The Next Video Machine?

The Kaleidescape video jukebox is a pretty simple idea: 5.5 terabytes of storage hooked up to your television. Store your DVD collection on it—up to 825 DVDs—and watch each one in an instant. No messy search for DVD boxes, a sizable fraction of which turn out to be empty (do people actually put away DVDs in your house)? A real video iPod: hundreds of selections a few clicks away. Sounds good? Not to the DVD Copy Control Association which sued Kaleidescape in late 2004. (Updated info on the lawsuit is here.)

 

What on earth can be the problem with storing your DVD collection on what after all is nothing more than a fancy, large hard drive? The answer tells us a great deal about tricky issues of the real business of lawyers—institutional engineering—when we are dealing with copyright and technology.

 

I italicized “your” for a reason, as I think everything turns on that. There is no good way for the machine to know whether the DVD that you have inserted for copying is one that you just purchased at Wal-Mart or one that just arrived in the red envelope from Netflix. The machine can’t tell whether you are an owner of the DVD, a renter or have just borrowed it from your neighbor.

 

Suppose that you own the DVD. Do you have a legal right to copy it to the server? I think the detailed technical legal answer is “gosh, that’s a hard one, don’t know for sure.” Under current U.S. law, you don’t have a straightforward general legal right to copy content that you own, even for private use. The Sony Betamax case which validated some private copying would have been a no-brainer if you just could make private copies willy nilly. But you can’t, and other than a handful of semi-clear private copying rights (some for music under 1008 (don’t rush to the statute) and some for libraries under 108 (ditto)) private copying usually turns on the uncertainties of fair use. That said, I suspect that no one will get worked up if you were to copy DVDs that you owned to your server in your house.

 

But if you have rented the DVD or borrowed it from a friend, then we have a different case. The whole premise of rental or lending is temporary access, not permanent access. If Netflix becomes the new 3Rs—rip (the envelope), rip (the DVD) and return—we will find it impossible to separate rental and sale, temporary access from permanent access.

 

A substantial fraction of copyright discussion, especially about the Digital Millennium Copyright Act, emphasizes particular examples. The argument takes the form of “with the DMCA, the following use can’t take place and that can’t be right, can it?” Tim Lee, whose post on this spurred this post, makes this argument in describing how the DMCA has stifled innovation.

 

This is an incomplete way to frame the argument. These situations are usually about sets of uses. The technology will allow us to allow A, B and C or X, Y and Z, and we are not just choosing B or Z. We are choosing among different bundles of uses. To be less abstract, we should try to define the relevant sets of uses at stake for the video jukebox. One use—a practically valid if somewhat legally uncertain use—is copying DVDs that you own to your home video server. The second use is copying rented DVDs to the box. A third use might be copying home movies that you have burned to DVDs (though presumably that content isn’t controlled by the CSS system found on commercial DVDs).

 

If we can build a cost-effective machine that allows uses 1 and 3 while blocking use 2, we should do so, but otherwise we are stuck with a machine that allows all three uses or none at all. And that brings with it choices about institutional structures. If rented DVDs can be ripped to the server with ease so that you keep the content, can we sustain both rental and sales markets for DVDs? When we had, briefly, a legal market in rental music, Congress responded quickly to kill it off with the Record Rental Amendments of 1984. Congress recognized that the music rental business was really rent-to-copy-to-own and we had to choose between the music rental market and the music sales market. We can’t always be sure that when Congress acts it does so out of pure motives, but, as I have suggested, I think that there are good reasons to want to sustain both rental and ownership markets in video, if we can do so, and even if we couldn’t have done so for music.

 

Now we face some choices. This is about how we engineer the enforcement of legal rights. We could allow the machine and look for an alternative way to enforce the legal rights trampled when rented DVDs are ripped to the machine. Spot checks on houses? Subpoenas to Netflix to see how quickly I am returning my movies? If these actions against end-users are unattractive—they certainly are to me—we are back to having to decide what to do about the machine. We will often want to design in enforcement at the front end rather than having to enforce it one-by-one at the back end, and this is exactly what the combination of the DMCA and CSS does for DVDs.

 

We might also consider a point about sustainable market combinations. By that mouthful, I mean the following. At least for now, we seem to be sustaining a music market with two parts: legally acquired (purchased CDs or purchased or given away online) and illegally downloaded. We have both free and fee at the same time. Some people want to comply with the law and hence just won’t participate in the free, illegal market. Others may be deterred from the illegal market by the risk of participating in that market (software viruses or the fear of legal enforcement). I don’t know that we could sustain in the music market fee/sale; fee/rental; and illegal. The 1984 music law may reflect that judgment, though do note that the ability of libraries to lend music puts pressure on this system. But libraries don’t scale, while a commercial enterprise would ramp up quickly.

 

For video, digital right management may help to make it possible to sustain these three markets. The darknet critique of DRM says that there will always be an illegal market. Someone will be good enough to break the scheme and put the content into the clear. Given that some people will not participate in the illegal market, we can sustain both free and fee markets. But DRM may help us sustain both fee/sale and fee/rental and that takes us back to the video jukebox.

 

With cheap video jukeboxes and easily copyable DVDs, my guess is that even the honest would be sorely tempted to do some copying. Haven’t quite finished the movie when it needs to be returned? Rip it and keep it just awhile longer by loading it on your video jukebox. After all, what is the real difference between having the content for six days instead of five? Many of these lines seem quite arbitrary and you could imagine a range of consumer views about the acceptability of temporary ripping.

 

DRM schemes prevent that. The schemes force a user to make a bigger and more transparent—to the user herself and to possible enforcers—jump in illegality. No slippery slope to illegality but instead a real choice. Critics of DRM make exactly that point—DRM turns honest users into users looking to beat the system—but we now have reached an empirical judgment about what honest users will do in the face of an irritating constraint.

Comments

[Bruce Boyden]

"The technology will allow us to allow A, B and C or X, Y and Z, and we are not just choosing B or Z." This is the point missed by a lot of people, such as the L.A. Times editorial board recently.
http://www.latimes.com/news/opinion/editorials/la-ed-piracy10jul10,0,2000938.story?coll=la-news-comment-editorials

One possible solution here is, ironically, even *more* content protection. That is, if devices had some way of distinguishing between DVDs you rent or borrow and DVDs you own, the substantive objections to Kaleidescape might go away. (Of course, the CSS license would still be there, and it might not be the easiest thing in the world to change.) But that would require some way of either tracking what consumers own, e.g. by registering DVDs, or some sort of code on the DVD itself that would distinguish rentals from owned copies. But that would lead to problems concerning how you force rental companies to rent "rental" DVDs, for example.

This issue may be worked out for the next generation. Providers of AACS-encrypted high-def disks will, under the final license, be required to offer consumers the ability to make at least one copy of the disk. I suspect that copy will be associated somehow with the particular disk or download, to eliminate Rent Rip & Return, but the details on how the "Managed Copy" is actually supposed to work are sparse at this point.

[Randy Picker]

Yes, I agree. I have a paper in which I discuss the role for identity-based digital rights management, something that we see with online content. The paper is at:

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=899155

[Doug Lay]

"Institutional Engineering?" Sounds like centralized economic planning to me. That's got a great reputation. And - suprise, surprise - where considerations of institutional engineering hold sway, we find freedoms being squeezed out of existence - in this case fair use rights and the freedom to tinker (freedom to reverse engineer, if you prefer).

[Randy Picker]

On fair use, all section 107 does is pull certain uses out of the general infringement regime created by copyright law, meaning that if you do one of those uses, you can't be held liable for copyright infringement. Section 107 doesn't create an independent right of access to works and doesn't limit the ability of a copyright holder to condition access to the work. Limits on those conditions will have to be found elsewhere, if anywhere. DRM is just one example of a way to condition access to the work and is not dealt with by Section 107. So while the phrase "fair use rights" is widely used, I think that is only partially informative if that.

On institutional engineering, I actually think that is what non-litigator lawyers do. We build frameworks--institutions--in which activities take place. So in other parts of my life, I have helped draft statutes for secured transactions and bankruptcy. In both cases, large volumes of transactions take place in the regimes that those statutes create. Institutional engineering?

And the world loves engineers but alternates between hating lawyers and treating us as a necessary evil.

[Drummond]

"I don’t know that we could sustain in the music market fee/sale; fee/rental; and illegal." I believe we do, at some level, with services like Napster-to-go, which has ~600,000 subscribers. It was also "cracked" within days of its release by means of the "analog hole".

The "analog hole", or analog reconversion problem, creates an inevitable weak link in copyright protection, an extremely weak link at that. The conversion from analog to digital is a relatively basic action and it is extremely unlikely that it will ever be "plugged".

Any action taken to encrypt or otherwise thwart the capture of the signal will ultimately fail unless the MPAA contracts with the NSA to encrypt their DVD's.

It is my belief that, in the light of these facts, we are left to create not the fool proof system that the MPAA would like, but rather a moderate system that allows easy, unencumbered access to the content that consumers would purchase. Essentially a system that does little more than keep the honest people honest. Efforts to police those who wish to crack digital media will in the end be for naught.

[Doug Lay]

I gather by your use of the term "Section 107" for what us lay folk would call "Fair Use" that you don't have a lot of use for the term. Oh well, one effective way to remove freedom is to argue that it never existed in the first place. How about this, as a paraphrase of the last paragraph of your post:

"Where there was once an ambiguously-defined space within which consumers and tinkerers could legally exercise free will, now there is nothing."

Nice work. High-fives all around.

I don't care for the engineering metaphor for what lawyers or politicians do. Too teleological, too top-down, too little room for independent agency on the part of the engineered subjects.

[José Pacheco]

But Doug, you forget that in a copyright issue the "full rights" are the copyright holder's. Due to the copyright laws or by contract, different spaces are created for users, such as fair use. Indeed, they're giving the user some freedom that he shouldn't necessarily have in the first place. The Law, or the holders, by contract, may give you fair use rights, and refuse tinkering (or allow, it depends on the holder).

In a copyright-less environment, rules would be different, but so far we are not dealing with that.

[Doug Lay]

José:

Fair use isn't something granted or withheld by the copyright holders, or at least it wasn't until the DMCA came along. Again, my congratulations to those who never liked the concept in the first place for an evisceration well done.

[José Pacheco]

Still... unfortunately that's a matter of policy. Are we discussing proper policies, or how the current policy works? If it's the former, I would go for weaker and narrower copyrights, going slowly towards the end of economic rights on the subject, but preserving so called moral rights.
The policy, as it is, implies limits, whether they come from the Law or from contracts.

[Doug Lay]

José:

Reading through the original post above, it seems it's about proper policy. Picker talks about choices and "engineering the enforcement of legal rights." He's talking about creating a framework. I disagree, quite strongly, with what appear to be his conclusions.

Regarding "moral rights" of the content creator, my (admittedly limited) understanding is that they are a creature of European legal systems and have historically, for better or worse, not been recognized in the American legal system. In another post, Picker states that DRM is a mechanism by which moral rights can be snuck into the American legal system. Here I question: whatever the merits of moral rights, why is it proper to sneak them into the legal system under another guise?

[José Pacheco]

Th whole thing with moral rights is to completely separate the "autorship" from the economic exploitation. Hence, a copyright in Europe usually has both components: moral and economic. Moral is who is the author, the economic is who can exploit.
That serves two purposes: no matter who has the economic rights, the author will remain the same; and it's the best way to go for advocates of a copyright free world, because it preserves the moral component (i.e. who did it), recognising the author while leaving the economic part free for all.

Going back... the proper policy? Is the end of the copyright world as we know it. Techonlogy is far ahead. Encrypt, we'll decrypt. Protect, we'll break it. Authors should embrace the ease of transfer that we have now, and view it as an advertising tool. In the end, if you can't distribute it for free on a peer to peer, how would you think you'll be able to sell it?
It's time to change it, and it implies liberalising it. Some people are already doing it, and it seems to work.

[qw]

what I learend from professor Picker in law school:

1. In conditions of ideal competition, price of commodities should approach their marginal costs. What does that translate into with regard to movies? that movie companies don't really compete.

2. Monopolies are the most efficient forms of distribution in the absense of monopoly profiteering. Size breeds efficiency, which is good, but it also breeds the ability to exact monopoly profits, which is bad. Therefore we should encourage efficiency that comes with size and ecomomies of scale, and regulate pricing.

[José Pacheco]

qw, about your remarks:

1)
Your silogism is false. You start with "in conditions of ideal competition". Ideal competition doesn't exist. Is a model for understanding the market. It tells us how firms must behave in order to survive.
I don't know if these firms compete, but I can assure you they don't compete in ideal conditions, because that's imposible.

Besides, you need data about how the investment in producing a movie translates into average costs. The low marginal cost you wrote about has to do with the replication of a DVD, but you need to incorporate the part of the average cost that relates to the production of the movie. Hence, the marginal cost might not be so low as you think.

2)
I'm under the impression that you should only regulate prices when there are 2 kinds of condition:

i) industries that tend to be monopolic and whose consumers can't (or shouldn't) wait for a new competitor to contest the monopolist (e.g. usually, transmission of electric energy). Not necessarily natural monopolies, but sometimes they could be so.

ii) there are barriers to entry, but the real ones, such as government intervention, irrational requirements, restrictions due to techonlogy issues (e.g. limits of radio spectrum), etc.

Both are well explained into a regulated market, where it's not likely that competition will flourish. Where there's competition, prices are only signals of the relationship between supply and demand, and we should not tinker with them.

Under Verizon vs. Trinko, I hope people start to realise that monopoly profits aren't "bad", as you said. They're part of the cost of the efficiency gained in distribution. Inefficient monopolies will perish, efficient ones should be encouraged without restricting their monopoly profits. They're the price we pay.

[Doug Lay]

qw:

regarding your point #2:

Isn't there an argument to be made that open standards (such as TCP/IP and HTML for instance) can provide the same sort of economies of scale that monopolies provide, without the predatory pricing problems? Does Picker's theoretical framework predate the Internet? Is it being rendered obsolete by the Internet?

[José Pacheco]

Predatory pricing doesn't exist. It only works on a model with high entry costs, low exit costs and a financial market that doesn't reach the predated firm. The best that can happen to you is to be predated. It'll doom the big firm and give you a cheap monopoly.

[qw]

Jose,

You say, "The low marginal cost you wrote about has to do with the replication of a DVD, but you need to incorporate the part of the average cost that relates to the production of the movie. Hence, the marginal cost might not be so low as you think."

No, actually that is not the theory. Those are the fixed costs, the costs of making the movie. The marginal costs are the costs of reproduction and distribution of the movie, and the theory goes the fixed costs will be made up for eventully because price only approaches marginal cost but never actually reaches it.

It is also good to regulate price when there are external costs of the transaction not borne by either the supply or the demand.

"I hope people start to realise that monopoly profits aren't "bad", as you said. They're part of the cost of the efficiency gained in distribution. "

Er no, they are always bad and result in dead weight loss. they are not part of the cost of creating the efficiecy. That is the whole point. Whatever cost savings that can be passed down due to efficieny of the monopoly no longer need to be because they have no competition. Otherwise they wouldn't be monopoly profits, just profits.

[José Pacheco]

About marginal cost: it might be useful to compare the sunk costs and the fixed costs. The problem is you assume reality resembles the model. The "eventuality" of recouping the fixed costs is what the model needs, but in real life firms must add the fixed price to the average cost. Marginal costs can be the average marginal cost, the variable marginal cost, etc.

Monpolies are not always bad. They might be bad. They might provoke deade weight loss. Monopoly theory only shows how they could behave, but there's no guarantee about it.
Since Baumol et al, the theory of contestable markets shows that some monopolists might even act closer to competition, and under Bork we have that the more efficient the monopolist, the lower its costs. That increases output -to get a bigger profit- and decreases price.