Hollywood Embraces Big-Brother Tactics

Hollywood’s getting serious, but it isn’t Sept. 11 that’s responsible. The entertainment industry has identified the real threat to its continued existence--Silicon Valley. Alarmed by the rise in pirated DVDs and CDs, Hollywood and the record companies have stepped up their efforts to push Congress to pass legislation extending the protection of intellectual-property rights. Lawmakers have held several hearings on digital copyright protection, and, at the urging of the industry, Sen. Ernest F. Hollings (D-S.C.) has introduced a sweeping bill called the Consumer Broadband and Digital Television Promotion Act. If the legislation passes, Silicon Valley would have a year to come up with measures to solve the copyright problem. Short of that, the bill could even lead to new electronic computer products containing software that would alert a government regulatory agency to a user’s attempt to violate copyright rules. The aim is give the entertainment industry virtual control over the digital domain.

But technological change is not a zero-sum game. Instead of trying to restrict consumer rights, the entertainment industry should create a new business model that works with--not against--technology. If copyright protection is expanded, technological change will be slowed, and consumers will be the big losers. Not only does creating a government agency that would electronically monitor consumer behavior have unpleasant overtones of Big Brother, but it would also cripple Silicon Valley’s ability to put out new, innovative technologies. Congress should be in the business not of trying to slow the digital highway but of lifting speed limits.

No one disputes that the entertainment industry is in the doldrums. Over the past two years, sales of music CDs have plummeted by as much as 10%, depending on the numbers you’re looking at. At the recent South by Southwest Music Conference, pop-music industry’s biggest annual conclave, keynote speaker Robbie Robertson of The Band said the dominant emotion is “doom and gloom.” British music giant EMI Group has announced plans to cut about 20% of its work force and release 400 of its 1,500 artists. Sony, Bertelsmann Music Group (BMG) and Warner Music Group have also had lousy sales.

Hollywood fears a similar financial fate awaits it. Jack Valenti, head of the Motion Picture Assn. of America, recently declared in the Wall Street Journal that, “With what velocity will this avalanche of thievery roar when broadband is more widely used?”

But are technology and the Internet solely to blame for the industry’s woes? No one forced EMI to give singer Mariah Carey an $80-million music package that it has had to eat. With sales plummeting, it’s also hard to justify the tens of millions of dollars in compensation that record executives have grown accustomed to. The ripping and burning of CDs from the Internet--about 3.6 billion songs are illegally downloaded a month, according to the Recording Industry Assn. Of America--may well cut into sales, but no one knows exactly by how much. Anyway, there is no hard evidence that those doing the ripping and burning would actually have bought the originals if they weren’t available cost-free on the Net.

Such uncertainty hasn’t deterred the industry from seeking copyright protections that may violate the rights of consumers to use a product noncommercially as they see fit. The U.S. Supreme Court has found that within the private sphere, no harm is done when a consumer, say, records a movie in the morning and then watches it in the evening. Furthermore, the 1992 Audio Home Recording Act specifically says that consumers have the right to copy material for their own use.

But the entertainment industry wants to criminalize all CD copying, as well as digital broadcasts. Already, it has started to encode some CDs to block copying--at a cost to consumer satisfaction. The encoded CDs sometimes skip or can’t be played in normal CD machines, and listeners, in blind tests, have noted that their sound quality is inferior to regular CDs. This is perverse. One reason to buy CDs is that the sound quality isn’t supposed to be degraded, as it is with MP3 versions.

The fundamental problem in all this is Hollywood’s desire to maintain complete control and to make ever greater profits. As Joe Kraus, co-founder of the Internet portal Excite and of Digitalconsumer.org, testified before the Senate Judiciary Committee earlier this month, “[The industry’s] goal is to create a legal system that denies consumers their personal-use rights and then charge those consumers additional fees to recoup them.”

If Hollywood and the music industry get what they want, consumers’ incentive to upgrade their technology might be weakened, a development with obvious economic implications. Their old personal computers or DVD players that are free of controls might be preferable. Hollywood’s hardball tactics have already slowed the spread of broadband access because the stream of movies it promised a few years ago has been, at best, a slow trickle. High-definition television may look sharper in your local audio-video store, but why pay a premium for an HDTV-ready set when the distribution system is such a mess?

Nor can the industry be trusted when it gets what it wants. In 1998, Congress passed the Digital Millennium Copyright Act, which created new safeguards for the industry and eroded some consumer rights. The industry claimed that the legislation would allow it to start pumping out high-quality digital wares. Fearful of unauthorized copying, it has not followed through. The new Direct TV satellite system may end up containing tuners with devices that downgrade picture definition, which was not the point of buying a more expensive television set capable of receiving higher-frequency signals. The industry is insisting on the device because any copy made by a product containing it would be worth less. The rationale is that the higher the retained definition of the medium, the more valuable it is.

Hollywood has played Chicken Little in the face of technological change before. Two decades ago, Valenti decried the VCR as a mortal threat to the movie industry. Now, video licensing fees make up a big percentage of the film industry’s profits. And when the CD was introduced in the early 1980s, the recording companies immediately jacked up prices. Barry Willis, an editor at Stereophile magazine, notes that the movie industry has always predicted doom whenever a new technology emerged: Television and even drive-in movies were said to be dangerous, because “somewhere, someone might be able to watch for free.”

Rather than stand in the way of technological progress and consumer satisfaction, industry executives should start working to build an online distribution system that consumers can pay for. Clearly, some safeguards for entertainment material that can be commercially copied are in order. But right now, the industry is stuck on automatic rerun, and consumers may have to foot the bill.