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Sony BMG Music Entertainment, the world’s second largest music group, has become embroiled in a very public debacle after it put copyright protection software on its compact discs. The discovery that the software could expose the CD users’ personal computers to hacker attacks has highlighted the controversial use of digital rights management (DRM) technology as well as hitting the operations of the joint venture between Japan’s Sony group and Bertels­mann, the German media giant.

Sony BMG has been forced to suspend use of the software, recall millions of music CDs – including some from its best-selling artists such as Celine Dion and Natasha Bedingfield – and issue a humiliating public apology. In addition, the company faces a slew of lawsuits in the US, including one tabled by the Texas attorney-general, which accuse Sony BMG of privacy and spyware violations that could put further pressure on the company’s embattled US management.

There are indications that sales of Sony BMG-branded CDs have fallen, particularly of the 52 discs that the company finally acknowledged contained the hidden ­software.

Now, as Sony embarks on a nearly unprecedented recall and exchange programme for the 4.7m music CDs containing the software, including an estimated 2m sold to consumers, industry experts say the record label’s missteps highlight a broader question for the computer and entertainment industries over the use of DRM.

While implementing effective but fair DRM technology is notoriously difficult, critics argue that Sony BMG’s music CDs, which installed a “rootkit” program that buried its DRM software deep on consumers’ hard drives when they were played on a PC, went too far.

But they also acknowledge that in its haste to protect digital content from piracy, Sony BMG is not the first company to fall foul of privacy concerns.

Mark Russinovich, the software developer and blogger who first discovered the rootkit on Sony BMG discs three weeks ago, points out that many other spyware software programs also invade users’ PCs – often without their knowledge or full agreement.

“Consumers don’t have any kind of assurance that other companies are not going to do the same kind of thing [as Sony],” he said in a recent online article for Eweek.com, published by the media group Ziff Davis. “Which actions are considered actions for which users want really prominent disclosure? I think that’s a complicated issue, but it needs to be addressed.”

As the same article noted, the controversy over Sony BMG’s use of copyright protection highlights the clash of two ideas of property as the technology and entertainment worlds converge.

In the emerging digital age it has become easy for almost anyone to make technically perfect and frequently illegal copies of music, movies and video games using a PC. As a result, music groups and movie studios have complained bitterly over the past few years that their intellectual property rights are ­routinely undermined by people burning copies of discs or DVDs, or trading files online.

While the widely publicised crackdown over illegal file-sharing services and users has had some impact, recent research suggests that nearly 30 per cent of people in the US have obtained music by burning a copy of a friend’s CD.

So record companies and other media content owners have responded by developing technology or supporting initiatives that limit the ability of a PC to make unlimited copies while permitting “fair use”.

These initiatives range from the rootkit software embedded in Sony BMG’s discs to the “broadcast flag” technology that blocks the retransmission of copyright material and that advocates say would prevent digitally recorded television content being swapped and traded online.

But some, including the powerful Consumer Electronics Association in the US, fear the concept of fair use enshrined in the Sony Betamax case 25 years ago could be curtailed.

“In the rush to crack down on pirates, we risk eliminating a critical consumer right – the right to use copyrighted material, without the permission of the copyright owner,” Gary Shapiro, the CEA president and chief executive, said in testimony before a congressional committee investigating the issue earlier this month (the CEA’s members include Sony).

Mr Shapiro argues that fair use is central to innovation because it allows the development of new products such as digital music players or DVD recorders that consumers can use to enjoy content that they have purchased.

“Fair use is a safety valve which ensures that you don’t need to ask the copyright holder to use copyrighted content. Fair use protected the Betamax and without it, we would have no VCRs, no tape recorders, no iPODs, no TiVos and no SlingBoxes.

“Our technological leadership – especially in the age of the internet – has relied on the protection fair use gives to innovators and venture capitalists. But this protection is rapidly eroding,” he warned.

“Until the [Supreme Court] ruling that said it’s illegal to encourage people to break the law by copying protected content in the Grokster decision this year, innovators were playing under the Betamax decision’s bright-line rule: a product is legal if it has substantial legal uses. The Grokster opinion added ambiguity to this rule, leaving innovators on uncharted legal ground. This shadow of litigation over the introduction of virtually any new product that manipulates content especially harms smaller entrepreneurs.

“Fair use is now all that protects inventors, investors and consumers from an over-regulated world in which every use of every product must be authorised in advance by every copyright holder,” Mr Shapiro said.

For the moment, the US television and film industries have accepted that one of the best ways to thwart piracy is to make as much of their content available on new distribution methods as legitimately as possible.

One lesson from the music industry’s battle against containing the spread of pirated music through digital file sharing was that music labels for too long resisted customer calls to make songs available digitally.

The music industry may not, however, be a complete blueprint for other media sectors. Sony BMG’s recent difficulties are partly the consequence of the “old technology” of CD players.

Tens of millions of CD players would not work if encrypted CDs were used on them. Sony had to develop encryption technology while trying to overcome that hurdle. “The encryption issues facing the movie industry or the film industry are very different because these sectors do not have to deal with such a large technological barrier as the music sector does,” says a senior executive at a large media company. “We are starting with a cleaner slate.”

The Sony BMG debacle is also a reminder that customers must be informed about what they are buying and what restrictions on usage, if any, are included in their purchase. Music industry blogs say consumer confidence in the sector has been damaged by the Sony BMG CD recall, dealing a further blow to the battered reputation of big music labels.

“There is no question all industries who face the encryption challenge have to be very aware of customer reactions and expectations, and presentation of information has to be very forthright and very clear,” says another senior industry executive.

The other side of the digital distribution explosion is the need for media companies to ensure they have the rights to distribute content in new ways. It can take months or even years to go back to artists and renegotiate rights.

Already, the film industry has been negotiating longer contracts effectively to give production companies full rights over distribution. The television industry in the US is catching up, and digital distribution deals of top content are being announced at breakneck speed.

This month, for example, NBC Universal announced a deal allowing on-demand viewing of some of its most popular television shows such as on the DirecTV satellite platform, the biggest satellite operator in the US. CBS announced a similar deal with Comcast Corp, the biggest cable operator.

“There is a lot of work going on behind the scenes to resolve these issues,” says Rick Cotton, general counsel at NBC Universal. “You will start to see new distribution arrangements entered into. Now the process has started it will only accelerate.”

TRACK RECORD: SONY BMG’S PRIVACY DILEMMA

■ The discovery of Sony BMG’s “rootkit” software hidden on its music CDs has brought accusations of privacy and spyware violations

■ The controversy over Sony BMG’s use of copyright protection highlights the clash of two ideas of property as the technology and entertainment worlds converge

■ Record companies and other media content owners have responded to illegal copies being made of CDs by trying to curb the ability of PCs to make unlimited copies while permitting “fair use”

■ Critics such as the Consumer Electronics Association fear that any curtailment of the concept of fair use could stifle innovation.

Copyright The Financial Times Limited 2017. All rights reserved.
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