The recent acquisition of OD2 by Loudeye presents the potential for a wholesale service to provide innovative technology and content in a business model that is prospectively profitable. At center stage, Loudeye's Sonic Selector will be available to all music retailers in Europe. It will allow uses to stream chosen tunes for 1 pence per track. This a la carte option for streaming contrasts with both iTunes/Napster downloads (at 99 cents per track) and Rhapsody services ("all you can eat" streaming for $9.99 per month.)

Many have suggested that government should institute a system to garner revenues from levies on internet service providers or equipment manufacturers, and so compensate rights owners for takings through peer-to-peer. This would presumably allow peer-to-peer to continue unchallenged. Little careful economic analysis has gone into estimating the correct number or perceiving the real consequences.

Among the many shortcomings of government schemes to collect copyright revenues, it is difficult to imagine how government could determine what new technologies (such as Loudeye's or Microsoft's prospective Janus) are presented to retailers. Free market forces provide the incentives for new innovation but necessarily implicate the protection of property rights to preserve those same incentives.

What advocates of free takings might not then understand is that peer-to-peer takings of copyrighted music take market share not only from catalog recordings, but also from competing new technologies that are now shaping the music industry and digital marketplace.

If you think media ownership and indecency to be the far-reaching issues the FCC is currently dealing with, think again. The prospect of treating the electro-magnetic spectrum as a commons or public good, instead of property “owned” by certain entities has HUGE implications to many industries – media, telecom, consumer electronics, tech…Two recent essays, one by the Economist and one by Clay Shirky, illuminate this issue in great depth, and are highly recommended reading -- Economist Article & Clay Shirky Essay. Basically, the FCC has been licensing use of the spectrum since its birth in 1934, based on the technology and understanding of physics that was in place at the time. Namely that only one signal could be transmitted on 1 frequency in a given location. To allow anything else would mean interference that consumers would experience (ever tune into a radio and get 2 stations at the same frequency?). Anyway, times have changed and there are now technologies out there that are smart enough to pick out certain signals being transmitted at the same frequency as others (like being able to hear a conversation at a cocktail party). And these technologies are getting better. The first successful application of this approach is in Wi-Fi. The 2.4 Ghz band is an unlicensed one meaning anyone can make use of it. As a result, you have cordless phones, baby monitors and Wi-Fi transmitters operating, and co-operating (for the most part), at this frequency. Unfortunately, it’s not really the good stuff. The frequency is too high to penetrate long distances and go through a lot of walls, and is a very small slice of the spectrum anyway, and thus it limits the potential of Wi-Fi. Now that the technology is there to pick out signals, one could theoretically transmit at lower frequencies, the same frequencies occupied by broadcast TV & radio (true wireless broadband anyone?). Not only that, it turns out a lot of spectrum today licensed to broadcasters goes unused or is needlessly wasted, making for opportunities to let broadcasters keep their frequency while also allowing other technologies to use lower frequencies. Anyway, to cut a long story short, the FCC envisions a future where it’s more of a traffic cop and less a real estate agent. Broadcasters and cell phone companies (who’ve sunk billions of dollars in 3G licenses) will oppose any change of licensing regime (remember they own the beachfront “property”), or allowing others to broadcast at their frequency ranges. They will fight tooth and nail to keep the oligopoly that the current licensing regime has established. There is a long-running struggle between low power FM broadcasters and the NAB about just this sort of thing. I can picture their lobbyists salivating already….

A trendy academic proposal that would allow computer users to make unlimited takings of copyrighted content is compulsory licensing. Under a number of proposals, users may freely download music, movies, etc. through P2P networks of various natures. Rights owners would presumably be compensated for their losses through levies collected on internet subscriptions, computers, storage media, and other services and hardware that have the potential to be used with infringing activity. Levy revenues so collected would be distributed to copyright owners per values assigned by a regulatory agency.

Compulsory licensing presents four problems. First, the levies would be assessed upon individual equipment purchasers and Internet subscribers regardless of their actual use of P2P technology and level of copyright infringement. For the primary benefit of media companies, the majority of users would be harmed by taxation that may stifle network buildout and upgrade.

Second, the regulatory panel empowered to establish prices would face the daunting task of parsing out a fixed pot of revenues to contending uses and determining the relative worth of each. HOW TO DO?? As new forms of content come to market, the panel would need to consider the relative worth of a one hundred page novel, a two hour movie, a three minute song, a 4 x 7 photograph, and a five frame comic strip. In addition to comparing unrelated products, the panel would also need to decide the value of different lengths; i.e., how much more is a full page comic book worth compared to the five box strip, how much more a symphony than a song. Problems yet compound even more with multimedia works that combine different media, such as photography, prose, and music.

Third, while immediate transaction costs may diminish, the long-run administration costs for setting and revising the license terms will be considerable. Just imagine the scene. As consumers download increasing amounts of content, administrators and legislators reconvene Congressional hearings annually just to adjust the tax instrument in order to keep up with demand. In public utility regulation, the resulting outcome was known as “pancaking”, which was administratively burdensome and harmful to the electric utilities whose investments depended upon adequate revenue recovery.

Furthermore, in the foreseeable event that content downloading outgrows levy dollars, compensation per individual work would necessary diminish. Fighting for a revenue pot that bears no direct relation to sales of underlying content, the uncertain nexus between effort and reward evidently harms the incentive of a content provider to invest the resources needed to break a new act, produce a new movie, or publish a new novel.

Finally, free takings are more harmful to the market than simple measures of sales displacement may or may not confirm. The effective support of P2P through fees and taxes paid by users and non-users alike will undercut other content of possibly higher quality and greater functionality. Most directly harmed with be either “paid for” download services and interactive streaming that enable sampling. Affected characteristics of competitive product may include superior sound quality, additional artist information and recommendations, and playlist sharing. With a competing P2P technology effectively subsidized by government revenues, the incentive to initiate and develop new services will be reduced. The outcome will lock in the P2P model without regard to the eventual efficiency of other providers.

President Bush signed the Copyright Royalty and Distribution Reform Act into law today. This abolishes the CARP process in favor of a sitting panel of Copyright Royalty Judges. CARPs (Copyright Arbitration Royalty Panels...originally named Copyright Royalty Arbitration Panels but they didn't like the acronym), were undertaken to decide royalty rates for statutory licenses like digital cable music broadcasting and, controversially, Webcasting. No one like CARPs, except perhaps the arbitrators (who were paid $500/hr), and the lawyers (who were paid more), and even then I know some lawyers who'd rather not spend their billable hours in front of a CARP. The good news is that it is now 2-3 orders of magnitude cheaper for entities to participate in a royalty rate setting procedure, and that each side has more powers of discovery so that, um, one side can't cite 25 royalty rate deals with small startups negotiated in a certain (high) 'sweet spot' and claim those rates to be what a 'willing buyer/willing seller' would agree to. (inside joke)

This law is a positive step and was supported by both the digital music industry and the copyright industry (which is pretty much why it was able to pass). That doesn't mean all is right in the copyright rate setting world. For instance the glaringly flawed willing buyer/willing seller standard by which rates are determined needs to be revisited, but, with the ink on this one barely dry, let's not carp over it until at least the weekend... (shame on me for such an awful pun but I couldn't resist...)

The SCOTUS decision for MGM-Grokster will soon be handed out. The conventional wisdom holds that the sacred cow of a precedent that the landmark 1984 Betamax decision became for the tech industry may not remain in its existing form. This because the SCOTUS smells a rat in Grokster and any precedent that allow the Groksters of the world to facilitate massive copyright infringement, which they do. They may punt it back to the 9th Circuit. Not many believe that they'll leave Betamax untouched.

I won't be so foolish as to predict an outcome. The one prediction I will make is that this will eventually end up in Congress' court. If the tech industry feels a chilling effect from any new precedent, you can be sure they'll be having their lobbyists push for Congress to shore things up for them. Vice-versa for the copyright industry should they be the clearcut loser.

Alas, I won't be able to fan whatever flames come out of the decision. I'll be out of the country on vacation for a few weeks starting Monday, and this will be my last column until late July.

Earlier this week, details emerged of the PERFORM Act backed by Senators Feinstein, Frist and Graham that attempts to ensure platform equality for the distribution of music by ensuring royalty rate parity and content protection.  The Senate Judiciary Committee had a number of people testify on the matter including Edgar Bronfman, Anita Baker, Gary Parsons (Chairman of XM) and Mark Lam, the CEO of Live365.

I haven't followed this matter very closely but I think attempts to level the playing field for various radio platforms is a good thing.  I've not been against the idea of paying a fair royalty rate to artists (both songwriters and performers), but rather paying vastly different rates for the use of the same music as is currently the case with terrestrial radio broadcasters not paying anything to sound recording owners, satellite radio companies paying mid to high single digital percentage of revenue, and internet radio companies paying up to 33% of revenue, and yet internet radio companies have to heed the song complement restrictions of the DMCA unlike others.  It seems that the PERFORM Act would not bring terrestrial broadcast into parity, although at least bringing the digital radio services into parity would be a great start.

The Act would also mandate content protections for digital radio companies.  This could result in webcasters needing to stream in a protected in a DRM'd format.  I haven't read the actual Act so can't comment too broadly on this except to say that Congress should be very careful in legislating content protection and of unintended consequences. 

There's a good overview on the bill from Sen. Feinstein's office. 

[Note: The views above reflect my personal views and not that of any company or association that I may nor or have been affiliated with]

Network Neutrality is a hot-button issue that concerns how the internet itself will be governed in years to come. One of the issues at the heart of the debate is the matter of bandwidth. The key questions: Is bandwidth a commodity? And if so, who can monetize it? Proponents of neutrality, like Google and Microsoft, argue that the internet is a great, equal platform from which all comers can speak on an equal footing. Others point out, however, that bandwidth is already a commodity—anyone who has signed up with a hosting service to publish a webpage knows that, in order to gain access to a wider audience, it is necessary to contract for the appropriate amount of bandwidth usage.

So the real question in the Network Neutrality debate, then, is if Internet Service Providers—the folks at the “core” who build and own the physical internet pipes—can monetize or otherwise “groom” their bandwidth. While it is unlikely that ISPs would ever attempt to charge all web-based content providers (they likely will maintain “best efforts” transmission for all), they might investigate entering into select partnerships in order to offer their subscribers certain higher quality, faster “edge-based” applications and content services. There are other issues to consider, as well—network innovation and platform diversity.

Some neutrality proponents imply that innovation should take place only at the internet’s “edge.” ISPs, on the other hand, take the view that innovation should also happen at the network’s “core” physical pipes. Allowing innovation at the core, ISPs argue, will pave the way for better edge services, because the core and edge exist together in a symbiotic relationship.

Neutrality advocates also assert that the current cable and DSL duopoly cannot be trusted to maintain open internet access. ISPs, however, believe that if network operators are allowed to reap the benefits of core/edge innovation through the provision of, for example, enhanced bandwidth to selected edge partners, then other entrants will be encouraged to build out new broadband pipes, resulting in “platform diversity” and more consumer choice.

In Congress, there have been a number of recent developments on this issue. For instance:

The Senate Commerce Committee voted on Wednesday to send the Communications, Consumer's Choice, and Broadband Deployment Act to the full Senate without the kind of sweeping network neutrality language lobbied for by “edge” service providers like Microsoft and Google. The neutrality issue proved divisive within the Committee, where a cadre of predominantly Democratic senators moved to amend the act to include principals enumerated in previous legislation. Though ultimately not included in the committee’s version of the CCBDA, those principals would have effectively rendered Internet Service Providers blind with respect to “the source, destination or ownership” of data packets, because ISPs would have been required to maintain a dumb pipe “in the carriage and treatment of Internet traffic.”

Instead, it appears that network neutrality proponents might have to content themselves with the compromise language of the Internet Consumer Bill of Rights, enshrined within Title IX of the CCBDA. The Bill of Rights would allow ISPs to maintain unfettered access to all lawful content, while also giving customers the option to subscribe to select applications and content services that are enhanced through higher transmission speeds.

While some may view Wednesday’s committee vote as a victory for Internet Service Providers, the network neutrality issue is not yet resolved. The Communications, Consumer's Choice, and Broadband Deployment Act must still face a vote before the entire Senate, where some senators have vowed to attempt to hold up the legislation until strong neutrality provisions are included in its language.

That's the name of a bill that was introduced earlier today by Rep. Inslee (D-WA) and 8 other co-sponsors.  Its purpose is to put internet radio on the same footing as satellite radio, which I've been a big proponent of.  That means the same standard when it comes to royalty rate setting and a royalty rate of $0.33 per hour or 7.5% of revenues, which is what satellite radio pays.  On a side note, terrestrial radio should also be on the same playing field. If this bill were to become law, it would be a huge reprieve for webcasters and, I'm sure, lead to more investment in the medium.

I've said that it would take an act of Congress to stop webcasters from going under, which is what happened last time around with the Small Webcaster Settlement Act.  The Internet Radio Equality Act represents the best shot for webcasters to finally be on equal footing.  I think terrestrial radio should also have to pay royalties.  I haven't talked to any of my former colleagues in the industry about which way the political winds are blowing on this and whether there will be enough momentum to get this passed.  Last time around, the music industry lobbied the congressmen sympathetic to them to modify or threaten to hold up the proposed legislation unless they got some provisions that they wanted.  I expect the same thing to happen here so I doubt the Bill will pass with all of the provisions intact as-is, if it passes.

To that end, the Webcasters are organizing a Day of Silence on May 8th as a way of attracting attention to their cause, which is what we did 5 years ago to attract attention to the cause (I'm proud that I played a small role in conceiving of the idea and getting Kurt Hanson and other Webcasters behind it).  They're also organizing a Hill Walk to rally support for the bill.  If you'd like to voice support for Webcasters, do so by calling your Congressman and asking them to support the Internet Radio Equality Act.

[Cross-posted from ragsgupta.com]