12. The Benefits and Challenges of Providing Content Protection in Peer-to-Peer Systems

IFIP TC6

http://virtualgoods.tu-ilmenau.de/2003/

Reviewed Papers

Session 1: Watermarking for Virtual Goods

1. A unified digital watermarking interface for eCommerce scenarios

Stefan Thiemert, Martin Steinebach, Jana Dittmann, Andreas Lang http://virtualgoods.tu-ilmenau.de/2003/watermarking_interface.pdf 2. Image Watermarking for Semi-fingerprinting

Han Ho Lee, J. S. Lee, N. Y. Lee, J. W. Kim

http://virtualgoods.tu-ilmenau.de/2003/ImageWatermarkingforSemi-fingerprinting.pdf 3. Watermarking of Analog and Compressed Video

Uwe Wessely, Stefan Eichner, Dirk Albrecht

http://virtualgoods.tu-ilmenau.de/2003/videowatermarking.pdf

Session 2: Contracts for Virtual Goods 4. An Application Programming Interface for the Electronic Transmission of Prescriptions

D. Mundy, D. W. Chadwick, E. Ball

http://virtualgoods.tu-ilmenau.de/2003/EPPAPI.pdf 5. Towards a Conceptual Framework for Digital Contract Composition and Fulfilment

Susanne Guth, Gustaf Neumann, Mark Strembeck

http://virtualgoods.tu-ilmenau.de/2003/toward_contract_frmwrk.pdf 6. Electronic Contracting in cross-media environments – a media theory for the description

of contracting processes

Daniel Burgwinkel

http://virtualgoods.tu-ilmenau.de/2003/econtractingmedia.pdf

Session 3: The Value of Virtual Goods 7. A decentralized, probabilistic money system for P2P network communities

Herwig Unger, Thomas Böhme

http://virtualgoods.tu-ilmenau.de/2003/money.pdf

8. Incentive Management for Virtual Goods – About Copyright and Creative Production in

the Digital Domain

Patrick Aichroth, Jens Hasselbach

http://virtualgoods.tu-ilmenau.de/2003/incentive_management.pdf 9. Increasing Consumer Value Through Technology for Virtual Music

Stephan Baumann, Oliver Hummel

http://virtualgoods.tu-ilmenau.de/2003/consumervalue.pdf

Session 4: Digital Protection and Digital Rights for Virtual Goods 10. Digital Battery – A Portable System to Gather Statistical Utilization Information for Digital

Media without Compromising Consumer Anonymity

Timothy Budd

http://virtualgoods.tu-ilmenau.de/2003/DigitalBattery.pdf

11. LicenseScript: A Novel Digital Rights Language

Cheun Ngen Chong, Ricardo Corin, Sandro Etalle, Pieter Hartel, Yee Wei Law http://virtualgoods.tu-ilmenau.de/2003/licensescript.pdf

12. The Benefits and Challenges of Providing Content Protection in Peer-to-Peer Systems

Paul Judge, Mostafa Ammar

http://virtualgoods.tu-ilmenau.de/2003/BenefitsAndChallengesOfP2PContentProtection.pdf

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INCENTIVE MANAGEMENT FOR VIRTUAL GOODS:

ABOUT COPYRIGHT AND CREATIVE PRODUCTION IN THE DIGITAL DOMAIN

http://virtualgoods.tu-ilmenau.de/2003/incentive_management.pdf

Patrick Aichroth, Jens Hasselbach

Fraunhofer AEMT

Langewiesener Str. 22, D-98693 Ilmenau, Germany

ath@emt.iis.fhg.de, hasseljs@emt.iis.fhg.de

Abstract: This paper analyzes the problems of copyright with respect to virtual goods, and possible solutions to these problems. Copyright law has been challenged by technology, and the current discussions about law and Digital Rights Management Systems to reinstate it are complex and confusing. The reader is provided with copyright’s economic rationale and guidelines in order to distinguish between adequate and inadequate interpretations of copyright. Most approaches to a solution of copyright’s current problems have focused on law and technology. An alternative view, Incentive Management, is described. It emphasizes incentives in order to solve the problems, and includes new business models while preserving copyright’s rationale. Moreover, a proposed role of technology within Incentive Management is outlined.

Introduction

In recent times, technological advances have produced radical shifts in the ability to reproduce, distribute, and control information:

Digitization and widespread availability of all-purpose computers have allowed for information to exist unbound from a specific medium, for perfect replicas and substantially lowered reproduction costs. The average computer user today can easily do copying that would have required a significant investment only a few years ago. But the fact that copying has become a ubiquitous action in the all-purpose computer environment also means that barriers to copyright infringement that existed in the analog domain have been eroded. Control of copying under these circumstances is a difficult and problematic thing to do. Moreover, global networks such as the Internet have minimized publication and distribution costs, and have enabled virtually everyone to send information worldwide, cheaply and almost instantaneously. They are designed to give as much information as possible to everyone who wants it without differentiating between authorized and unauthorized use. Copyright, on the other hand, restricts the distribution of information in order to allow authors, artists and publishers to earn money.

The new technologies greatly enhance possibilities for consumption, creative production and cost-effective distribution, but at the same time represent difficult challenges for copyright law, often referred to as the digital dilemma. Users, technology providers, and even policy makers are confronted with a copyright law that appears complex, confusing and at times incoherent. Certain actions, such as the public offerings of unauthorized works on a website, are commonly regarded as blatant violations of copyright laws; others, like the copying for private use, require subtle legal interpretation. While specific legal questions are difficult to answer, there are clear basic concepts and goals behind copyright law that will be outlined in this paper.

Part I is intended to develop guidelines that may help the reader to understand what the current copyright discussion is all about. It will introduce the reader in copyright’s rationale, which will be derived from the economics of creative works. It will explain why copyright is necessary, how it works, and discuss the role of limitations like fair use within copyright law. Then, technological challenges to copyright in the digital domain will be described. An evaluation of the dominant responses to these challenges will follow, which includes the discussion of the DMCA1 and similar lawmaking, DRM2, and consumer copying. 12

DMCA - The Digital Millennium Copyright Act (1998). [17] Digital Rights Management.

Part II will propose Incentive Management as an alternative approach to establishing markets for virtual goods. It is intended to include new business models while preserving copyright’s main goals and the guidelines derived from the first part. A method to analyze the complex interdependencies within markets will be introduced, and the possible role of technology will be discussed.

In the following, the term virtual goods is used for entities of information that carry a certain economic value, but are not bound to a specific medium. As such, they lie at the center of the debate about promises and threats described above. Although some of the following statements may be valid for all kinds of virtual goods, the paper will focus on creative works, specifically on music as an example of virtual goods.

Virtual Goods and Copyright

Economic Traits of Virtual Goods

In economic theory, public goods are characterized by two attributes: Non-rivalry and non-excludability. Non-rivalry means that several individuals can enjoy the same good without diminishing its value. Non-excludability, on the other hand, means that it is not possible or too costly to prevent an individual from enjoying the good. Pure public goods do possess both traits absolutely, while impure public goods are only slightly rivalrous, or only excludable with difficulty. Private goods, in contrast, do possess neither of these traits.

In contrast to private goods, virtual goods (and information goods in general) are non-rivalrous. A bike’s value is inevitably diminished if others use it at the same time, but the value of an idea stays just the same even if millions share it simultaneously. Thomas Jefferson observed this trait when commenting on the US Copyright Act:

“He […] who receives an idea from me, receives instruction himself without lessening mine; as he who lights his taper at mine, receives light without darkening me.”3

This also means that once a non-excludable good has been created, everyone benefits automatically, and society’s welfare as a whole increases – the more consumers there are, the better. Because of that, society’s main goal is broad availability of an extensive creative production. More precisely, there are two main goals: the production of creative works (otherwise there would not be anything to enjoy), and broad dissemination and public access once they have been created. Later on, it will become obvious that these goals do often collide. However, it is all about incentives – incentives for creative production, dissemination, and consumption. Therefore, Incentive Management (IM) appears to be a more appropriate approach to describe activities that aim at solutions for the digital dilemma and at working markets for virtual goods.

How can society make sure that there are incentives for the production of such goods at all? In case of excludability, it is possible (although not always necessary) to demand a contribution in exchange for the good, thus creating revenues and financial incentives for authors to produce. Non-excludable goods, in contrast, suffer from the so-called free rider problem: Without potential exclusion, it is not possible to “persuade” consumers to make a contribution. In most cases, the market will not produce as many of the goods as desired due to a lack of revenues and financial incentives. Even if the benefit exceeds the contribution for everyone, which means that everyone would contribute if the good was excludable, there is no way to simultaneously persuade them to make that contribution. But in practice, non-excludability is nearly always a question of costs: Even in the case of the national defense of a country, which frequently serves as prime example for a non-rivalrous good, it would be theoretically possible to exclude. But the costs would arguably be tremendous.

Virtual goods are absolutely non-excludable as abstract information, but not in their practical, digital form. Although it is costly to prevent people from enjoying digital information (certainly more than with physically fixated information), it is possible. Virtual goods should be seen as public goods for which excludability can deliberately be created by technological means. However, the decision about whether an artificial exclusion is economically reasonable has to be made case-by-case, based on the respective benefits and costs: There are direct 3

Jefferson T. (August 13, 1813). Letter to Isaac McPherson. [2]

costs, especially for designing and maintaining these systems so as to be secure. And there are indirect, social costs caused by so-called deadweight losses due to the artificial exclusion from a non-rival good, which would otherwise be available in abundance.4

Copyright’s Rationale

One possible response to the free rider problem is the removal of the natural non-excludability. Traditional copyright law represents such a strategy. It introduces artificial monopolies - exclusive rights to copy and distribute creative works - in order to create revenues and therefore incentives for creative production. These rights can then be assigned or licensed to distributors, which means that copyright also indirectly protects distribution. It implies the traditional business model: creating revenues by allowing consumption to those willing to pay. Despite some ambiguity in recent copyright lawmaking, the rationale of copyright actually remains quite clear. The US legal system serves as a good example, although others like the EU or Germany could be applied, too.5

The US Constitution emphasizes public interest and the limited nature of copyright6, and the Supreme Court states:

“The limited scope of the copyright holder's statutory monopoly […] reflects a balance of competing claims upon the public interest: Creative work is to be encouraged and rewarded, but private motivation must ultimately serve the cause of promoting broad availability of literature, music and the other arts.”7

The exclusive rights on creative works do necessarily restrict public access. Therefore, there is a trade-off between the two main goals of copyright, public access and production. While its basic principles are clear and simple, the implementation remains complex. Defining the scope of the monopolies involves a difficult balance between the interests of the public on the one and the interests of copyright holders on the other hand. That is why there are fair use regulations that ensure public access under certain conditions or time-limitations that ensure absolute public access after a certain period of time. Copyright represents a bargain: authors get artificial privileges in exchange for producing and making their work available to the public. The privilege is a granted monopoly, which has to be limited, carefully revised, and adapted to new circumstances if necessary. Copyright is neither a natural nor an absolute property right that would allow for a maximizing of copyright holders’ wealth, even though the term intellectual property might give that implication. Rewarding authors is a means to an end, and not the end in itself. In order to remove the obstacle of the free rider problem, copyright aims at a fair return for authors in terms of the bargain instead: “The rights conferred by copyright are designed to assure contributors to the store of knowledge a fair return for their labors.”8

The US Supreme Court has also repeatedly and clearly spoken about copyright, emphasizing public interest and copyright limitations9, economic philosophy and incentives10, and fair return11, thereby confirming what has been outlined so far.

Prices under the granted monopoly will be higher than the (very low) marginal costs. Therefore, many consumers that would have otherwise purchased the good will be excluded and will not benefit from the good. 5

Germany’s Federal Constitutional Court ZR 79/88- (1998). [3] 6

It empowers US Congress to “promote the Progress of Science and useful Arts, by securing for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries.” [4] 7

Twentieth Century Music Corp. v. Aiken, 422 U.S. 151, 156 (1975). [5] 8

Harper & Row, supra note 34, at 545-46 (citing Twentieth Century Music Corp. v. Aiken, 422 U.S. 151, 156 (1975)). [6] 9

The primary objective of copyright is not to reward the labor of authors, but “[t]o promote the Progress of Science and useful Arts.” To this end, copyright assures authors the right in their original expression, but encourages others to build freely upon the ideas and information conveyed by a work. Feist Publication, Inc. v. Rural Telephone Service Co., 499 U.S. 340, 349-50 (1991). [7]

We have often recognized the monopoly privileges that Congress has authorized, while “intended to motivate the creative activity of authors and inventors by the provision of a special reward” are limited in nature and must ultimately serve the public good. Fogerty v. Fantasy, Inc., 114 S. Ct. 1023, 1029 (1994) (quoting Sony, supra note 22, at 429). [8]

The monopoly privileges that Congress may authorize are neither unlimited nor primarily designed to provide a special private benefit. Rather, the limited grant is a means by which an important public purpose may be achieved. It is intended to motivate the creative activity of authors […] by the provision of a special reward, and to allow the public access to the products of their genius after the limited period of exclusive control has expired. Sony, supra note 22, at 429. [9]

The copyright law, like the patent statutes, makes reward to the owner a secondary consideration […] It is said that reward to the author or artist serves to induce release to the public of the products of his creative genius. United States v. Paramount Pictures, Inc., 334 U.S. 131, 158 (1948). [10]

4

From the Analog to the Digital Domain

While the main goals of copyright are constant, the balance or bargain of copyright is not static, and cannot be. Technology sometimes challenges economic structures in such a manner that copyright law has to be reinterpreted. In such cases, there are two questions to be answered. They have been formulated in Sony v. Universal, which was about the question of whether non-commercial videotaping by means of the newly introduced VCR should be considered fair use (see below) or not:

“First, how much will the legislation stimulate the producer and so benefit the public; and, second, how much will the monopoly granted be detrimental to the public? The granting of such exclusive rights, under the proper terms and conditions, confers a benefit upon the public that outweighs the evils of the temporary monopoly.”12

But what are the important differences between the analog and the digital domain? A look at the value chain of production, aggregation, distribution, and consumption of music is helpful: With the advent of cheap Digital Audio Workstations and an abundance of powerful software, production becomes affordable for nearly everyone. The aggregation of music is provided with new tools by digital technology, but appears as a largely unaffected, nonetheless very important function that will always lie at the core of labels. The most important changes, however, take place within distribution and consumption:

For traditional distribution technologies like the CD or the LP, the initial distributor has to bear huge costs for the investment in manufacturing equipment. For online distribution, on the other hand, investment costs are very low, and marginal costs approach zero. While that is a businessman’s dream come true, it has become a nightmare for the record labels. Not only do distributors have to expect a lot more competition - costs are even so low that average consumers can become distributors at the same time. All recent conflicts about Peer-to-Peer services have emerged just because of that. The enormous economic potential of online distribution remains, and that makes a solution of the conflicts all the more desirable.

Traditional consumption was bound to dedicated consumer devices and physical carrier mediums with natural excludability and natural barriers to copyright infringement. In the digital domain, the general-purpose PC dictates the “living conditions” for creative products. Goods are constantly copied, and excludability has to be technically created. But while the control of copying under these circumstances is a difficult and very problematic thing to do, it should also be noted that once established, it would allow for an extent of control far beyond the previous scope.

Fair Use and Consumer Copying

The doctrine of fair use, which may be viewed as the complement to fair return, has been a concept for balancing between the interests of copyright holders and the public all along, and was codified in 1976.13 It exists because not every use of a protected work without permission14 is opposed to the rationale of copyright law, and because some uses lie beyond the scope of copyright. Fair use, for instance, allows the use of protected material for educational and research purposes, in criticism, comment, parody, news reporting, and similar uses in the public interest. The question of whether consumer copying should be considered fair use has been very controversial. In the Audio Home Recording Act (AHRA) of 1992, congress explicitly recognized the right of consumers to make home “The sole interest of the United States and the primary object in conferring the monopoly lies in the general benefits derived by the public from the labors of authors.” Sony v. Universal, 4 U.S. 417 (1984). [11] 10

The economic philosophy behind the [Constitutional] clause . . . is the conviction that encouragement of individual effort by personal gain is the best way to advance the public welfare through the talents of authors and inventors . . . . Sacrificial days devoted to such creative activities deserve rewards commensurate with the services rendered. Mazer v. Stein, 347 U.S. 201, 219 (1954). [12]

[I]t should not be forgotten that the Framers intended copyright itself to be the engine of free expression. By establishing a marketable right to the use of one's expression, copyright supplies the economic incentive to create and disseminate ideas. Harper & Row, Publishers, Inc. v. Nation Enterprises, 471 U.S. 539, 558 (1985). [13] 11

“The ‘immediate effect’ of the copyright law is that authors receive a ‘fair return for [their] creative labor’; however, the ‘ultimate aim is, by this incentive, to stimulate artistic creativity for the general public good.’” Twentieth Century Music Corp. v. Aiken, 422 U.S. 151, 156 (1975). [14] 12

Sony v. Universal, 4 U.S. 417 (1984). [11] 13

United States Code. Title 17. Chapter 1. Section 107: Limitations on exclusive rights: Fair use. [15] 14

Many uses are valuable because they can be done without the copyright holder’s permission: criticism, parody, news, and some uses in education and research are examples to this.

recordings of music, while introducing royalty payments at the same time.15 The more recent Digital Millennium Copyright Act (DMCA) of 1998 still recognizes fair use, but casts considerable doubt on the question of fair use in practice - this issue will be discussed later on.

“The fair use doctrine must strike a balance between the dual risks created by the copyright system: on the one hand, that depriving authors of their monopoly will reduce their incentive to create, and, on the other, that granting authors a complete monopoly will reduce the creative ability of others.”16

The task of deciding whether a use is fair and therefore not infringing depends on the respective costs and benefits, and has to be determined on a case-by-case basis. Because of this, fair use is often considered troublesome and irritating, and has been bothering lawyers all along. However, it is where the concrete conflicts between copyright holders and the public have to be solved; it is the bargain, it is what copyright is all about.

Uses in education and research, criticism, news, or parody are declared as fair because they generate values that are not fully internalized. All these activities again result in goods (e.g. information) creating substantial benefit not only for the user of the copyrighted work, but also for society as a whole. They promote the very idea behind copyright law, because they contribute to the “harvest of knowledge” mentioned by the Supreme Court17. As for consumer copying, the underlying rationale is weaker, but similar18: By accepting a certain amount of unregulated non-commercial copying, fair use facilitates the free flow of ideas, and a certain level of awareness and education within society. Fair use insures that a small amount of culturally vital goods leak from the copyright system to the public. All creative production reflects prior creative production, and without a basic amount of free flow secured, cultural production would not be promoted, but hindered. As can be seen, fair use with all of its complexity does not represent a handicap, but a vital restriction that prevents copyright from betraying its very own ideas, and it plays an important role in the dissemination and production of cultural products. The US Supreme Court has stated:

“Despite this absence of clear standards, the fair use doctrine plays a crucial role in the law of copyright.”19

On the other hand, a use cannot be fair if it causes such a great deal of harm that existing incentives for creative production are seriously threatened. A reasonable distinction between “fair” and “unfair” consumer copying could be drawn between personal copying that takes place in the personal environment, and dissemination to an anonymous public through Peer-to-Peer networks or website publishing. Personal copying does allow for a fair return, even if in some cases the introduction of a flat fee might be appropriate. Moreover, it does not only have negative impacts on sales. Personal copying is also a means of promoting content, and it depends on the situation whether the overall result turns out be positive or negative. Public dissemination, however, does have the potential to cause a great deal of harm and threaten authors’ incentives, and it should therefore not be considered “fair”. Jack Valenti, who lobbied for the MPAA20 in the VCR case, made the statement that “the VCR is to the motion picture industry and the American public what the Boston strangler is to the woman alone.”21 But the Supreme Court finally stated that a prohibition of videotaping would be inconsistent with copyright, and non-commercial videotaping was considered fair use.22 However, not only did the public benefit and the motion picture industry survive, videocassette sales even became a very lucrative market. While the digital dilemma does certainly not follow the same rules, the example shows that some of the fears about copyright infringement can be at times exaggerated.

United States Code. Title 17. Chapter 10: Digital Audio Recording Devices and Media. [16] DMCA - The Digital Millennium Copyright Act (1998). [17] 17

”copyright is intended to increase and not to impede the harvest of knowledge”, Harper & Row, supra note 34, at 545-46 (1975). [18] 18

“A teacher who copies to prepare lecture notes is clearly productive. But so is a teacher who copies for the sake of broadening his personal understanding of his specialty. Or a legislator who copies for the sake of broadening her understanding of what her constituents are watching; or a constituent who copies a news program to help make a decision on how to vote.”, Sony v. Universal, 4 U.S. 417 (1984). [11] 19

Sony v. Universal, 4 U.S. 417 (1984). [11] 20

Motion Picture Industry Association of America. 21

Valenti J. (early 1980s). [36] 22

“But a use that has no demonstrable effect upon the potential market for, or the value of, the copyrighted work need not be prohibited in order to protect the author's incentive to create. The prohibition of such non-commercial uses would merely inhibit access to ideas without any countervailing benefit.” [8]

1615

Information Anarchism and Information Feudalism

The technological challenges of the digital domain have lead to two principal schools of thought, often referred to as information anarchism and information feudalism.23 The first advocates the abolishment of copyright on the Internet, while the second seeks to reinstate absolute property rights by means of technology.

Information anarchism, which has been proposed by intellectuals like John Perry Barlow24, claims that society should abolish copyright and that creative production would not be seriously affected. The argument is that non-excludability cannot or should not be accomplished in the digital domain. As previously mentioned, although the necessary technical information is not in the scope of this paper, effective non-excludability can be pursued. Creative production would be affected if copyright was abolished altogether. The idea of alternative funding sources is valuable, but the traditional business model cannot simply be ignored. The assumption that social norms alone could prevent free riding appears unrealistic. The period from 1791 to 1792 of the French Revolution, where copyright was abolished, showed that society suffers.25

Information feudalism, on the other hand, argues that there would be no significant difference between copyright and material property rights, and it seeks to put these alleged rights into force by means of trusted or Digital Rights Management (DRM) Systems that control and restrict the use of content both online and in consumers’ homes. To reach that goal, information feudalism aims at the expansion of copyright to support the technology by law. The frequent use of terms like “theft” and “piracy” for consumer copying demonstrates that the understanding of copyright as a natural, absolute property right is not unusual. However, there are significant differences to material property26, and copyright is neither absolute nor natural. It is not the recognition of some pre-existing right, but an artificial creation with a certain policy goal and limitations. The described economic guidelines behind copyright and the statements of US Supreme Court and Constitution have always been clear about that.27 Consequently, the notion that limitations like fair use were simply imperfections of the market is unfounded. Fair use is an integral part of, and is as old as copyright itself.28

Consumers want all information to be free, and copyright holders want to expand privileges – that comes as no surprise. The conflicting interests are reflected in information anarchism and information feudalism, but both concepts do clearly ignore vital aspects of copyright’s rationale.

DRM: Unlimited or Fair?

Recent lawmaking clearly tends to favor information feudalism. After several years of lobbying, the DMCA was passed in 1998. It does make the circumvention of technical copyright protection such as DRM systems a criminal act – actually, the distribution of respective information is declared a crime already.29 This remains true regardless of whether or not DRM systems respect prior limitations such as fair use, all of which the DMCA explicitly recognized, but only in theory. In practice, it empowers copyright holders to overrule copyright law, and to custom-design their own version of law with technology: Such “unlimited” DRM technology does not merely prevent unauthorized infringement, it prevents every access unauthorized by the rights holder, be it legitimate or not. It enables to bind content to devices and to establish extensive, recyclable monopolies – CSS is an example to this.30 But copyright only protects the distribution of creative works in general – it does not protect any particular industry or business model.31

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Eckersley P. (2003). Virtual Markets for Virtual Goods: An Alternative Conception of Digital Copyright. [1] Barlow J.P. (1993). The Economy of Ideas. [19] 25

Little J. (2002). History of Copyright – A Chronology. [20] 26

Even if the comparison with real property was adequate, there would be limitations in cases of conflict with the public interest. 27

Little J. (2002). History of Copyright – A Chronology. [20], Skala M. (2003). New Media Copyright Extensions Would Harm Canada. [21] 28

The Statute of Queen Anne (1709/10), for instance, had fair use regulations for universities. It also had procedures for buyers to complain about high prices and for possible compulsory reductions. Little J. (2002). History of Copyright – A Chronolog. [20] 29

United States Code. Title 17. Chapter 12: Copyright Protection and Management Systems. [22] 30

CSS prevents playing of a DVD on any device that lacks a CSS module, e.g. on Linux. 31

Sony v. Universal, 4 U.S. 417 (1984). [11]

DRM is inherently neutral just as other technologies. But if it is unconditionally backed by law, copyright holders will minimize concessions in order to maximize profits. This is understandable, but it is definitely not what copyright is about. If the purpose of DRM is to protect copyright, fair use including consumer copying must be integrated – DRM must be supplemented with User Rights Management.32

It might be argued that lawmaking is still heading in another direction: Proposed legislation33 would require all computers sold in the US to incorporate federally approved DRM34, and some US States have introduced a Super-DMCA35 that makes the concealing of communication to a service provider a criminal act. Taken literally, this outlaws firewalls, router and encryption software, and the dissemination of respective information. But given the irritations and fears about an “anarchic” internet technology, it appears unlikely that lawmakers did anticipate the enormous consequences of their decisions. With the current, obvious contradiction within copyright law, it seems possible that the DMCA may be declared unconstitutional in its present form. Other countries have been reluctant to implement recent US copyright ideas. The EU directive, for instance, requires members to provide legal protection for DRM similar to the DMCA, but it leaves space for legislation demanding that copyright holders comply with limitations and exceptions of copyright law, specifically including private reproduction, criticism, parody, and news reporting.36

Even though final decisions of many EU member states, like Germany, on this critical issue are still open37, the demand for compliance with copyright’s limitations might just be a question of time, because the current contradiction with copyright’s rationale appears highly problematic. Even Mark Stefik, the father of DRM, integrated fair use into his concept of trusted systems.38 Such “fair” protection systems do not only increase copyright’s credibility and consumer acceptance, but also create additional value for customers.

Private Copying and Public Dissemination

But how could technology be designed and implemented in a way that is “fair”? To perfectly integrate fair use into a protection system that aims at an “optimized exclusion” seems difficult: It would require for complex code that would have to be rewritten according to current law, and it would need complicated ad-hoc approval mechanisms, e.g. with key escrow and a third party involved.39 It would be complicated, expensive, and bothering for copyright holders (and most probably for applicants and consumers as well). But again, copyright’s rationale is not at all about “optimized exclusion”, but about incentives, fair use, and fair return.

However, a fair protection system that is more generous and leaves some “breathing air” for customers will avoid most of these problems. It allows more small-scale copying, and concentrates on large-scale infringement instead. The proposed distinction between personal copying and public dissemination might be helpful in doing so: Personal copying is allowed, while illicit public dissemination can be addressed with server-side technologies. Moreover, consumers can be expected to act more cooperatively in such a less restrictive environment.

Both economically and morally, the advantages will most probably far outweigh the disadvantages, and resources could be used for the build-up of new services and products instead. Therefore, protection systems that do not aim at being perfect might paradoxically prove as more effective than their supposedly perfect counterparts: Simple mechanisms to discourage copying might suffice in many cases. Another approach could be based on personalization and traceability: Given that privacy concerns are cleared, they allow for a high degree of freedom for customers and the possibility to track large-scale infringements at the same time. Kuhlen R. (2002). Kein Digital Rights Management ohne User Rights Management. [23] Consumer Broadband and Digital Television Promotion Act. 34

Garfinkel S. (2002). The Rights Management Trap. [24] 35

Super-DMCA. [25] 36

Richtlinie 2001/29/EG des Europäischen Parlaments und des Rates zur Harmonisierung bestimmter Aspekte des Urheberrechts und der verwandten Schutzrechte in der Informationsgesellschaft (2001). [26]

Burk D., Cohen J. (2001). Fair Use Infrastructure for Rights Management Systems. [27] 37

In Germany, for instance, it is at this point possible to sue someone who circumvents, but circumvention is not a criminal act. The contradiction with fair use and the role of private copying is still open (§53 vs. §95). [35] 38

Stefik M., Silverman A. (1997). The Bit and the Pendulum: Balancing the Interests of Stakeholders in Digital Publishing. [28] 39

Burk D., Cohen J. (2001). Fair Use Infrastructure for Rights Management Systems. [29]

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Incentive Management and Rights Management

When it comes to the digital dilemma, there are reasons for being sceptical about the exclusive focus on rights. Law is an important, albeit not the only important element when it comes to solve the digital dilemma. It does not appear reasonable at all to use the term “rights” to describe activities aiming at the establishing of a market: Do people produce, distribute, or consume creative goods because of rights? They do because they have incentives for doing it. For good reason did copyright law frequently cite the term incentive: copyrights law’s own understanding has always been based on economics.

That is why IM seems to be a more appropriate approach. Its main goal is, due to the economies of information goods, broad availability of an extensive creative production. To reach that goal, i.e. to establish markets, incentives have to be created. All business models which serve this goal are potential candidates – and in the digital domain, there are arguably more models than before.

Until now, the paper has focused on the traditional business model based on exclusion. Protection systems comply with the main goal when including concepts of fair use and fair return - “unlimited” DRM, in contrast, does not qualify as a candidate for IM.40 Other models based on exclusion would, for instance, be subscription services. They can at times allow for simple solutions that would otherwise be quite complicated, as in the case of legal Peer-to-Peer services. Generally, it seems less problematic to exclude from a subscription service than to exclude from consuming a good, but it is more difficult to assign revenues to authors.

However, creating excludability is not the only answer to the free rider problem of non-excludable goods. Another answer is to simply live with it. Society can, for instance, decide to raise taxes to publicly fund the supply of the good. Alternatively, it may in some cases be possible to use alternative business models which do not depend on the possibility to exclude, like advertisement, data mining, generating net traffic or certain promotion models.41 All of these business models qualify as candidates for IM (see figure 1), each of them addressing different potential markets or market segments. The “traditional” model will probably always be the most important one, but it received some new brothers and sisters in the digital domain.

ExclusionYesNoindirectcompensationPublic FundingYesBroadAvailabilityof an Extensive CreativeProductiondirectcompensationTraditional Models with“Fair Protection“SubscriptionServicesAlternative Models“Unlimited“DRMInformationFeudalismNoInformationAnarchismFigure1: Approachesto the“Free Rider”ProblemAll of them need copyright law, because

the binding of the work to the author and the author’s right to the result is essential for creative production. However, not all of them need the “right to copy” - some models simply do not generate revenues by restricting copying.

Therefore, a two-level approach would appear reasonable which is, in principle, already existing:42 There are unalienable rights which bind the work to its creator, and exploitation rights that can be transferred. The protection of the latter will then depend on the business model used.

It should be noted that while “unlimited” is a distinct characteristic, the quantification of “fair” is, of course, a complicated and subjective determination. 41

Example for such an approach: Nützel J., Grimm R. (2002). Peer-to-Peer Music Sharing with Profit but without Copy Protection. [30] 42

The idea exists, for instance, in Germany and the EU. [35]

40

The “Dot Model”

The Digital Dilemma cannot be solved by legal and technological means alone. Obviously, there are many factors involved. In the following, an approach that has been introduced by Lawrence Lessig43 will be presented in order to analyze these factors and their interdependencies.

The “dot model” is based on an abstract unit, the so called dot, representing an objective to be reached. The dot is influenced by distinct regulators, all of which are changeable, but also interdependent. There are four regulators: architecture (which represents technical aspects in the broadest sense), market (economic aspects), norms (social, psychological and ethical aspects) and law (legal aspects).

Figure 2 illustrates the approach with the Prohibition of alcohol in the USA (1920-33).44 Above all, the example shows the following: Firstly, laws may not be in contradiction to common norms, and secondly, laws must be enforceable at appropriate costs. If either of these conditions is not met, a regulation is not recommendable. Or, as Albert Einstein put it:

“Nothing is more destructive of respect for the government and the law of the land than passing laws which cannot be enforced.”45

This insight could, by the way, also be applied to current DRM systems: Since architecture and law is the same under the DMCA, it may be derived: The architecture may not be in contradiction to common norms, and it must be enforceable at appropriate costs. If either of these conditions is not met, a regulation is not recommendable.

Problem: Intemperance associated with alcohol was claimed to be responsible for crime and poverty. Dot: Prohibition of alcohol should be enforced. Approach: Regulating the law. Claiming to protect the people against their own weakness, the government’s strategy was to correct their behaviour by means of severe penalties for violation of the prohibition laws. Effects and Interdependencies: • Law’s effect on market: Prices and profits for alcohol went up. • Market’s effect on norms: Alcohol-related crime and corruption increased, and patterns of consumption changed, but not as desired: Many adults were simply unwilling to be pushed around, and for the young, alcohol became even more attractive as it was associated with excitement and intrigue. • Norms’ effect on architecture: Court and prison systems were overloaded, and government spending increased greatly. Result: Prohibition was a failure on all counts. Changing the regulator law without considering interdependencies caused unintended consequences and the complete failure of the system. Figure 2: Explanation of the “dot model” on basis of Prohibition

For IM, the “dot model” seems to be an appropriate tool for the analysis of the Digital Dilemma and the interdependencies involved. Problem and dot might be formulated as follows:

• Problem: A destabilized system. The fundamental change within architecture (economies of information goods

and digital networks) caused a change of norms and market, and the loss of revenues for creative works. • Dot: A readjustment of the system in order to reach the main goal: broad availability of an extensive creative

production. The ineligibility of both information feudalism and information anarchism for finding a solution is quite clear, since they do not comply with the main goal. For other approaches and respective business models, however, the dot model should provide valuable hints for solutions. Their formulation will be the subject of future work.

The Role of Technology in Incentive Management Systems

The proposed business models for IM have very different needs with respect to architecture (=technology). Because of that, a high level of flexibility within architectures is desirable in order to cover a wide range of possible 4344

Lessig L. (1999). Code and Other Laws of Cyberspace. [31] Thornton M. (1991). Alcohol Prohibition was a Failure. [32] 45

Einstein A. (1921). My First Impression of the USA.[34]

approaches without causing conflicts between them. Such a flexible architecture could, for instance, be based on personalization. Without describing technical details, personalization will be applied to various business models. As for the traditional business model, an application might look like this: Content that has been purchased and personalized (to the purchaser) may be transferred to portable devices or to family members and friends: Personal copying is explicitly allowed. Since the content is personalized, however, public dissemination can be detected and, in cases of large-scale infringement, be tracked. Given that privacy concerns are taken care of, such a system can ensure both a fair return for copyright holders and a high degree of freedom for customers at the same time.46 It represents “fair protection”, and meets all conditions that were defined for IM systems.

The same personalization technology can also be applied to a non-excluding, alternative business model based on promotion: In that model, private copying and public dissemination is allowed even if the user does not want to personalize the content. But only if he pays in order to personalize the content, he will receive a fraction of the payments of subsequent “personalizers”.47

Referring to the “dot model”, it could be argued that in the first case architecture and law are used to regulate. In the second case the regulation is done by the market, while architecture (personalization) is a means to an end, not the end in itself.

Some Key Factors for Incentive Management

For IM, there are many more important factors to mention - some in the scope of the architecture, others in the scope of the market. Some of them are listed here: • • • • • • •

Availability of content: Possibilities to enjoy a good anywhere.

Search and matching services: Possibilities to retrieve a creative work in an intuitive manner. Usability: User-friendly and intuitive design of the architecture. Simple and clear rules. Community Services: Elements that support the demand for human interaction. Broad selection: A rich variety of content.

Appropriate pricing: The Price will of course be a crucial factor for any successful system. Target-group-orientation: Addressing of distinct market segments.

Conclusion

There is a clear rationale behind copyright which is derived from the economics of creative works. Copyright law aims at a broad public availability of these goods, but has to address the free rider problem in order to generate incentives for creative production as well. It therefore introduces artificial monopolies - exclusive rights to copy and distribute creative works, which are limited as they do necessarily restrict public access. Copyright is not an absolute property right, but a trade-off between public access and creative production, and it therefore aims at a fair return for authors and fair use for the public. Fair use is a vital restriction on copyright that has to be respected, and a distinction between “fair” and “unfair” consumer copying can make sense.

Technology has challenged economic structures in such a manner that copyright law has to be reinterpreted. But the two principal schools of thought, information anarchism and information feudalism, fail to give reasonable answers to the digital dilemma. While recent lawmaking tends to favour information feudalism, “unlimited” DRM technology backed by laws such as the DMCA in its present form is very problematic. Protections systems must integrate fair use and consumer copying if their purpose is to protect copyright, and some ideas of how this could be accomplished have been discussed.

Law is an important, albeit not the only important element in the digital dilemma. As copyright law is based on economic reasons and aiming at a working market, focussing on incentives appears to be a better approach for a solution of the current problems. Incentive Management concentrates on the main goal of copyright, and works 46

Example for such an approach: Neubauer C., Brandenburg K., Siebenhaar F. (2002). Technical Aspects of Digital Rights Management Systems. [33] 47

Example for such an approach: Nützel J., Grimm R. (2002). Peer-to-Peer Music Sharing with Profit but without Copy Protection. [30]

with incentives to reach it. The traditional business model and “fair protection” systems qualify for Incentive Management, as they comply with that goal, while “unlimited” DRM does not. However, it can be argued that there are other possible answers to the free rider problem than artificial exclusion, and that Incentive Management means to evaluate all business models complying with the goal. The idea of a “dot model” might serve as a tool for the analysis of how different approaches to the digital dilemma work, considering the various factors and interdependencies involved. As for the role of technology within Incentive Management, a high level of flexibility is desirable. One possible implementation based on personalization which cannot only be applied to the traditional, but also to an alternative business model, was presented

Acknowledgements

The authors would like to thank Dr. Jürgen Nützel and Prof. Dr. Rüdiger Grimm for their contributions to this paper. We would also like to thank Katja Franz and Stefan Puchta for fruitful discussions about the subject.

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