN ENABLER OF BUSINESS MODELS
3. Intra-industry Conflicts
Implementing the Digital Retailer model also requires resolving two
conflicts within the entertainment industry. The first intra-industry conflict
is the result of an old but still troublesome fact: single works often em-
body several separately-owned copyrights. Music recordings embody at
least two copyrights per track: a copyright in the musical composition,
usually owned by a music publishing company (and if a song is co-written
by more than one songwriter, the musical composition copyright is likely
to be co-owned by more than one publisher); and a copyright in the re-
cording itself, usually owned by a record company. As a result, royalties
for the online performance or download of a single recording must be split
between two or more copyright owners. In addition, music publishers
grant licenses for performances and downloads through separate agencies:
ASCAP, BMI or SESAC for performances; and the Harry Fox Agency for
downloads. So today, royalties for the online use of a single music re-
cording may be claimed by three separate agencies on behalf of two or
more separate copyright owners.
Likewise, a movie may embody several separate copyrights: one in its
visual elements and the sound effects in its soundtrack, and another in
each song in the soundtrack. As a result, royalties for the online perform-
ance or download of a single movie may also have to be split among sev-
eral copyright owners.
Some copyright owners may demand too much, thereby discouraging
customers from making online uses of works to which those copyright
owners contributed. Other contributors to the same work may be pressured
to decrease their royalty rates in order to lower the total royalty claimed
for that work enough to increase sales volume. The presence of multiple
owners may thus trigger strategic bargaining among copyright owners,
each owner hoping to persuade the others to lower their royalty demands.
This process may not succeed, however, in lowering the total royalty
enough to actually increase sales.
Under the Digital Retailer model, none of these kinds of conflicts is of
concern to ISPs. But before ISPs can know who to pay, conflicts like these
will have to be resolved.
The second intra-industry conflict involves ISPs: some ISPs and some
copyright owners are subsidiaries of the same corporate conglomerate.
Given complete discretion, such a conglomerate may choose to implement
a business plan that seeks to attract subscribers to its ISP subsidiary by
offering them exclusive access to the conglomerate's copyrighted works
BERKELEY TECHNOLOGY LAW JOURNAL
or access at lower rates than those charged to unaffiliated ISPs.78
The
Digital Retailer model, however, would give all ISPs access to all copy-
righted works. Also, to prevent copyright owners from substituting high
prices for exclusivity, all ISPs would have to be charged the same whole-
sale royalty for each work. Copyright owners could not favor some ISPs
with lower royalties than they charge other ISPs. This means, for example,
that Warner Bros. and Time Inc. could not charge their sister company
America Online lower royalties for digital recordings or online magazines
than they charge other ISPs, let alone give America Online exclusive ac-
cess.
4. Privacy
The Digital Retailer model requires copyright owners to make signifi-
cant concessions of control over how, when, where, and to whom their
works are distributed. It also requires some concessions from users. For
example, in order to enjoy the convenience of online access to copyrighted
works, users will have to tolerate some loss of privacy. The Digital Re-
tailer model requires ISPs to compile records of copyrighted works ac-
cessed by their subscribers for billing purposes.
Some may view this as an unacceptable loss of privacy.79
I, on the
other hand, see this as a small and acceptable loss of privacy when com-
pared with the other invasions of privacy people accept today. Credit card
companies already know where we shop and how much we spend. When
we shop in places or spend amounts that look unusual, they call us on the
phone to confirm that our cards have not been stolen. Likewise, phone
companies already know who we call, when we call, and how long we
talk. Even our patronage of brick-and-mortar retail stores is likely to be
videotaped.80
And in many American cities, highway and toll bridge users
and their passengers are likely to be videotaped as well.81
In sum, The Digital Retailer model is no more intrusive than credit
card or telephone company billing schemes. Tracking copyrighted works
78. Reuters, AOL to Offer Exclusive Time, CNN features (Dec. 3, 2002), available
at http://www.ispworld.com/Reuters/BreakingNews/120302_js04.htm.
79. See, e.g., Julie Cohen, DRM and Privacy, 18 BERKELEY TECH. L.J. 575 (2003).
80. See, e.g., Tim Coyne, Videotaped Beating Mom Pleads Guilty, CBSNews.com
(Feb. 14, 2003), available at http://www.cbsnews.com/stories/2002/09/20/national/-
printable522684.shtml.
81. Paul W. Shuldiner & Jeffrey B. Woodson, Acquiring Travel Time and Network
Level Origin-Destination Data by Machine Vision Analysis of Video License Plate Im-
ages, Presentation at 1996 National Traffic Acquisition Conference, at 442, available at
http://www.itsdocs.fhwa.dot.gov/jpodocs/proceedn/2g901!.pdf.
DRM AS AN ENABLER OF BUSINESS MODELS
we access online, for billing purposes, diminishes our current levels of pri-
vacy only slightly.
5. Pay-per-use, Fair Use, and Non-infringing Uses
Some may object to the Digital Retailer model because it requires a
pay-per-use royalty and makes no payment exceptions for non-infringing
uses, including fair use.82
But this objection is accurate only in part and is
no reason to reject the model.
The Digital Retailer model does not require payment for each use of a
work. It requires payment each time a work passes through an ISP's
router. Thus, rather than characterizing the model as a pay-per-use model,
it should be thought of as a pay-per-redistribution model. Downloaded
works may be used countless times on the computer to which they are
downloaded without additional payment. Only the initial download trig-
gers a royalty fee.
Those raising the non-infringing use objection imply that users should
be able to get free access to copyrighted works they intend to use in ways
that qualify as non-infringing. That, however, has never been the case in
the physical world. Teachers, for example, may be entitled to display or
even photocopy newspaper articles for use in their classes, but they do not
have the right to take copies of newspapers from the newsstands they pass
on their way to school without paying. Likewise, movie critics have the
right to include plot synopses and quote dialogue in their reviews, but they
are not entitled to free admission to movie theaters showing the movies
they intend to review.
6. Unregulated Royalty Rates
I have left the lack of regulation of royalty rates for last because for me
it is not a problem at all. I acknowledge, however, that for others, lack of
regulation may be troubling. One might argue that copyright owners may
effectively eliminate the ability to legally reproduce copyrighted works
and redistribute them online by charging high rates.
While copyright owners may charge high royalties for some works,
especially when they are new, they always have had the ability to do so in
the physical world. A recent report entitled "Digital Rights Management:
Content Protection in the Networked Economy" has been priced by its
publisher at $995,83
and newsletters published by the same company cost
82. See, e.g., Raymond Ku, Consumer Copying & Creative Destruction: A Critique
of Fair Use as Market Failure, 18 BERKELEY TECH. L.J. 539 (2003).
83. See Kagan, Kagan Catalog, at http://www.kagan.com/cgi-bin/pkcat/drm03.html
(last visited May 3, 2003).
BERKELEY TECHNOLOGY LAW JOURNAL
more than $1,000 a year,84
without apparent objection from anyone. There
is no reason why things should be different--especially not by law--in the
digital world.
Nor is there any reason to suppose that copyright owners would set
high rates to eliminate digital versions of their works altogether. Naturally,
when motion pictures are first released to movie theaters, or television
programs are broadcast for the first time, their owners will not be pleased
by online distribution of unauthorized copies. As previously noted,85
dis-
tributing unauthorized copies online shortly after a work's first release in-
terferes with the owner's ability to engage in sequential and separate re-
leases of that work. Copyright owners may therefore set high royalty rates
for newly released works to discourage the online distribution of unauthor-
ized copies at that stage. However, by the time movies and television pro-
grams are made available on DVDs, copyright owners have no reason to
prefer DVD distribution through retail stores to online distribution through
ISPs, so long as their online royalties net them the same amount per
download as they net from the wholesale price of a DVD.
IV. CONCLUSION
In a perfect world, technology companies and copyright owners would
have complete freedom to design and market their products as they think
best. Digital copying and redistribution have made these objectives in-
compatible, at least in part. The quest is for a business model that best ac-
commodates these conflicting objectives.
As a general rule, copyright owners are opposed to statutory licenses.86
Some copyright owners may object to the Digital Retailer model as being
a statutory license and will be hostile to it for that reason. Their freedom,
however, to set their own royalties should soothe this objection. Still other
copyright owners may contend that the Digital Retailer model--tied, as it
is, to online redistribution--will simply promote unlicensed and uncom-
pensated CD and DVD burning and a return to the "sneaker net" of disks
and tapes that "were handed in person between members of a group or
84. See Kagan, Kagan Catalog, at http://www.kagan.com/cgi-bin/pkcat/scan/se=-
usnews/sf=pk_item/se=hardcopy/sf=pk_sort/tf=title.html (last visited May 3, 2003).
85. See supra Part II.A.
86. See, e.g., Napster, Music Industry Square Off on Capitol Hill, USATO-
DAY.com (Feb. 6, 2002), available at http://www.usatoday.com/tech/techreviews/2001-
04-03-napster.htm; Statement of the American Society of Composers, Authors and Pub-
lishers on Internet Uses of Music for the Senate Judiciary Committee Hearing on
"Online Entertainment," available at http://www.copyrightassembly.org/briefing/-
ASCAP2.pdf.
DRM AS AN ENABLER OF BUSINESS MODELS
were sent by postal mail."87
Indeed this may occur; if it does, the issue of
blank media levies will again take center stage.
The Digital Retailer model will likely draw objections from consumers
and their advocates. Hardware and software companies would be relieved
of all burdens by the Digital Retailer model. And ISPs should be pleased
with their share of the retail take. My concern is that even if the imple-
menting technology works perfectly so that consumers are charged only
for what they choose to buy and only at prices they have agreed to pay,
they or their advocates will view the Digital Retailer model as one that
gives copyright owners too much control.
Any argument that copyright owners would have too much control,
however, is one that would overstate the extent to which copyright owners
have exclusive rights to their works. Copyright law gives copyright own-
ers very thin protection. It does not protect ideas, concepts,88
theories, or
the facts on which they are based.89
Thus, although "Mickey Mouse" be-
longs to Disney, "Mighty Mouse" does not; "Mighty Mouse" belongs to
Viacom.90
And while copyright law does not permit others to make exact
copies of "Mickey" or "Mighty Mouse," it does permit unregulated breed-
ing of other animated mice by all who wish to do so. The thin protection
of copyright law does not even give anyone the exclusive right to tell sto-
ries about archaeologists in search of artifacts hidden in snake-infested
caves while simultaneously confronting dangerous human antagonists.
Anyone who wants to tell that story, may.91
Finally, in the music business, copyright law does not give record
companies the ability to obtain exclusive recording rights to songs. In-
stead, all who want to make and sell their own recordings of popular
songs, even sound-alike versions, may do so simply by paying license fees
to music publishers at rates set by law.92
MP3.com could have started its
own record company--producing sound-alikes or original recordings--for
less money than it agreed to pay in settlement of copyright infringement
lawsuits filed against it by record companies.93
87. Biddle, supra note 61, at 3.
88. 17 U.S.C. § 102(b) (2000).
89. Hoehling v. Universal City Studios, Inc., 618 F.2d 972 (2d Cir. 1980), cert. de-
nied, 449 U.S. 841 (1980).
90. Search for "Mighty Mouse" at http://www.copyright.gov/records/cohm.html.
91. Zambito v. Paramount Pictures Corp., 613 F. Supp. 1107 (E.D.N.Y. 1985).
92. 17 U.S.C. § 114(b) (2000).
93. MP3.com Settles Copyright Case Filed Against it by Universal Music Group by
Agreeing to $53.4 Million Judgment, 22 NO. 6 ENT. L. REP. 5 (Nov. 2000).
BERKELEY TECHNOLOGY LAW JOURNAL
There has been debate over the appropriate scope of the derivative
work right: the right to make new versions of copyrighted works.94
But the
derivative work right is not at the heart of the digital copyright contro-
versy. P2P and related controversies have involved digital copying and
online redistribution of exact duplicates of copyrighted works.
Given that copyright law permits anyone to breed new animated mice,
tell new stories about adventuresome archaeologists, and make new re-
cordings of "Oops! I Did It Again" using vocalists who sound just like
Britney Spears, it hardly seems too much to ask that they do so, rather than
make unpaid-for digital reproductions of works whose copyrights are
owned by others.
94. See 17 U.S.C. § 106(2) (2000); Suntrust Bank v. Houghton Mifflin Co., 268
F.3d 1257 (11th Cir. 2001); Castle Rock Entertainment, Inc. v. Carol Publishing Group,
Inc., 150 F.3d 132 (2d Cir. 1998).
DRM AS AN ENABLER OF BUSINESS MODELS