more on Sony reaches provisional settlement in rootkit fiasco

[David Farber <dave () farber net>]

Dave is President & CEO, eMusic.com Inc.  djf

Begin forwarded message:

From: David Pakman <david () dimensionalassociates com>
Date: December 29, 2005 6:50:10 PM EST
To: dave () farber net
Subject: RE: [IP] Sony reaches provisional settlement in rootkit fiasco

Dave,

In light of the Sony rootkit reported settlement, and the recent news
that US Album sales are down another 7% this year
(http://news.yahoo.com/s/ap/20051229/ap_en_mu/music_sales), I thought
your readers would enjoy a recent essay I published on a new strategy
the music industry should consider in light of the consumer backlash
against DRM.

Regards,

David

-------------------------------------------------------

Why DRM Everything?
A Sensible Approach to Satisfying Customers
and Selling More Music in the Digital Age

by David Pakman
Managing Director, Dimensional Associates, Inc.
President & CEO, eMusic.com Inc.

Worldwide recorded music sales are down more than 25% over the last five
years. The music industry believes the primary culprit is file-sharing
and other forms of piracy. Let's leave the debate as to whether piracy
is truly the cause of the music industry's troubles for another time.
The responses to consumer-based digital piracy have been numerous
(artist-sponsored education campaigns, TV commercials advising kids not
to steal), aggressive (suing technology providers such as Diamond Rio,
Napster and Grokster as well as more than 15,000 customers), and, at
times, draconian (the recent Sony BMG rootkit fiasco). In general, the
music industry response seems to fall into three categories:

    1) Educate, predominantly by using lawsuits to bring to parents'  
and
kids' attention that file-sharing is stealing
    2) Widely license their catalogs in only copy-protected, restricted
digital formats
    3) Lock down the CD, often preventing personal copying, thereby
stopping the use of a Congressionally immunized activity

At the same time, consumers are now bombarded with more competition for
their limited entertainment dollars and leisure time than ever before:
cell phone minutes, text message fees, DVD purchases and rentals,
portable and console video games, downloadable games, MTV request lines,
several varieties of ringtones, Java games, digital music downloads,
music video downloads, premium online radio, satellite radio, broadband
ISP charges, etc. At a time when potential music-buyers have more
entertainment choices and have demonstrated a reduced interest in
purchasing recorded music, does it really make sense to take away
functionality and limit a customer's ability to enjoy the music they
purchase? Is it truly prudent, when piracy still abounds both
aboveground and underground, to make the legally purchased product
inferior to the pirated (and free) one?

I sympathize with the plight of recorded music companies. Dimensional
Music Publishing owns or controls more than 15,000 music copyrights and
derives revenue from their commercial exploitation. It is the right of a
content owner to decide on what terms to sell its content. If record
companies choose to lock down the CD and the digital download in an
attempt to prevent piracy, this is their right. But two problems have
arisen as a result of these decisions:

    1) Record companies are using technology to limit what was  
otherwise
a protected fair use of the music by the consumer: namely, to freely
make personal non-commercial copies, and
    2) Customers don't like it.

At this critical moment, the music industry needs to cultivate as many
new customers as it can, not drive away potential ones by making the
music inconvenient, restricted, or, even worse, invasive. But whatever
the major labels continue to do, why do their tactics have to apply to
the entire music catalog? Understandably, recorded music executives may
be petrified by the free market forces that rule a capitalist economy,
especially that it is one's customers that ultimately call the shots
that shape any commercial marketplace.

More than 25,000 new CDs were released in 2005. How many of them have
you heard about? Probably 20-30, if you're the average consumer, and
maybe as many as 100 if you're a music aficionado. So the music industry
funnel problem of trying to get exposure for both new releases and back
catalog is still a challenge. To this end, the industry has experimented
with pricing for many years, making back catalog titles available at
lower price. The industry should also recognize that, like higher
prices, limitations in functionality and music files sold that are
incompatible with the most widely used playback devices are
disincentives to buy, and should thus experiment with easing
restrictions on some portions of their catalogs.

For example, it might be essential to "DRM" the newest Eminem download.
But why must those titles that sell very poorly in both physical and
digital retail also be restricted? If it were possible to demonstrate
that non-DRM'ed music encourages more sales, wouldn't it make sense for
the industry to offer portions of its catalog as unrestricted MP3 files?
It seems like bad business to bind every category of customer and every
category of product with the same sales offering. Consumers are very
comfortable with different pricing for different value propositions. In
short, the industry should become more customer-focused, dreaming up
ways to increase sales of their catalogs by offering music products in a
variety of formats and pricing.

Fortunately, we have the answer available to us. eMusic, the world's
number two digital music retailer, selling more than 3.5M songs per
month, sells a catalog of 1M songs from the world's largest 3,800
independent record labels. Independent labels see the world differently
from the majors. They want to do everything possible to encourage
consumption of their catalogs, and as a result, eMusic's entire catalog
is available as unrestricted, no-DRM, high-fidelity MP3's. These files
download without hassle, never expire, and play on every hardware and
software digital music device ever created, including your iPod! (In
other words, they are not inferior to the CDs you've been buying for
years.) And when compared to a restricted buying experience, customers
consume far more music from eMusic than from digital stores like iTunes.
At iTunes, customers are averaging purchasing between one and three
songs per month. At eMusic, the average customer purchases between nine
and 31 songs per month. There are other differences between the services
(eMusic is a subscription service where customers pre-pay for their
downloads), but a major reason customers subscribe to eMusic is because
the songs are not restricted in any way, and play everywhere.

The majors should abandon the idea of locking down their entire
catalogs.  They should experiment with selling their jazz, blues,
classical, classic rock, comedy and more obscure titles -- the "long
tail" -- in unrestricted formats. A good place to start might be the
out-of-print titles and those portions of their catalogs which have sold
ten or fewer times on iTunes. Clearly those titles have limited
commercial appeal to iTunes customers. But why not determine if
customers are willing to buy more digital music that has no
restrictions, just as they're willing to buy more CDs when they are
discounted? The independent record labels have already proven this by
licensing their entire catalogs to eMusic and allowing their sale
without unreasonable restrictions. We know that eMusic customers
purchase more music on a per customer basis than customers at the other
well-known digital music services. We also know that their selections
run deeper and wider, and that eMusic customers purchase music that
doesn't sell elsewhere. In this model, hard-to-find cult titles and deep
back catalog in traditionally under-selling genres like blues, jazz, and
classical are likely to experience much stronger sales than their
current business.

The majors appear attached to a value proposition that actually takes
benefit away from the very customers they must satisfy and one which the
marketplace has already rejected. For the market to start growing again,
the oligopoly has to make their products available for sale on more
customer-friendly terms, like universally-compatible formats with fewer
restrictions. The market will obviously prevail in the end; the question
to pose is not if, but when. How much lost revenue will it take to
prompt the oligopoly to act in the interests of consumers, which, in a
market-driven economy, benefits all stakeholders, including their own
shareholders, artists, and employees? Failure to act does not signal the
end of the industry, it simply creates a redistribution of power among
hundreds of smaller players that will inevitably join forces over time
to consolidate and create tomorrow's oligopoly.

If the majors would undertake such a strategy, it would have the added
benefit of actually selling consumers what they want: a product not
inferior to the free pirated copy - and available in seconds with a
click of the mouse.

eMusic is the world's number two digital music service, selling more
than 3.5 million songs a month and is the #1 site for independent music.


........................................
eMusic
#1 Site for Independent Music

David Pakman
President & CEO, eMusic.com Inc.
Managing Director, Dimensional Associates Inc.

100 Park Avenue
17th Floor
New York NY 10017
212.201.9210
917.597.1855 mobile
david () dimensionalassociates com
........................................


> -----Original Message-----
> From: David Farber [mailto:dave () farber net]
> Sent: Thursday, December 29, 2005 3:34 PM
> To: ip () v2 listbox com
> Subject: [IP] Sony reaches provisional settlement in rootkit fiasco
>
>
>
> Begin forwarded message:
>
> From: Michael Geist <mgeist () pobox com>
> Date: December 29, 2005 3:16:31 PM EST
> To: dave () farber net
> Subject: Sony reaches provisional settlement in rootkit fiasco
>
> Dave,
>
> Reports today indicate that a provisional settlement has been
> reached in the U.S. Sony rootkit class actions.  While the
> settlement still requires court approval, it makes for an
> interesting read since it may provide the starting point for
> a future statute that protects against the misuse of digital
> rights management technologies.
> Proposed settlement at
> http://www.sunbelt-software.com/ihs/alex/sonysettleme23423423434nt.pdf
>
> My blog posting (posted below) summarizes some key provisions
> and argues that the deal may provide the basis for a future
> DRM Protection Act.
> <http://www.michaelgeist.ca/index.php?
> option=com_content&task=view&id=1052>
>
> MG
>
> The Start of a DRM Protection Act
>
> Reports today indicate that a provisional settlement has been
> reached in the U.S. Sony rootkit class actions.  While the
> settlement still requires court approval, it makes for an
> interesting read since it may provide the starting point for
> a future statute that protects against the misuse of digital
> rights management technologies.
>
> Given the Canadian focus on my blog, I should note up front
> that the settlement does not apply to Canadians, who for the
> moment are left with no compensation and no protection
> against ongoing DRM misuse.
> This is very troubling given the fact that more than affected
> 100,000 CDs have been distributed in Canada.  Sony BMG Canada
> should step up and immediately offer the same terms to
> Canadian consumers and undertake to abide by the same
> restrictions found in the settlement agreement.
>
> The settlement has two broad goals: compensate consumers for
> the harm they suffered from both the XCP and Media Max DRM
> software and place limits on Sony's use of DRM.  The
> compensation for XCP purchasers includes the replacement of
> the CD with a version without copy- protection and the choice
> of either (i) US$7.50 plus one free album download or (ii)
> three free album downloads (Sony will select at least 200
> eligible titles).  The compensation for Media Max offers
> fewer free album downloads.  The most notable aspect of this
> part of the settlement is that Sony will undertake to provide
> the free downloads from at least three music download
> services including Apple iTunes.  The irony of Sony being
> forced to offer Apple iTunes downloads when a prime reason
> for inserting the DRM software was to combat Apple iTunes
> should not be lost on anyone.
>
> More interestingly (at least to non-class action lawyers) is
> the undertakings on Sony's future DRM use.  The company has
> agreed to the following limitations on the use of
> copy-protection software until 2008:
>
>     1. No further use of XCP or Media Max
>     2. Ensure that the DRM will not be installed on users'
> computers until the user accepts the end-user license agreement
>     3. Ensure that an uninstaller for the copy-protection
> software is made readily available to consumers
>     4. Fully disclose any updates to the copy-protection software
>     5. Ensure that the EULA accurately discloses the nature
> and function of the software in plain English
>     6. Obtain comments about the EULA from an independent
> oversight person
>     7. Obtain an expert opinion that the copy-protection
> software does not create security vulnerabilities
>     8. Only collect limited personal information necessary to
> provide enhanced CD functionality
>     9. Include full disclosures of the copy-protection
> software on the CD jewel case
>    10. Fix any software vulnerabilities that may arise from
> the copy- protection software
>
> While many of these obligations should be standard operating
> procedure and not require a court approved settlement, the
> full package provides the starting point for a future Digital
> Rights Management Protection Act.  Much like the settlement,
> a DRMPA must include consumer protections, privacy
> protections, security protections, interoperability, and
> appropriate oversight.  Rather than pushing for protection
> for DRMs, it is apparent that we need protection from DRMs
> and DRMPA would be a smart step in that direction.  Such a
> statute would be the best legacy of the Sony rootkit fiasco.
>
> --
> **********************************************************************
> Professor Michael A. Geist
> Canada Research Chair in Internet and E-commerce Law
> University of Ottawa, Faculty of Law
> 57 Louis Pasteur St., Ottawa, Ontario, K1N 6N5
> Tel: 613-562-5800, x3319     Fax: 613-562-5124
> mgeist () pobox com              http://www.michaelgeist.ca
>
>
>
>
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