December 05, 2005
Intellectual Property Developments
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Jack Horgan - Contributing Editor

by Jack Horgan - Contributing Editor
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Intellectual property (IP) consists of many different types of things including printed material (books, magazines, journals, …), music (sheet, recordings), movies, software and semiconductor content. The owners of the rights to this IP view it as an asset and would like to make money from the time, talent, effort, creativity and investment that were used to create it. They will take measures to protect it through copyrights, patents, employee agreements, licensing arrangements, lawsuits and so forth. The owners of a piece of IP may sell all of their rights or some of their rights, e.g. author to publisher, screenwriter to producer, producer to distributor for European movie rights.
In the final analysis money is made when the public directly or indirectly pays to purchase, rent, view or use the IP. Sometimes it is advertisers who subsidize a presentation in exchange for access to eyeballs as in the case of broadcast TV and search engines. IP protection requires a system of laws and the willingness and ability of governments to enforce these laws. Many nations trail the US in providing IP protection.

Decades ago when I was young, you could purchase books, records and movies. You could then give them to another or loan them to one or more persons over time. Libraries also loaned material to their clients. This use by multiple persons of a single copy undoubtedly reduced the number of copies actually sold. However, there was only one physical copy. Back then you could Xerox a book or magazine but the time and expense to do so made it largely impractical. I remember having a large, about 50 pound tape recorder. But I never thought of recording music from someone else's records. The cost of the blank tape, the time and the likely quality of the resulting recording were
considerations. Many early PC programs required that a master disc be in the drive as much to overcome memory limitations as for security purposes.


Over time the technology for copying has progressed exponentially. We see this most dramatically in the music industry. With the advent of file sharing program one could share the collective music libraries of millions of people and freely download just about any song or artists you could think of. The most widely used peer-to-peer file sharing program was Napster founded in 1999 by an 18 year-old college drop out, Shawn Fanning.

The Recording Industry Association of America (RIAA) filed suit for copyright infringement and demanded $10,000 for every copyrighted song traded using Napster. The rock band Metalica joined the suit. In the lawsuit Napster argued that since the files were never in Napster's possession it was doing nothing illegal. On March 5, 2001, RIAA won a temporary injunction, which ordered Napster to stop trading copyrighted music over its network. In July 2001, despite attempts to overturn the court-imposed shutdown ruling, Napster had to close the doors on its MP3 file-trading network to comply with the court decision. On September 24, 2001, Napster agreed to pay over $26 million to settle its
legal battle with songwriters and music publishers, and an additional $10 million against future royalities. Napster declared bankruptcy and its assets were acquired by Roxio in November 2002. Roxio merged it with PressPlay, another acquisition, and began offering a portable music service.

Today Napster offers three ways to obtain music: as a member, Napster on the Go and the Napster Light Music Store where you can purchase a song “ala carte” for $0.99 or an album from $6.95. With a Napster subscription consumers can enjoy unlimited on-demand streaming and unlimited tethered downloading of songs to the hard drives of three PCs for as long as they maintain their subscription. Membership in Napster costs $9.95 a month.

Shawn Fanning, founder of Naspter, founded SNOCAP, Inc. in 2002. The firm is an end-to-end provider of digital licensing and copyright management services for the digital music marketplace. SNOCAP's content registry and clearinghouse enables record labels, publishers and individual artists to sell their entire catalogs through peer-to-peer networks and online retailers.

In October 2001 Apple introduced the iPod which for a few hundred dollars enabled one to store and play up to 1,000 songs (current version ~15,000 songs) on a highly portable device. Apple has since introduced several additional models, namely the iPod Mini, the iPod Shuffle, the iPod Photo and the iPod Nano. Essentially, these offer lower capacity and smaller physical size for less money. Apple has a website called iTunes, launched in 2003, where for a fee one can download over 2 million songs (99 cents each), 25,000 podcasts and 11,000 audiobooks to a computer which can then be transferred to the iPod. Materials from existing CD and other sources can also be transferred to an iPod.
In the last quarter Apple shipped 6,451,000 iPods, a 220 percent growth over the year-ago quarter. This generated $1.2 billion in revenue. This compares to shipments of 1.2 million CPUs for $1.6 billion. A number of firms have introduced similar devices.

Another new and emerging area for the music business is cellphones. In 2004 the sell of personalized ringtones for a few dollars apiece amounted to $4 billion. Initially, tunes were synthesized. Polyphonic ringtones can create multiple tones and/or notes simultaneously. The synthesized version has been succeeded by master tracks or true tones, which are compressed snippets of an actual recorded song typically 25 seconds long. Polyphonic ringtones are essentially cover versions of songs: aggregators must pay royalties to the publisher, who then pays the songwriter. But since master tones are compressed versions of original recordings, record labels are entitled to collect a fee. IDC
forecasts that the total volume of ringtone sales will approach the 100 million mark by 2009, and that by then, 4 in 10 wireless subscribers and customers will be ringtone purchasers. Master track or sampled ringtone sales have exploded in the past year, and IDC estimates that by 2009 nearly two-thirds of all ringtone revenue will be generated in this category.

Xingtone is a startup whose application bridges personal computers and mobile phones, empowering Internet users to utilize their MP3 and CD libraries to create custom ringtones and upload content, such as images and games, to their own wireless handsets. Ringtone Maker sells for $19.99, $9.95 for additional copies. Xingtone does not work with files that are digital rights-protected.

Apple and Motorola are working on a deal to put iPod technology on Motorola cell phones. Nokia has inked a deal with Loudeye to create a music platform that will let network operators build their own music services on top of Nokia phones. EMI, Sony, and Universal all have divisions devoted to distributing some of their artists' work as mobile ringtones. Even individual artists are in on the act. Alain Levy, CEO of EMI Music, for one, has said that digital sales could be 25% of his company's total in five years, with cell-phone downloads and subscriptions making up a big chunk.

The music industry has been turned on its head by new technology and yet technology may prove to be its savior by providing different types of end user experiences and therefore different opportunities for revenue.

The event that triggered this editorial was the content protection or digital rights management effort undertaken by Sony BMG, a joint venture between Sony Corporation of America and Bertelsmann A.G. and the second largest music label.

In November Mark Russinovich, a security expert with Sysinternals, discovered that Sony BMG had installed a hidden rootkit on some (~50 titles) of its music CDs. A rootkit is commonly used to circumvent antivirus software and take over control of a computer. Common PC monitoring mechanisms cannot detect them. They can capture passwords and message traffic to and from a computer. They can allow a hacker to provide a backdoor into a system. The software was developed by First4 Internet Ltd, a UK based developer of content management technologies providing Digital Asset Management, Copy Protection and Image Content Filtering solutions.

Sony's explanation for using this technology was: “The software was intended simply to prevent copying beyond the level appropriate for personal use. The content protection software was designed to enable you to listen to the music while the disc is in your computer, move the music tracks to your computer in a variety of file formats and make a limited number of backup copies of the audio on the disc. It also permits you to move the music files from your computer to compatible portable devices. “

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-- Jack Horgan, Contributing Editor.


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