DiMA Comments on Copyright Policy, Creativity and Innovation in the Information Economy

Before the

Office of the Secretary, U.S. Department of Commerce;

Patent and Trademark Office;

National Telecommunications and Information Administration,

U.S. Department of Commerce

Washington, D.C. 20230

Comments of Digital Media Association

TABLE OF CONTENTS

I. Introduction and Summary…………………………………...……….……. Page 1

Background…………………………………………..…………...……..……Page 3

II. Some Specific Policies that will Promote Innovation, Benefit Creators, and Reduce Infringement

1. a) Performance Rights Parity………………………………….……..….. Page 6
2. b) Orphan Works Legislation………………………………….……..….. Page 8

III. Additional Policy Recommendations

1. a) The need for improved data collection and increased education…….. Page 11
2. b) Promoting Balanced, Policy-Driven Decisions………………………… Page 12

c)Increase the Range of Stakeholders Involved in the Efforts to Eliminate

Copyright Infringement…….……………………………….………….. Page 14

Conclusion…………………………………………………………..…………..… Page 14

1. I. Introduction and Summary

The Digital Media Association (DiMA) is an established trade association whose membership has helped to revolutionize consumer media and to democratize creative opportunity.  DiMA members include Amazon.com, Apple, Best Buy/Napster, Live365, Microsoft, MTV Networks, Nokia, RealNetworks, Rhapsody, Slacker and YouTube.  The innovative products and services that DiMA-member companies bring to market have changed – and will continue to change – commerce and politics, as well as how Americans obtain and enjoy music, entertainment and other media.

DiMA members appreciate the Task Force in the explicit identification of a dual public policy imperative -- to not only combat online copyright infringement, but to also sustain innovative uses of information and information technology.  DiMA members support the Task Force in the quest to identify policies that will enhance benefits for rights holders of creative works that are accessible online while also facilitating innovation and growth of the Internet economy and simultaneously combating infringement and safeguarding end-user interests in freedom of expression, due process, and privacy.

As the mandate for the Task Force makes clear, and the subject matter of the various discussions, along with the specifics of the present Notice of Inquiry echo, the significance of the development of new technology businesses to the U.S. economy should be a primary concern in this inquiry and should be a fundamental element in any recommendations that might develop out of the inquiry.  As Commerce Secretary Gary Locke noted, The U.S. economy is moving towards being a technological one and indeed, even in the recent trying economic times, the technology sector is a unique area of our economy that is returning appreciable growth.[1]

Protecting the promise of technological innovation which is leading the way to appreciable economic gains is extremely important. The desire to participate in technological advancement is becoming the most significant part of the engine that drives education, innovation and economic growth, as well as cultural advancement and global importance, in the United States.[2]

DiMA appreciates the Department's Internet Policy Task Force conducting such a comprehensive review of the relationship between the availability and protection of online copyrighted works and innovation in the Internet economy, including the convening of listening sessions and public meetings with a wide range of stakeholders, in the Task Force’s endeavor to understand the current issues related to online copyright protection and the broader impact of content issues on innovation in the Internet economy.

In these Comments DiMA will provide an overview of our member companies’ dynamic and evolving services and their business environment, and will detail some of the organization’s observations regarding just a few of the underlying circumstances that ultimately work against the legal, copyright-respecting distribution of copyrighted works, and in fact serve to make piracy an attractive option to some, in both on the technological development side and also the potential consumer side. Our recommendations are for approaches that will ensure that both intellectual property and technological and business innovation are protected, as the inevitable growth of internet-based technological businesses continues and becomes ever-more important to the United States economy.

Notwithstanding DiMA’s broad-based comments here, which are provided in a constructive spirit, DiMA and its members are mindful of the challenges posed by the issues being addressed by the Task Force and that the Task Force does not have the authority to change the framework of copyright law in the United States.  Hopefully however, the Task Force does have significant influence and can help spur substantial review and perhaps reform of the Copyright Act in a way that will benefit creators, rights holders, technological innovators and the public, alike.

Within the universe of music and audiovisual programming available through digital media, DiMA wholly agrees with the explicit suggestion in the NOI that the Task Force should focus not only on traditional copyright protection for established media, but also focus on balancing those concerns with the need to retain and even enhance an environment that fosters technological innovation and free and unlimited access to communication.  Therefore, the Task Force’s inquiry and any recommendations that result from it should reflect the stated goal of maintaining a robust internet, communications and promoting technological progress.

Background

DiMA members’ media offerings are remarkably diverse, and are continuously becoming more diverse as global citizens and cultures and markets become increasingly connected.  In the most general overview, DiMA members:

• provide digital “new media” entertainment services;
• develop and distribute software that powers those services;
• develop related consumer electronics products; and
• market and sell new media products and services to the public.

But these broadly characterized general products and services are in fact comprised of a complex and diverse palette of various business models, technologies and content delivery platforms and models.  Our members offer or otherwise make available musical, spoken word and other audio and audiovisual content.  DiMA members’ programming and offerings are available for purchase, for passive listening or viewing to content that is streamed, for interactive participation, and on either (and often both) a subscription or advertiser-supported basis.  Some of the content is professionally produced and distributed, and other content is user-generated.  Some of the content that DiMA members make available is linear (i.e., it is intended to be listened to or viewed from end to end), while other content is highly interactive and variable.  Moreover, the programming is fast becoming - and will continue to be - available via a remarkable number of networks and on an extraordinary variety of devices.

Several DiMA members’ services are music-oriented, and they have fundamentally changed the ways that consumers enjoy music and that artists promote their work.

• Apple’s iTunes Store revolutionized music purchasing, and along with Amazon.com, Best Buy and several other DiMA members, make finding and acquiring new music easier than ever before.
• Slacker offers user-influenced radio that dynamically modifies playlists as consumers inform the service what songs they like or dislike.  Slacker is available over the Internet, through the iPhone and the Blackberry, as well as through traditional home consumer electronics systems utilizing media networking equipment.
• Rhapsody, Napster (owned by Best Buy) and Microsoft’s Zune service offer music subscriptions that permit users to enjoy all the music they want, streamed from the Internet (including through traditional consumer electronics devices), stored locally on their computer, or stored on mobile phones and specialized portable music devices.
• Live365 aggregates thousands of individually programmed radio stations at www.live365.com, and makes them available over mobile devices also.

Several DiMA members’ offerings include audiovisual programming.

• Amazon.com and iTunes sell downloaded movies and television programs that play on consumers’ televisions, computers and portable video devices.
• YouTube offers short-form audiovisual programming produced by individual consumers who upload their product to YouTube servers, and also offers professionally produced content from 3^rd party licensors including record companies and television producers.  Every minute, over 35 hours of video is uploaded by users to YouTube.

Additionally, several DiMA members offer specialized consumer electronics products that are developed particularly for their own media offerings, but which in some circumstances may also be used to distribute others’ programming or services.

• Microsoft’s Zune personal media player is integrated with the Zune Marketplace, which offers music and audiovisual programming for sale and for subscription.
• Apple’s iPod is seamlessly integrated with the iTunes Store which sells music and audiovisual programming.  The iPhone, iPod Touch and the iPad are also platform devices that render third-party applications which are often oriented toward entertainment media.  For example, millions of Slacker listeners enjoy those services on their iPhone and/or iPod Touch, rather than through their PC or a single-purpose device.

The complexity and vast spectrum of different businesses and dynamic innovation illustrated by these few examples are the basis of DiMA’s views as expressed in these comments: That the Task Force should make policy recommendations that will lead to a simplified and easier-to-navigate copyright policy, thereby increasing benefits for creative rights holders not by limiting – but indeed by facilitating - the continued innovation and growth of the Internet economy.

II. Some Specific policies that will promote innovation, benefit creators, and reduce infringement.

a) Performance Rights Parity

In pursuing the Task Force’s focus on not only on traditional copyright protection for established media, but also the focus on balancing those concerns with the need to retain a robust internet, enhancing an environment that fosters technological innovation and promotes technological progress and access to communication, one area where we could make strides could be in revising out-dated and selective aspects of the United States’ copyright rules. It can be argued that the United States has one of the premier copyright regimes in the world.  Many of the specific provisions however, were drafted an enacted at various times, as the Copyright Act was only updated partially and periodically, over the course of the past century.  Many of these inconsistent provisions are in need of serious update and significant reform.

An example is the current sound recording performance royalty system codified in section 114 of the Copyright Act.  The provisions outlined in Section 114 represent a patchwork of outdated rules, exceptions and royalty standards that serve to impose higher or lower royalty burdens based solely on the technology used to deliver programming, rather than the quality or value of the programming, itself.  Even for intellectual property lawyers, section 114 is difficult to read and hard to understand.  For business people, it is largely unintelligible.  The inexplicable variations and vague definitions found in Section 114 and the uncertainly they create mean significant unknowns for people seeking to develop new technologies surrounding the delivery of recorded media - and also for those who might invest in such technologies or businesses based on them.

These problems are exemplified by the Sirius Stiletto.  The Stiletto is a relatively new technological device that offers the ability to hear more than 130 channels of subscription radio (including 69 channels of music) using both satellite technology and/or a wireless Internet connection.  If a consumer is within range of a satellite, then the programming is delivered by that technology; otherwise the programming is delivered via broadband wireless.

To the consumer, the experience is seamless and uninterrupted, but to Sirius, to record companies and to artists, the otherwise transparent switch from one particular technology for delivery of the programming to another mode of delivering the very same programming is dramatic.  Satellite-delivered radio pays royalties of less than 8% of revenue, while radio delivered over the internet-delivered radio pays vastly higher royalties – and uses a different method of calculating the royalties due, as well.

In fact, in 2007 the Copyright Royalty Board (“CRB”) issued two decisions regarding digital radio sound recording performance royalties.  Using the traditional copyright arbitration royalty-setting standard found in section 801(b) of the Copyright Act, the CRB set royalties for XM and Sirius at an escalating amount between 6 and 8% of revenues. In comparison, using the Internet radio-specific (‘willing buyer – willing seller’) standard codified in a different sub-section of section 114 of the Copyright Act, the CRB set royalties for Internet radio that are effectively several multiples higher than the satellite radio royalties.  Large Internet radio services, such as Live365 and Slacker were held to pay royalties of as much as 40 – 80% of their total gross revenues.

This example – one of practical technology and one of competitive disadvantage – demonstrates the uniquely difficult environment that policymakers have defined for technology innovators.  In this case, between digital radio innovators and competitors.  The challenges, however, extend far beyond hindering Internet radio’s ability to effectively compete against cable and satellite radio or the chilling effect on technological innovators (and investors) trying to effectively navigate the complex landscape of disparate rights associated with specific technological uses and the varying attendant royalties.  These difficulties also limit innovators’ ability to provide important benefits to independent artists and protect against unwanted acts of copyright infringement.

The benefit that Internet radio offers to the independent music community is undeniable.  Prior to the development of Internet radio, independent artists often found it difficult to gain exposure and cultivate new fans due to existing gatekeepers and bottlenecks that made it difficult – if not impossible – for any, but the largest artists to gain widespread exposure.  Fortunately, the advent of Internet radio changed this phenomenon.

With regard to unwanted acts of copyright infringement, recent studies have indicated that the existence of Internet radio leads to a decline in such behavior.  Indeed, a 2009 study conducted by Music Ally and a 2010 study conducted by the NPD Group each separately determined that legitimate online music service providers such as Internet radio play a tremendous role in reducing the rate at which illegal file sharing occurs.  The NPD Group, in particular, noted a “precipitous drop in the number of songs being shared on peer-to-peer networks which was attributable to growing competition from [online] legal services…”[3]

The Music Ally study undertook a longitudinal examination of the music listening habits of one thousand teenagers ranging in age from 14 to 18.  In 2008, 42% of this demographic acknowledged engaging in illegal file-sharing at least once a month.[4] However, in 2009, that number had declined to 26%.[5] In explaining the reason for the (near 50%) reduction, the research revealed that many teenagers were streaming music on a more regular basis, with approximately 31% listening to streamed music on their computer every day.[6]

As the Department’s Internet Policy Task Force strives to advance policies that will promote innovation and protect copyright owners from unwanted acts of infringement, it should strongly consider advocating for platform parity in the context of future rate setting proceedings.  Platform parity not only guarantees that Internet radio will continue to thrive.  It also promises to encourage continued creativity by, and income to, artists and musicians.

b) Orphan Works Legislation

In addition to advancing performance rights parity, another set of policies that the Department’s Task Force should consider advancing occurs in the context of orphan works – that is copyrighted material in which the owner of such works cannot be identified or located.

The problem presented is that efforts to promote international harmonization of copyright protections and terms over the past thirty years have created a substantial class of ‘orphaned’ copyrighted material.  The elimination of certain formalities such as registration, the need for explicit renewal, extensions of the term of copyright protections itself and the elimination of mandatory copyright notice has only exacerbated what was a always a fundamental problem in identifying and finding copyright owners.

The inability to readily identify or locate such individuals and obtain permissible licenses (which is the specific burden of one who would like to commercially exploit the work, in many cases) creates a substantial problem for DiMA member companies and anyone else who seeks to develop technology or launch a business that involves the distribution of or access to copyrighted works.

The aforementioned harms aren’t unique to DiMA members or other technology and media companies.  As was recognized by Marybeth Peters, the Register of Copyrights: “When a copyright owner cannot be identified or is unlocatable, potential users abandon important, productive projects, many of which would be beneficial to our national heritage.” (HJC testimony, March 2008).  Ms. Peter’s went on to highlight the direct loss to scholars, publishers, museums and filmmakers.  She concluded her remarks by declaring that “The Copyright Office finds such loss difficult to justify when the primary rationale behind the prohibition is to protect a copyright owner who is missing.  If there is no copyright owner, there is no beneficiary of the copyright term and it is an enormous waste.”

A potential solution to this problem, which has been discussed for several years now, would be to enact “Orphan Works” legislation.  Legislation that would limit the risk and potential damages resulting from the use of copyrighted material by an individual who is unable to identify or locate the owner of the copyrighted material, subsequent to a reasonably diligent search.  Legislation of this nature was introduced in the Senate in the 110^th Congress (S. 2913, Shawn Bentley Orphan Works Act of 2008); and was even reported out of that Chamber.  However, the House failed to act on similar legislation, so the measure ended up dying at the end of the 110^th Congress.  Also, unfortunately, neither chamber attempted to address the issue in the current Congress.  The Dept. of Commerce should urge Congress to address the problem of orphan works through effective legislative measures that will serve to allow new and continued uses for these abandoned works.

Some type of Orphan Works relief would go a very long way to easing some of the licensing constraints associated with trying to build, launch and maintain modern businesses around the distribution of media.  The present domestic system for licensing musical works – which hasn’t been significantly updated in almost 100 years – assumes that copyright owners will register their works with the Library of Congress, and that those who wish to make use of those registered works will thereafter search those registrations, individually, for the one or two songs that they’d like to utilize.

In the wake of amendments relaxing U.S. registration requirements in an effort to harmonize U.S. standards with international standards that apply copyright protection to unregistered works, however, that system of notices has completely broken down.  It is no longer necessary for the owner of a copyrighted work to register with the Library of Congress in order to receive full copyright protection.  Going further, it is no longer the reality that a person or entity seeking to employ musical works as part of a modern business endeavor would seek to locate, at most, a handful of songs.  The modern reality is that to launch and maintain competitive music service, the service must have access to virtually the entire catalog of all songs available in the United States – that is millions and millions of individual musical compositions - at once.

The combined effect of a) compulsory licensees of  music compositions being required to file a Notice of Intention to Obtain Compulsory License, including the requirement that they serve notice of intention to do so “on the copyright owner,” (or the Copyright Office itself, if the registration or other public records of the Copyright Office do not identify the copyright owner and include an address at which notice can be served), and b) the intervening abolishment of the requirement that copyright owners  must  register with the Copyright Office or provide an address at which such a notice can be served – at all, has lead to the untenable situation in which those who would like to use copyrighted works, as the compulsory license originally intended, are left with no practical course of action in order to secure those licenses.

Pursuing Orphan Works policies that would allow those that wish to make legitimate use of copyrighted works to find, license from and ultimately pay the copyright owners for those works would spur increased income to those owners, promote development and investment in businesses aimed at such uses and ultimately discourage wide-scale infringing uses.  In addition, such policies will make it easier for educators, libraries and archivists to move forward with the important work of promoting learning about our culture and preserving our national heritage and culture.

III. Additional Policy Recommendations

a) The need for improved data collection and increased education.

In furthering the explicit task of protecting copyright protection while acknowledging the need to also retain and indeed facilitate growth of internet-based, digital businesses and supporting technological innovation and access to communication, there are a few other general suggestions we would like to make, on how to accomplish these goals. The Task Force’s Notice of Inquiry asked what are stakeholders’ experiences and what data collection has occurred related to trends in the technologies used to engage in online copyright piracy, and what is the prevalence of such piracy? What are some of the challenges related to attracting users to legitimate sources of copyrighted content?

In April of this year, the U.S. Government Accountability Office (“GAO”) issued a report to Congressional Committees on “Intellectual Property - Observations on Efforts to Quantify the Economic Effects of Counterfeit and Pirated Goods.”  The report ultimately found that, despite widespread assumptions regarding the existence and extent of copyright infringement, even leading to a commonly accepted “rule of thumb” with respect to the amount of economic impact on the economy such piracy has,[7] the data underlying these assumptions is largely unreliable, noting that “While experts and literature we reviewed provided different examples of effects on the U.S. economy, most observed that despite significant efforts, it is difficult, if not impossible, to quantify the net effect of counterfeiting and piracy on the economy as a whole.”.[8]

This outcome, which was surprising and troubling to many in the copyright community, indicates the lack of clear data regarding precisely how copyrights are being exploited in the new technology world.  It would seem to indicate that commonly held perceptions about the pre-eminent need to protect copyrights are the product of a relatively exclusive perspective, namely that of copyright owners who have seen a decline in their fortunes over the last few years.  It is clear that, as the GAO study recommends, a more comprehensive view of not only the effects of piracy, but of many related factors and conditions, [9] including the effects of inconsistent standards, outdated licensing regimes and complex, multiple-rights-stacking paradigms, need to be reviewed.

In conjunction with greater understanding of the true causes and effects of copyright infringement, we recommend a more concerted effort to educate the public on precisely what copyright infringement is, how engaging in piracy damages rights holders, as an important segment of not only the economy, but also of our culture and also educating the public on legitimate, fully-licensed sources for the consumption of media.  Of course, being able to point to a simplified copyright regime – one that does not include the myriad of subtle, dated and esoteric distinctions we now have - would also help to spur those legal alternatives while also facilitating the education of the public on copyright concerns.

b) Promoting Balanced, Policy-Driven Decisions.

The Notice of Inquiry also asked if commenters could make any generalizations about the online business models that are most likely to succeed in the 21^st century, as well as the technological and policy decisions that might help creators earn a return for their efforts and how government policy or intellectual property laws can promote successful, legitimate business models while discouraging infringement-driven models.

Again, DiMA suggests that the answer lies in creating an environment that promotes the continued development of legitimate forms of online distribution of copyrighted materials.  It will ultimately serve to help copyright owners, as the United States continues on the inevitable course towards a technology-based economy and culture, to work with technology companies in a concerted effort to forge an environment – including a copyright regime – where new, online, new media innovators can quickly, efficiently and easily license the rights to distribute, perform and display those copyright owners’ works.

Existing frameworks for copyright protection and licensing, the result of years of incremental and partial amendments, made at the behest of particular business interests, at specific times when now-defunct technological or business distinctions were driving the reform, ultimately hurt not only legitimate potential businesses, but also copyright owners, themselves.  As outdated concepts such as the inexplicable distinction between satellite and internet based digital radio services, and the century-old, non-functioning licensing system for musical works discussed herein continue to be the rule, copyright owners will continue to find, as they already are, fewer legitimate outlets for their creative works.

DiMA urges the Task Force to make recommendations that encourage the government to resist current and future attempts to continue the implementation of unbalanced and inconsistent policies, such as the recently-proposed amendment to the pending Performance Rights bill that would give songwriters a unique and unfair advantage over all digital radio service providers in future ratemaking proceedings, by prohibiting licensees from using evidence of royalties paid solely “for the purpose of reducing or adversely affecting” the license fees to performance rights organizations – but specifically allowing those organizations to use the very same evidence in efforts to increase their royalties.  These types of one-sided attempts by special interests – in this case, the Performing Rights Societies, who represent but one of several rights to be licensed from musical composition rights-holders - to ensure that they have unique leverage and an upper hand in rate setting proceedings (and any attendant negotiations) should be  considered in a very harsh light, as they are clearly designed to serve a very specific set of unique interests, do not help to clarify or move copyright policy forward and will ultimately hold back innovation and legitimate use of copyrighted content.

These types of special interest attempts to secure preferential treatment by further parsing out the landscape of copyrights and how they are administered are extremely short sighted.  While it may appear to be a benefit to those who administer those rights, in the short term, as we have tried to make clear in these comments, the continued stratification of copyright interests into individual fiefdoms, resulting in more and more complex and unbalanced rate setting and licensing environments, only stifles the innovation necessary to move the business of legitimate commercially exploitation of copyrights fully into the digital future.

c) Increase the Range of Stakeholders Involved in the Efforts to Eliminate Copyright Infringement.

The general inquiries incorporated into the Notice of Inquiry promisingly include a request for information on how the government can best encourage collaborative approaches within the private sector.  It is DiMA’s view that the best way for the government to accomplish that goal is to create an environment that promotes collaboration among ALL stakeholders in the online copyright ecosystem.  In the future, government-convened and especially government-led taskforces should include not only copyright holders but also various representative of the digital media industry.  Technology companies, media distribution companies and perhaps even venture capital companies that help fund media-related start-ups, as well consumer representatives, all have legitimate perspectives on how digital media is now and can and will be accessed, in the future, which should all be heard.

The multitude of services that currently exist within the digital media industry - a cross-section of which is represented by the diverse set of companies and business models within the DiMA membership – will only increase as technological capabilities  make new and more exciting and engaging consumer experiences possible.  The Task Force should recognize the need to ensure that each of the different business models, and each of the different contributors in the chain of commerce bringing copyrighted works to the public, is adequately represented in future policymaking proceedings and should recommend a more inclusive process, as a result.  Government-led collaboration will undoubtedly spur future private party collaboration.

Conclusion

DiMA and its members fully support the Task Force in its mission to (1) Increase

benefits for rights holders of creative works accessible online but not for those who infringe on those rights; (2) maintain robust information flows that facilitate innovation and growth of the Internet economy; and (3) at the same time, safeguard end-user interests in freedom of expression, due process, and privacy.  These distinct goals are not nearly as mutually exclusive as they may seem, on their face.   The best way to increase the benefits for creative rights holders in an increasingly online market is precisely to maintain robust information flows that facilitate innovation and growth of the Internet economy, which spurs innovation on the part of legitimate services who offer copyrighted works in compelling formats that appeal to consumers.  Doing so will not only increase the fortunes of copyright holders, but it will also make it more difficult and less attractive for those who would infringe on those rights.

Respectfully submitted,

[1] Comments of Commerce Secretary Gary Locke, delivered Thursday, July 1, 2010: “…the impressive growth in the Internet economy, even in the midst of major economic challenges. That’s particularly true when it comes to copyrighted works.”

[2] Comments of  Assistant Secretary of Commerce Larry Strickland, delivered Thursday, July 1, 2010

[3] Mark Hefflinger, Report: 21% Fewer Americans Buying Music, Digital Media Wire, Feb. 25, 2010.

[4] Alexandra Topping, Collapse in illegal sharing and boom in streaming brings music to executives’ ears, Jul. 12, 2009, available at http://www.guardian.co.uk/music/2009/jul/12/music-industry-illegal-downloading-streaming.

[5] Id.

[6] Id.

[7] GAO Study on “Intellectual Property - Observations on Efforts to Quantify the Economic Effects of Counterfeit and Pirated Goods.” April, 2010.

[8] Id., at pg 27.

[9] Id at pg. 25.