Digital Copyright’s Corrupt Bargain

Unfulfilled with the staggering restrictions on competition already incorporated into U.S. copyright law, the entertainment industry launched a new offensive in the digital piracy war thanks to the enlistment of Senate Commerce Committee Chairman Ernest (Fritz) Hollings (D-S.C.). Sen. Hollings introduced the “Consumer Broadband and Digital Television Promotion Act” to mandate copy control standards on virtually every electronic device and software code sold or distributed in the United States.

The rationale for this sprawling regulatory initiative is that copyright’s “delicate balance” is tilted too far in the direction of consumers. But recent evidence should suggest that the opposite is true.

In the past few years, Hollywood has crushed every online service and technology that has posed a threat. The entertainment industry sued, devalued, and then acquired MP3.com and Napster; refused to license its music catalog to nonaffiliated online vendors; suppressed academic inquiry into copy protection software code; and is positioned to extract huge fees for Internet music broadcasts.

No one can seriously dispute that recent legislation to expand copyright’s term and breadth has done little to benefit anyone outside of a handful of multinational media conglomerates. But piracy persists and the entertainment industry’s growth has suffered as a result. The industry now wants copyright to require others to join in their indignation. “If someone figured out how to unlock the gas in the gas station, people would be outraged,” Disney CEO Michael Eisner said to the Senate Judiciary Committee in February, “They wouldn’t say to the oil industry, ‘You need a different business model.’”

But is a statutory right to distribute or sell something really the same thing as private property? The gasoline stolen from the station is scarce and can be used only by the engine into which it is pumped. Conversely, there is no limit to the number people who can have their own “N’SYNC” CD. Copyright imposes scarcity – and attracts discretionary risk capital – by granting the industry exclusive distribution rights.

This model is now threatened by communications networks run by computers and software that can distribute and promote content to a far greater audience at a much lower cost per user. The entertainment industry sees how lucrative the Internet could be, but cannot exploit it if technology and communications firms do not moderate the openness of the current system to control piracy. Hollings’ legislation would mandate that they do so without any compensation from content businesses.

But as Eisner acknowledged in his Senate testimony, content is fueling the demand for new electronic equipment, software, and services. The great improvement of Microsoft Windows XP over earlier versions is the way it manages the storage and performance of digital content. Computer equipment and chip design has strived to improve consumers’ listening and viewing experience, while electronics companies have been improving their players, speakers, and television sets for generations.

It is the lack of available content that many analysts believe is artificially slowing the pace of broadband adoption. Regulatory disincentives and a lack of facilities-based competition are concerns, but broadband’s biggest roadblock is that the applications that create demand for faster Internet service are also the ones that are outlawed by copyright. No application ever had greater prospects to stimulate demand for broadband than Napster, whose 72 million members used about 5 percent of the network capacity available in the United States.

If tech companies need a flourishing content industry to fuel demand for their own products and are at the same time capable of controlling piracy – a presumption implicit to Hollings’ legislation – then there is no reason to believe that the market cannot address piracy concerns while enhancing the availability of content at the same time. The entertainment industry would simply prefer not to take the chance that private negotiations may erode profit margins.

In the Internet age, the role of shielding content from unauthorized use is going to be the job of software developers, equipment manufacturers, and perhaps most importantly, network operators. Protecting the content industry’s “property” will come at a price. By arguing that tech firms can defend against piracy and have a financial incentive to do so, Eisner unwittingly makes a compelling case against Hollings’ bill.