Technology
Chances are you have heard about Bitcoins because lately the news has been full of stories about them. If you have not already, you will.
What is a Bitcoin?
A Bitcoin is a form of intangible virtual currency that is not backed nor regulated by any governmental entity. Despite this, Bitcoins are actual currency in that they are accepted in trade for real goods and services and can be exchanged for other, tangible currency.
So, then, WHAT is a Bitcoin?
This is where the explanation gets complicated. The Bitcoin is the brainchild of a computer programmer, or group of programmers, who go by the alias Satoshi Nakamoto. (The actual identity of Nakamoto remains a mystery.) It was developed as an alternative to governmentally issued currency. Although a Bitcoin does not exist in tangible form, it is an actual measure of value. Bitcoins, like gold, are “mined.” Rather than digging up the earth, Bitcoin miners use powerful computers to solve complex mathematical problems by “digging” through possible solutions. The correct answer to each problem is a unique number. Finding this number yields the miner a block of Bitcoins. These are monitored from the beginning of their existence by a computer network that maintains the authenticity of each Bitcoin, thereby making it impossible to “counterfeit” Bitcoins. This is the simple explanation for a very complicated process, but it will serve the purpose of this discussion. Click here for an in-depth discussion of this “mining” process.
While Bitcoins can only be used to pay persons and merchants willing to accept Bitcoins as payment, the number of merchants willing to do so (especially in larger cities) is growing. An owner of a Bitcoin can transfer it to a party willing to accept it as payment through a computer or smartphone without an intermediate financial institution. Those merchants accepting Bitcoins (both e-commerce and brick and mortar businesses) use the Bitcoin symbol which is a dollar-like double-barred “B” (shown in the photo, above).
Most business will not set their prices in Bitcoins because of value fluctuations. Some creative companies are working to make Bitcoins more mainstream, especially in the e-commerce realm. One such company, BitPay, handles Bitcoin transactions for over 4,500 companies, most of which are e-commerce websites, but some of which are traditional brick and mortar retailers. BitPay takes payments in Bitcoins, converts them based on the then-current value, and forwards the cash equivalent to the merchant. This places the risk of such volatility on BitPay, not the merchant. The value of Bitcoins is highly volatile these days. It was recently reported that the total value of Bitcoins in “circulation” currently is over $2 billion. Just a year ago, that number was a small fraction of the current value. The value of a Bitcoin a year ago was approximately $10. However, a couple of weeks ago, the value of a Bitcoin had shot up to an all-time high (over $250). By the end of the same day, the value had dropped back to $100. A cottage industry has arisen with people speculating over the value of Bitcoins (as they would with other precious commodities like diamonds and gold).
For a currency that only exists in a virtual world, it is gaining traction nonetheless. In fact, there are reports of people who have traded in their real world savings in exchange for Bitcoins in the hope that the value of Bitcoins (like any item that is scarce) will increase in value. Others simply choose to use Bitcoins because of the unregulated nature of transactions involving them.
While Bitcoins certainly can be and are used for completely legitimate purposes, their unregulated nature also lends themselves to use in connection with illegal activities such as drug trafficking, illegal weapons deals and other criminal ventures. This is causing concern with law enforcement officials.
While this could be a passing Internet fad, I don’t think so. I think that we will all be hearing more about Bitcoins in the coming months and years.
Technology
Google, in an effort to control the market for its Google Glass computer eyewear (cost $1500), is prohibiting purchasers from reselling or even lending them to another person. If someone tries to do that, Google has stated that they will disable the software that runs the device. Can they do this legally? Well, since the software is licensed, not sold, the Copyright Act’s First Sale Doctrine does not apply and the terms of Google’s license agreement (which prevent such sales or lending), will likely control.
Think about that before plunking down $1500 to be the first on your block to have these.
http://www.cnn.com/2013/04/18/tech/innovation/google-glass-resales/index.html?hpt=hp_t5
Music, Technology
In the tech world, a “disruptive technology” is one that changes a fundamental business or technical paradigm in the industry. Streaming subscription radio services, such as Pandora Internet Radio (also known as Pandora Radio or simply Pandora), is just such a disruptive technology. In a prior post, I discussed the interesting and innovative approach that is being taken by Pandora and its “Music Genome Project” from the standpoint of the listener’s musical experience. Today’s focus is on the business and legal impact of services such as Pandora on the record labels and recording artists, as well as on the music publishing companies and songwriters.
Pandora, like many of the streaming music services (such as Rhapsody and Spotify), has two levels of subscriptions: a free subscription supported by advertisements, and a fee-based subscription without ads. As might be expected, most users choose the free subscription.
Currently, because of copyright issues, Pandora is only available to subscribers in the United States, Australia and New Zealand. Even so, its growth (notice that I did NOT say profitability) has been impressive. So much so, in fact, that Pandora became a publicly traded company on February 11, 2011 and officially began trading on the New York Stock Exchange with ticker symbol “P” on June 15, 2011 at a price of $16/share. This gave them an initial public offering valuation of nearly $2.6 billion. During its 2011 fiscal year, Pandora reported $138 million in revenue with a $1.8 million net loss, excluding the cost of a special dividend associated with the IPO. Over time, Pandora hopes to become profitable, but that is no certainty. Pandora announced $80.8 million in total revenue for their first quarter of fiscal 2012, which was up 58% over their previous year’s first quarter results. Of the $80.8 million, $70.6 million came from advertising, while the other $10.2 million came from subscription. In addition, Pandora has seen a 62% advertising revenue increase, and a 38% subscription revenue increase year-over-year.
Pandora’s cost structure is highly variable, with “content acquisition costs” (mostly license fees) representing roughly 50% of Pandora’s total costs. There are three main costs associated with their content acquisition:
- fees payable for performing the recordings;
- fees payable for performing the musical compositions embodied in the recordings; and
- fees payable for song and artist information included as part of the service.
In the traditional radio world (e.g., playing a CD on a standard terrestrial station broadcast), public performance royalties are payable only to the owners of the copyrights to the musical composition (normally, a music publishing company and the songwriters) while the owners of the copyrights to the recording (i.e., the record company) do not receive a royalty. The theory was that playing recordings on the radio helped sell those records so there was no need to compensate a record label that just received that “free advertising.” Digital music services such as Pandora are treated differently: they are required to pay a digital public performance royalty to both the song publishers and the record companies.
A company called SoundExchange collects content fees on behalf of labels or artists on the recording themselves for these digital performances. These are by far the largest content acquisition costs. Pandora also pays licensing fees to the public performance societies, namely, Broadcast Music, Inc. (BMI), American Society of Composers, Authors and Publishers (ASCAP), and SESAC, Inc., in order to compensate composers, songwriters and publishers for the performance of their musical compositions embodied in the recordings.
So what is the impact of Pandora and other music streaming services on the music industry and musicians? For starters, it means that fewer consumers are purchasing CDs or even mp3s of their favorite music. Instead, they are getting it from these services. This means losses to the record companies and musicians.
Record companies and musicians are looking to offset those losses with licensing revenues from Pandora and other digital streaming services and with revenue from licensed ringtones and incorporation of music into video games.
These additional revenue streams for the record labels do not make up for the losses from CD and mp3 sales, however. Recording artists do not receive the normal artist royalty (which is based on a percentage of the retail sales price of CDs, etc.—normally around 15% before deductions), although they do get a percentage of licensing revenues. These revenues are not nearly as lucrative and a song needs to be played many, many times before the artist will receive meaningful compensation.
Even with the loss of revenues to record labels and artists, Pandora and other music services have lobbied hard to have the royalty rates reduced, claiming that they cannot make money while having to pay rates that are currently in effect. It seems the single biggest problem is that consumers have become accustomed to getting their music for free and that may be a trend that is very difficult to reverse.
So, is the emergence of this disruptive technology all bad news for the music industry? While this change in the business is just the latest in a series of body blows that have been suffered by the industry in the past ten years, there are those who feel that it actually presents the industry with a great new opportunity: despite the great decline in sales, the Internet has exposed consumers to more music than ever before. That accessibility has been difficult to monetize, however.
Artists see these new avenues as a way to better and more “democratically” promote their music, which leads to greater revenue opportunities for live performances. Record labels, seeing the same thing, now are attempting to negotiate so-called “360 deals” with artists that entitle the label to a percentage of the artist’s live performance and other music industry revenues (revenue streams that traditionally were off-limits in an artist recording agreement with a record label).
Stay tuned, as the one constant in the music business seems to be change.
Entertainment & Media, Law, Technology
In my last post I was critical of Netflix’s recent policy changes regarding pricing and consumer privacy. This week I want to give a big shout out to the flick rental giant. A recent decision by Netflix as to how they would distribute original programming content was a thoughtful, consumer-oriented decision that deserves praise. As noted in my earlier post, the home entertainment market is highly competitive and Netflix, like other premium services, is not immune to that competition. More and more of Netflix’s customers (in part due to their ill-advised pricing policy change) have elected to receive only the streaming video service from Netflix. As such, they are competing with other content providers at the set top box such as cable and premium cable (including pay-per-view), Hulu, YouTube, etc.
Part of Netflix’s plan was to create quality original programming that could compete with the likes of that which is shown on AMC, HBO and Showtime. Their first outing is called House of Cards, a drama that explores corrupt politics and its relationship with the press, and stars an impressive cast led by Kevin Spacey and Robin Wright. What is most significant about House of Cards, however, is the manner in which Netlflix has chosen to release the show. Rather than following the traditional pattern of releasing a new one-hour episode once a week over a thirteen week season cycle, Netflix decided release the entire thirteen-episode first season at the same time. By doing so, Netflix has allowed its subscribers the power to choose when and how to watch the series, either a little at a time or in a single thirteen hour sitting. Netflix subscribers already have the flexibility to choose the device on which to view their programming.
Why is this significant? While it is not exactly the same thing, it is an indication that we may be moving a step closer towards what some (including me) have argued for years: the notion of simultaneous release. I believe, as do others, that the value is in the intellectual property of the programming, not the means by which or the time frame within it is seen. Stated more simply, viewers, now more than ever, want to view content when or where they choose and on whichever device or devices they prefer.
Simultaneous release (also referred to as closing of the “video window”) has been opposed for years by the major motion picture studios. The smaller, independent studios have advocated for it. Historically, movies have been released first in theatres, followed next by a DVD/Blu-Ray release. After a period of exclusivity (usually several months), the movie is released through pay-per-view television and then through the premium cable networks. Only after all of those markets have been exploited are films aired on free television. This staggered release schedule has provided each distribution channel with an exclusive “video window” in which to profit from the movie. The staggered release schedule has been beneficial not just to theatre owners: it has also been claimed to have enhanced pay-per-view and later video sales. The large studios have insisted that without it, they simply could not make profits on their films.
Contrary to this traditional “video window” approach, small, independent film distributors and studios like the notion of simultaneous release because the movies they distribute have much smaller marketing budgets. With simultaneous release, they can spend the marketing budget in a single marketing campaign, rather than separate campaigns for each video window. These independents argue that simultaneous release is the only way that they can compete with the large studios and distributors.
While there certainly are merits to both sides’ arguments, it seems that consumers ultimately will dictate how and when films are distributed. Some people absolutely prefer the “movie theatre experience.” Movie theatres, which have huge investments in infrastructure, depend on ancillary revenues such as concessions to make their profits. The downside, of course, is that the theatre operators decide when the movies will be shown and inflate the prices of these concessions. Other people prefer to watch films, at their leisure, on crystal clear large HD televisions. Still others want even more flexibility to watch on their computers, tablets and even smartphones. They value the convenience over the picture quality.
So who is right? The answer is simple: they are all right. That is the point here. The value in the creative work is the work itself, not the delivery mechanism for it. Marc Cuban, the colorful billionaire owner of the Dallas Mavericks basketball team, as well as Landmark Theatres, and Magnolia Pictures, and the chairman of the HDTV cable network AXS TV, long has advocated for simultaneous release to maximize the potential revenue on every film.
The concept of dictating the time and format of viewing has not been limited to movies. Television also has insisted on the “you will watch the episodes as we decide to release them” approach for first run shows. They depend on advertising and need programming over a longer time period in which to sell that advertising. However, they also will need to adjust to the reality of television audiences: the viewership for traditional network programming is shrinking rapidly as more and more people, especially younger people, choose to get their entertainment in different ways, especially via the internet. Just look at how many people DVR programs and have their own “mini-marathons” during which they will watch an entire season after the fact. The numbers don’t lie. As traditional viewership continues to slide, advertisers will follow where people are, not where the television networks would like for them to be.
This same thing has happened in the music industry. When it switched from analog vinyl recordings to digital CDs in the 1980s, the industry had to invest in manufacturing and distribution facilities for this new technology. When the iPod and other mp3 players came around, this new technology disrupted the status quo. While record companies kept on pushing for people to buy CDs and found online and other digital distribution of music, consumers did what they always do: they chose the preferred manner of accessing that music. As a result, the music industry had a devastating 10 year period of sagging sales. That industry finally appears to have learned what is should have figured out years ago: that the value was in the music, not in the manner in which it was delivered. While audiophiles may continue to embrace the higher fidelity of CDs and the warmth of vinyl recordings, most people have chosen the convenience of being able to carry around 1000 songs in a device the size of a stick of chewing gum, even if the sound quality of an mp3 playing through ear buds is not nearly as good.
As a subscription service and a provider of its own original content, Netflix is not subject to the same “video window” pressures that are felt by the studios or the television networks. However, in my view, it is just a matter of time before the networks and studios recognize that in order to extract the maximum value in their investment, they will have to deliver their intellectual property according to what consumers want.
Entertainment & Media, Law, Technology
First Netflix announced a new pricing model last year where subscribers would be charged separately for access to streaming service and for rental of DVDs/Blu-Rays instead of the single charge for both that had been in place. The total charge, of course, was more than the single charge that had been paid for both services.
Despite the consumer backlash to the announced changes, Netflix still moved forward with its new pricing policy. As might have been expected, many Netflix customers became former Netflix customers (or chose to subscribe to only one of the two offerings). I can understand that Netflix is looking for new ways to generate income as competition heats up in the always competitive market for home entertainment dollars. However, you would have thought that they would have done their homework a little more diligently in assessing the likely marketplace reaction (and the resulting loss of customers and drop in stock price) before enacting the new pricing plan. It kind of reminds me of Coca-Cola’s decision to dump the old formula for New Coke without gauging how Coke drinkers would react, only to have to backtrack later.
On the heels of that pricing controversy
Netflix then decided to partner with Facebook to show its customers’ viewing histories on Facebook, presumably to data mine the value from that demographic and behavioral information. By aggregating the information collected by both on a Facebook user, Facebook and Netflix could paint a pretty accurate picture of a user’s anticipated buying behaviors and otherwise generate a fairly detailed personal profile. This allows Facebook and Netflix (and any third parties with whom they could share that information) to pinpoint marketing to those users. While some may view this ability to be targeted to one’s specific interests and activities as a real convenience, I (and I suspect a lot of other folks) see this as yet another erosion of our personal privacy.
Some history is in order.
The U.S. Senate, after heavy lobbying from Facebook and Netlflix, tinkered with the Video Privacy Protection Act (“VPPA”), a law originally enacted in 1988 after the video rental history of failed U.S. Supreme Court nominee, Robert Bork, was published by the Washington City Paper during his Supreme Court confirmation hearings. The VPPA, as originally enacted, outlawed the disclosure of video rentals unless the consumer gave consent, on a rental-by-rental basis. Previously, the law prohibited Netflix customers from allowing their Facebook streams to automatically update with information about the movies they were viewing, though Spotify and other online music-streaming customers could consent to the automatic publication on Facebook of the songs to which they’re listening. Facebook and Netflix both lobbied Congress hard to amend the VPPA to put it on an even footing with these music services. Late last year, the U.S. House of Representatives passed the Video Privacy Protection Act Amendments Act of 2012 and President Obama signed it into law. As a result, Netflix and Facebook now can automatically update a user’s timeline with a list of whatever they’re watching on Netflix.
So what’s the big deal?
Netflix says that you can “opt out” of this for each movie or show you rent, but how many people are going to remember to do this on a title by title basis or even once? It is bad enough when Facebook keeps eroding our privacy. However, it is a “free” service and allowing Facebook to monetize the data it gathers is part of the price you pay to use it. However, Netflix is a pay service. While the same people who enjoy keeping all of their “friends” up to date as to their current location, activities and meals might enjoy sharing this information with the world, I think that there are plenty of people who will not see it that way and Netflix can expect to receive some less than happy reaction from at least a portion of their subscriber base.
Entertainment & Media, Law, Music, Technology
A recent episode of the Fox television hit, Glee, featured the cast performing a cover of Sir Mix-A-Lot’s 1990’s hit, “Baby Got Back.” Almost immediately after it aired, legions of “Gleeks” accurately pointed out that the new version of the song was a nearly identical arrangement that had been released by Jonathan Coulton in 2005. Coulton has claimed that the show’s producers did not seek, nor were they granted, permission to reproduce his arrangement on the show. Having not seen the episode myself, I decided to put my musical training to good use (something that comes in very handy in my practice as an entertainment lawyer) and I compared the two versions. Yep, nearly a note-for-note copy of the Coulton arrangement.
Predictably, the Internet lit up with posts by folks offering their “legal analysis” of this situation. As with much on the Internet, this is another situation of “don’t believe everything you read simply because it is on the Internet.” Much of the discussion fails to address certain fundamental issues of copyright law and, even if discussed, many of the blog postings and articles that do address it are simply incorrect in their analysis.
Under copyright law, the owner of a copyright (in this case the copyright to a musical composition) owns a bundle of rights. Included in that bundle is the right to create “derivative works” based upon that work. The Copyright Act defines a “derivative work” as “a work based upon one or more preexisting works, such as a translation, musical arrangement, dramatization, fictionalization, motion picture version, sound recording, art reproduction, abridgment, condensation, or any other form in which a work may be recast, transformed, or adapted.” An arrangement of a musical composition is a typical example of a derivative work.
It is reported that Jonathan Coulton properly obtained a license from the music publisher that owned the copyright to “Baby Got Back” to legally prepare his new version (i.e., his derivative work) of the song. That cover version became popular as well.
The current issue is whether Glee’s recent version (which is nearly identical to 2005 Coulton’s version) is an unlawful reproduction or derivative work of that version or, on the other hand, falls under the category of “fair use.” This legal issue should not be confused with the “what is right” issue as to whether or not the producers should have sought Mr. Coulton’s permission.
There have been statements made in various publications indicating that since Mr. Coulton’s version was not the original version, anyone legally may use his version. A derivative work absolutely is entitled to copyright protection in its own right. In the case of a cover version done pursuant to the Copyright Act’s compulsory license provisions, it is true that the cover version normally is not subject to protection as a derivative work–unless the copyright owner of the original agrees to allow the creator of the cover to own a derivative work. Most cover licenses are not obtained via the compulsory license. Instead, most are obtained by getting a voluntary license, either directly from the music publisher or, more commonly, from the licensing clearinghouse The Harry Fox Agency. Those voluntary licenses may grant the derivative work rights to the cover creator. So, let’s assume, for the sake of argument, that Coulton’s version is subject to its own copyright protection.
Assuming that the cover is subject to its own copyright as a derivative work, what IS causing confusion here, is whether or not the Copyright Act’s fair use doctrine should apply. Along with the notion that a copyright owner has the right to control the creation of derivative works is the often misunderstood (and equally vague) concept of “fair use.” Fair use is a defense to copyright infringement for actions which, but for the applicability of the defense, would amount to an act of infringement.
Section 107 of the Copyright Act sets forth a non-exhaustive list of four elements that the courts must consider in determining if any unauthorized use of a copyrighted work is a “fair use.” They are: (1) the purpose and character of the work (which is claimed to be a fair use); (2) the nature of the copyrighted work; (3) the amount and substantiality of the portion used in relation to the copyrighted work as a whole; and (4) the effect of the use upon the potential market for or value of the copyrighted work.
While the statute does not list it as a factor that must be considered, as a result of an interesting 1994 U.S. Supreme Court decision in the case of Campbell v. Acuff-Rose Music (a case involving rapper Luther Campbell’s unauthorized cover version of Roy Orbison’s classic song, Oh, Pretty Woman), the courts have established another element to be considered: whether or not the unauthorized use is a “transformative use.” While some consider this to be a new “fifth element” to be considered, most legal scholars consider the “transformative work” test to be an element to be considered as part of the analysis of the first of the four statutory factors, i.e., the purpose and character of the work.
The Campbell Court stated that a derivative work becomes a “transformative work” (and, thus, entitled to fair use treatment) if it uses a source work in a completely new or unexpected way. In other words, even though the statute says that a copyright owner may stop others from preparing derivative works based on their copyrighted work, if that new work is “transformative” enough, the copyright owner may not be able to stop the use, even if the other four fair use factors set forth in the statute weigh against a finding of fair use. One thing that has led to quite a bit of confusion over the years is that the definition of a “derivative work” includes a work that is “transformed.”
Confused yet? From the variety of commentators on this point, it is clear that there is little consensus on how to apply this in the real world. Because reasonable people can disagree as to whether or not any given use is a fair use (including whether a transformed work has been sufficiently transformed as to amount to a fair use), many record producers and recording artists will seek to obtain licenses to create these new versions as a sort of “insurance policy” against a lawsuit alleging infringement. Nonetheless, others are willing to roll the dice that the use is sufficiently transformative to qualify as fair use.
So, what about the current situation with Glee? Assuming that Mr. Coulton did obtain a right to create and record a derivative work of the original Sir Mix-A-Lot composition (this right is called a “mechanical license” when used for audio-only versions and is called a “synchronization license” when used for audio-visual versions), he has nothing to worry about. In fact, depending on the terms of his license with the original copyright holders, he may even own a separate copyright in the changes he made to the original composition. By taking his derivative work and merely reproducing it, the producers of Glee likely have infringed the copyrights in that derivative work, unless they can argue that their use is “fair use.” While reasonable people can, and do, disagree as to whether any use is sufficiently transformative in order to amount to a fair use, clearly, there has been no transformation of the Coulton version to the Glee version. Thus, their case will have to live or die on the analysis of the other four fair use factors.
Personally, I can’t see how a nearly note-for-note copy (while perhaps an homage, of sorts) is a parody or other type of fair use.
