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Markets for Rights Do Not Make a Wrong

Wednesday, January 24, 2007

The new business models that can be enabled by digital technology will make things better for everyone.

I pick up the non-directional remote in my family room. With the push of a single button, a blues playlist on my iPod across the room fires up on a set of surround-sound speakers. After a few minutes of Buddy Guy, I decide to catch a few minutes of the Phoenix Suns game I recorded on my TiVo after I went to bed the night before, unable to stay up for a West Coast game on East Coast time. One more button brings up the game on my high-definition widescreen TV. When I see the Suns have the game well in hand, I push another button and "Little Miss Sunshine" appears on the TV, being streamed wirelessly from my PC. After the movie, yet another button fires up my Nintendo Wii and I see if I can finally break par on the Wii Sports golf course.

This integrated world is fast approaching. Actually, it's already here if you're a techie who loves mixing and matching hardware components. To make it simple for the rest of us will require a little negotiation within the market, and attendees I spoke with at the recent Consumer Electronics Show (CES) in Las Vegas were bullish on seeing those deals happen.

JERKS by Flickr user ebmorseBut some Washington policy advocates at the show had less faith in the market. They claimed that restrictive copyright laws are preventing consumers from enjoying legally purchased content in the privacy of their own homes, in the way they'd most like.

It's easy to forget that when we purchase digital content, we are in fact purchasing a set of rights to that content, rights shaped by current technologies, as well as the expectations of both creators and consumers. When those rights are sold to us, there are some uses that the creator does not authorize. As we discover new ways of using content, those uses begin with the creator, who can then decide the terms on which he wants to sell them.

I can see why a consumer, having paid for a song or a movie once, wouldn't want to pay for it a second or third time in order to use it on another platform. However, when the market offers sets of flexible rights, consumers will be able to buy only the rights they want. If you want to listen to music only on your home stereo, say, but not in your car, then in the future you may be able to pay less—you won’t have to buy (and then not use) the right to listen in your car, as you do today.

From Microsoft striking a deal with Fox Sports to include content in the Windows Media Center found in Vista, to Qualcomm's MediaFLO convincing Viacom to supply Comedy Central content for its mobile phone TV service via Verizon Wireless, consumer electronics industry leaders are working hand-in-hand with content providers to grow a nascent but vibrant market. Both sides have a common goal: ensuring consumers can enjoy digital content.

Despite all the advances on display at CES, we are only in the earliest stages of this new market. There is a great deal of money to be made, whether you're a software company such as Microsoft or a hardware company such as Apple. Those two companies have the incentive and the means to play a role in every aspect of the home media experience, and in fact they would be betraying their shareholders if they didn't attempt to do so. But they'll face fierce competition from existing and yet-to-be-launched companies that will position themselves somewhere in the content-to-consumer value chain by offering user-friendly devices and services—companies such as TiVo and Sling. The latter company, considered revolutionary a year ago, was this year embraced at CES by the chief executive of CBS Corp.

Clearly there is no one true path to the ubiquitous home media experience. It's not for any of us to say if the best way to have seamless media experiences in the home is to have two or three major companies providing end-to-end connections, or if it's better for a thousand consumer electronics offerings to bloom and have many of those interoperate, or if we should have the most likely scenario, both. Ultimately, consumers will decide what models they prefer. As such, it's also not the government's place to decide how this market competition will resolve itself.

Some activists at CES sought attendees’ signatures to petition Congress to intervene in this new market. They want to curtail a 1998 law called the Digital Millennium Copyright Act. In that law, Congress recognized the challenge of protecting digital content online. The law aims to prevent the free-riding that tends to happen when copying is unrestricted, thus giving content creators some assurance of a market for content rights. Among other things, the law makes it illegal to circumvent copy-protection measures on digital content, although the statute itself contains exceptions and more have been issued every three years by the U.S. Copyright Office. The changes activists want would be a big mistake.

Consumer electronics industry leaders are working hand-in-hand with content providers to grow a nascent but vibrant market.

Does the DMCA encourage one digital business model over another? Does it favor the "walled garden" approach of Apple's iTunes and iPod? The truth is, it doesn’t matter. One approach is not necessarily better than the other.

For the sake of argument let's assume the DMCA puts a thumb on the scale in favor of a closed approach. If Company A creates a walled garden, and Company B hacks it and offers unauthorized products that are compatible with Company A’s, does this "choice" benefit the consumer more than Company B building a separate, competing walled garden would? Why even assume that Company A would enter the market to begin with, if the law does not protect its ability to differentiate itself through control of digital rights? The marginal cost of digital content production is vanishingly small—and if that’s all companies can hope to recover, it will stunt the growth of the market.

It has been nine years since the DMCA became law, and the digital content market, virtually nonexistent at the time of the Act, is now flourishing. New deals involving content, services and hardware are announced every day. Consumer electronics manufacturers are determined to deliver a ubiquitous home media experience, and content companies are inking licensing agreements as fast as they can. Congress should only alter the state of a market when there is a sign of market failure, and there are no signs of that here; instead, there is tremendous competition in price, services and features. We don't need Capitol Hill stepping into this feverish market and picking winners and losers. We must allow the market to keep working, so consumers may enjoy the fruits of that market.


Image credit: "JERKS!" by Flickr user ebmorse

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