Innovator Essays - Fred Von Lohmann

In high-technology markets, disruptive innovation is something to be taken as a given, like gravity. Businesspeople do their best to exploit it, avoid it or cope with it. Industry upstarts depend on it, while established companies fear it. But no one in the competitive world of high technology thinks they can stop disruptive innovation, any more than they can alter the laws of gravity.

But what if you could? What if an industry could banish disruptive innovation, leaving only a "well-mannered marketplace" of incremental innovations that reinforced comfortable business models?

In Hollywood, a town known for making dreams come true, that project is under way. For the past several years, the titans of the entertainment industry have been working to eradicate disruptive innovation from their business horizons. The effort has been staged using copyright laws made by courts, lawyers and lobbyists; the mechanism has been a web of regulations and legal risks that have hemmed in those who make digital technologies that can copy, share and manipulate movies and music.

While this may sound like good news for the entertainment industry, it is certainly bad news for everyone else. The entertainment industry has a history of fighting technologies that upset existing business models. Yet disruptive innovation in media technologies has fueled economic growth, spawned new industries and given consumers ever greater opportunities to access and remix their favorite movies and music. And ironically, disruptive innovation has invariably ended up enriching the entertainment industry that once tried to smother it in the crib.

In short, should the movie and music industries succeed in their effort to banish disruptive innovation, everyone will end up the poorer-the fans, the innovators, the economy and future generations of musicians and moviemakers.

Innovate first, adjust later
Like established market leaders generally, incumbents in the entertainment industry have never been fond of innovations that disrupt their markets. As a result, they have consistently tried to use copyright laws to block these disruptive innovations. As early as 1906, the music industry was responding to new technology-then, the player piano-with proposed legislation that would put the offending invention under the music industry's sole control. No less a figure than America's great composer John Philip Sousa argued that the player piano was a dangerous machine that would be a catastrophe for music in America. Fortunately, the music industry lost that fight, and the player piano ultimately led to the phonograph, on which the entire recording industry was built. Sousa was wrong-the rise of recording and playback technologies marked the beginning, not the end, of the music industry.

Of course, the entertainment industries continued to use copyright law to attack a long list of other technologies-broadcast radio, cable television, the VCR and the DAT recorder, to name a few. Each time, the entertainment industry portrayed the disruptive innovators as thieves, pirates or worse.

Fortunately, for much of the 20th century, Congress and the courts have refused to expand copyright law to give the entertainment industry a veto power over new technologies. This is not to say that the entertainment industry came away empty-handed. Congress has often adjusted copyright law, after the fact, to help the entertainment industry cope with the consequences of innovation. For example, the publishers of sheet music ultimately were able to demand payment from those who reproduced their works on player piano rolls and, later, phonograph records. Similarly, amendments to copyright law created the foundations for the payments made to copyright owners by radio stations and cable TV providers.

But one principle remained clear-innovators were entitled to innovate without having to first seek the approval of the entertainment industry incumbents, even if the innovations were likely to disrupt existing business models. It was this "innovate first, make adjustments later" approach that made innovations like the VCR possible. Had Sony been required to ask permission of the major movie studios before launching the Betamax VCR in 1976, the product would never have come to market in the form it did.

In fact, Disney and Universal City Studios sued Sony for introducing the Betamax, arguing that Sony's technology enabled individuals to make infringing copies of material broadcast over the air, and that Sony should be held responsible for those infringements. In 1984, the Supreme Court rejected those copyright claims in Sony v. Universal City Studios, announcing what has become known as the Betamax defense: So long as your product is capable of substantial noninfringing uses, you will not be held responsible for infringements committed by end users you do not control. Innovators have relied on that principle ever since.

Enter the DMCA
In 1998, things changed. That year, thanks to the work of entertainment industry lobbyists, Congress passed the Digital Millennium Copyright Act (DMCA) and replaced "innovate first, make adjustments later" with "permission first, innovation later."

The DMCA provides that if a copyrighted work is protected by a "technical protection measure" like digital rights management (DRM), it is unlawful to circumvent or bypass the DRM without first obtaining the authorization of the copyright owner. In other words, once a movie or recording is "locked up," technology innovators must ask on bended knee for the keys they need before they can build devices that access the content. And before the keys will be given, innovators have to enter into licensing agreements that impose restrictions on the devices they can build.

The experience of innovators with the DVD is a good example of how the rules have changed, thanks to the DMCA. Movie DVDs are encrypted by the studios using a system called the Content Scramble System. Anyone interested in building a player or recorder able to play DVDs must enter into a license agreement with the DVD-CCA, a multi-industry group that controls the necessary access keys. The terms of the DVD-CCA license, in turn, impose a variety of restrictions on the features that device makers can offer.

For example, when a company called Kaleidoscope built a product that allowed movie fans to store their DVDs digitally on a central server, it was sued for violating the terms of the DVD-CCA license. The movie studios have repeatedly taken the position that they will not authorize any digital copying of DVDs, and have used the DMCA to pursue companies that enable movie fans to make personal backup copies.

The upshot is simple-innovators who want to create new DVD devices must ask permission first. The same "permission first, innovation later" rules apply to other new formats on the horizon, like SACD, DVD-A and next-generation high-definition video formats like Blu-ray and HD-DVD, as well as to devices that connect to cable and satellite set-top boxes.

In short, by locking up content one format at a time, the entertainment industry is using the DMCA to force innovators to ask permission before they innovate.

Grokster's big chill
The DMCA, however, is only part of the story. After all, the DMCA applies only to content that is locked up with DRM. A wide variety of content remains unencumbered by DRM restrictions, including most music CDs and the music and video files that are routinely traded among fans on peer-to-peer networks.

At the same time, an increasing number of technologies are making it easier for fans to share and enjoy their libraries of DRM-free music and movies on their own terms. These technologies include computers acting as home media servers, personal video recorders that skip commercials, portable music and video players, and networking technologies that allow consumers to access their digital media libraries remotely over the Internet. How can the entertainment industry hold back these new devices, devices beyond the reach of the DMCA?

Beginning with the lawsuit against Napster in 1999, the entertainment industry has been attempting to persuade courts to interpret copyright laws so as to give it more leverage over technologies that consumers use to enjoy unprotected music, movies, videogames and other entertainment industry content. This legal campaign has included lawsuits not only against a variety of peer-to-peer file-sharing companies-including Napster, Aimster, Audiogalaxy, iMesh and Grokster-but also against other technologies, including the ReplayTV personal video recorder (PVR). The goal? To secure judicial precedents that will impose a "permission first, innovation later" requirement on new technologies, even in the absence of DRM restrictions and the force of the DMCA.

This judicial effort came to a climax in June, when the Supreme Court handed down its decision in MGM v. Grokster. Addressing the legality of distributing peer-to-peer file-sharing software, this ruling marked the first time since 1984 that the high court has revisited the question of when a technology innovator will be held liable for distributing a technology that others can use to infringe copyrights.

Rather than reevaluating the Betamax defense, which generally protects technologies so long as they are capable of noninfringing uses, the court said that "one who distributes a device with the object of promoting its use to infringe copyright, as shown by clear expression or other affirmative steps taken to foster infringement, is liable for the resulting acts of infringement by third parties."

While the entertainment industry did not get all it asked for in the Grokster ruling, the continuing legal uncertainty, coupled with the industry's willingness to sue those who innovate in disruptive ways, continues to chill disruptive innovation.

Raising the broadcast flag
The entertainment industry has also turned to Congress and the Federal Communications Commission seeking mandates that would directly regulate the design of technologies that can receive and record digital television and radio broadcasts. Because these free, over-the-air broadcast mediums have never included DRM restrictions, they do not fall within the scope of the DMCA. This means that innovators are free to design products to receive and record these broadcasts without interference from the entertainment industry.

When it brought its first PVR to market, for example, TiVo did not have to ask permission of the entertainment industry. Nor can the entertainment industry dictate features to TiVo by forcing it to take a "license" to any mandatory DRM technology. This is not to say that the fear of litigation has not influenced TiVo's design decisions.

The "broadcast flag" would change all that. The flag itself is simply a part of the digital broadcast signal that indicates whether a particular program is meant to be "protected" upon receipt. In the absence of a specific legal mandate, however, technologists are free to ignore such flags. Consequently, the movie and music industries are now lobbying Congress to grant the FCC the authority to impose design mandates on future innovators, requiring them to impose DRM restrictions on broadcast programming based on the broadcast flag.

In essence, the broadcast flag is intended to put a legal obligation on device makers that would give copyright owners the option to transform DRM-free broadcast programming into DRM-restricted content once it is received or recorded. Once the content is encumbered with DRM, the DMCA applies, putting innovators in the position of having to seek permission (through licensing groups similar to DVD-CCA) before they can build devices that can access the now-restricted content.

Should the entertainment industry succeed in persuading Congress and the FCC to enact broadcast flag mandates for over-the-air digital television and digital radio, "innovate first, make adjustments later" will be transformed into "permission first, innovation later."

It is nearly an article of faith in the high-technology marketplace that disruptive innovation is a critical part of economic growth and competitiveness, even if it is difficult for established market incumbents in the short term. Furthermore, when it comes to the entertainment industry, the lessons of the 20th century demonstrate that disruptive innovation is often the key to creating new business opportunities that expand the pie for future generations of authors and artists. Therefore, the entertainment industry's efforts to use copyright law to impede disruptive innovation should be cause for concern for innovators and artists both.

Fred von Lohmann is a senior staff attorney with the Electronic Frontier Foundation, a membership-supported public-interest group devoted to protecting civil liberties and free speech in the digital world.