The Next Net

Universal Music Tests the DRM-Free Waters

  DRM Elimination Crew Suit 
  Originally uploaded by GregoryH

The future of digital-rights management (DRM) took another blow, as Universal Music tests the effects of selling its music catalog in the unrestricted MP3 format. 

The good news is that it looks like it will sell its MP3s at the regular 99-cent price per song (instead of charging more for the lower-quality MP3 format, as EMI is wrongheadedly attempting to do).  But Universal Music is playing its own games with this move by making its MP3 catalog available to every online music retailer except iTunes. 

That's just it's way of trying to shake Apple's hold on the digital music market.  Universal MP3s bought from Amazon or Rhapsody will play on your iPod, but if you buy the same songs from iTunes, they will be wrapped in Apple's DRM software.  This is doubly ironic, given Steve Jobs' public stance against DRM.  But he cannot take the DRM off of Universal's songs sold on iTunes.  Only Universal can.  And since Universal is the largest music label, by keeping iTunes out of the MP3 camp for now, it might gain some leverage at the bargaining table with Apple.

Or it might just piss off Steve Jobs, which is never a smart thing to do.

(In other Universal Music news, video-sharing site Veoh filed a preemptive lawsuit against Universal before the music giant could sue Veoh for abetting copyright infringement by its video-uploading members.  First YouTube (with Viacom), and now Veoh.  It won't be long before every major video site will be embroiled in a lawsuit with an old media company.)

A $1.15 Billion Oversight For Internet Radio

  Broken 
  Originally uploaded by Vovien

It's bad enough that increased royalty rates are threatening the very existence of Internet radio, but Internet music streamers will also have to pay an additional "administrative fee" to the music industry that is estimated to cost $1.15 billion for Yahoo, RealNetworks, and Pandora alone.  As my Business 2.0 colleague Chris Taylor reports:

Tucked into the record industry's request for a fee hike was a suggestion, offered without explanation, that webcasters should cough up a minimum $500 "administrative fee" for every channel they broadcast online.

Attorneys for the webcasters thought this was such a patently ludicrous idea that they didn't even bother to respond to it. After all, "channels" don't mean the same thing online as they do in the old broadcast world.

I can go to Pandora right now and set up a dozen or so channels in a minute, each one based on a favorite artist or song. . . .  the possibilities are practically limitless. Last year, for example, RealNetworks' Rhapsody service streamed more than 400,000 channels.

The webcasters' lack of response was a huge mistake. The three-judge panel accepted the administrative fee without question, backdated it to January 2006, and have since flatly refused to return to the subject. The fee goes into effect July 15.

The only thing that can save Web radio now is if Congress passes the Internet Radio Equality Act, which seeks top set royalty rates at the same level that satellite radio pays.

Microsoft Bows to Google on Desktop Search

  bowing before my robot master 
  Originally uploaded by massdistraction

It looks like Google's gambit to play the antitrust card against Microsoft last month paid off in spades.  Google had complained to antitrust officials that Microsoft's Vista operating system crippled its own desktop search product.  Microsoft is now backing down and changing Vista so that consumers can choose whichever default desktop search software they prefer.

Damn those Monopoly rules!

Google Plays the Antitrust Card Against Microsoft

  "Evening in Paris" 
  Originally uploaded by seriykotik1970

In its never-ending zeal to combat Microsoft (MSFT), it came out this weekend that Google (GOOG) is raising antitrust concerns with the government concerning the Windows Vista operating system.  Vista comes with a desktop search feature that competes with Google's own (freely downloadable) desktop search software.  The desktop search in Vista cannot be turned off, and this apparently slows  down PCs when Google's desktop search is simultaneously running.  Google has argued to officials in the Justice Department and states' attorneys that this crippling of its software harms consumer choice. 

Google CEO Eric Schmidt learned how to battle Microsoft on antitrust grounds during his days at Sun.  But this time around, Microsoft has more friends in Washington.  Reports the NYT:

The top antitrust official at the Justice Department last month urged state prosecutors to reject a confidential antitrust complaint filed by Google that is tied to a consent decree that monitors Microsoft’s behavior. Google has accused Microsoft of designing its latest operating system, Vista, to discourage the use of Google’s desktop search program, lawyers involved in the case said.

The official, Thomas O. Barnett, an assistant attorney general, had until 2004 . . . been vice chairman of the antitrust department at Covington & Burling. It represented Microsoft in the antitrust case and continues to represent the company.

It guess it really does pay to get a good lawyer.  Will Google fare as well from the Bush Administration as it faces its own antitrust scrutiny (at the urging of Microsoft) over its proposed deal to acquire DoubelClick?

Startup Watch: Attributor (Scanning the Web For Copyrighted Content)

Every media executive's fantasy is to be able to scour the entire Internet, see who is using their content, and possibly demand payment or threat legal action—all in a completely automated fashion.  A startup called Attributor promises to let them do just that.  Today, it just announced its first customer, the Associated Press.  "We thought we would start with one of the largest content producers in the world,"  CEO Jim Brock tells me.

Attributor has indexed 13 billion Web pages and says that it can digitally fingerprint any publisher's content—from the largest media company's to the smallest blogger's—and report back where it appears on the Web.  For an organization like the Associated Press which already syndicates its articles to thousands of newspapers and hopes to make 20 percent of its revenues online this year, keeping track of both the authorized and unauthorized replication of its stories is a key priority. 

It's a key priority for any media company in an era of superdistribution.

And while sites like YouTube are developing their own copyright databases to help stem abuses, there are always other sites to worry about.  Says Brock: "If you are playing whack-a-mole and remove something from one site, it will appear somewhere else. Web-wide visibility is what publishers want."

Microsoft's Patent War With Open-Source Software May Turn Against Its Customers

Microsoft claims that open-source software like Linux infringes on 235 of its patents (which ones, it won't say).

The intricacies of open-source software's general public license (GPL) make it difficult for Microsoft to sign cross-licensing deals with open-source software distributors, even though it tried to get around those strictures in a deal last fall with Novell. 

That means Microsoft's only legal option is to go after its customers.  As Fortune reports, it's already had some of those discussions and may do so again:

Since the GPL covered only distributors of Linux, nothing stopped Smith from seeking royalties directly from end users - many of which are Fortune 500 companies. He would have to proceed carefully, however, because most of those users were also major Microsoft customers.

. . . In the meantime, with Microsoft seemingly barred from striking pacts with distributors, only one avenue appears open to it: paying more friendly visits to its Fortune 500 customers, seeking direct licenses.

If push comes to shove, would Microsoft sue its customers for royalties, the way the record industry has?

"That's not a bridge we've crossed," says CEO Ballmer, "and not a bridge I want to cross today on the phone with you."

It's a sign of the times that patent wars are coming to an area that was designed to be unpatentable.

It's Hard to Question the Boss When He is Steve Jobs

   
  Originally uploaded by ИΞUSKOOĿ.

One last thought on the Apple options mess: This might have been avoided if it were not for the cult of Steve Jobs.

After settling with the SEC, former Apple CFO Fred Anderson is trying to save his reputation by publicizing the fact that he had warned Steve Jobs there might be problems with the accounting for the backdated options at the center of the controversy.  In effect, he is shifting blame to his former boss.  But as an SEC lawyer points out in this morning's NYT:

“From our standpoint, the key fact in assessing Mr. Anderson’s liability is that regardless of what he may or may not have believed, he had before him e-mails that stated the price was picked with hindsight and that the board’s authorization was dated on a date when no event occurred,” said Marc J. Fagel, associate regional director for the commission. “Based on that, he should have done more to ensure the financial statements were accurate.”

In other words, it's the CFO's job to tell the CEO what he can and cannot do when it comes to the company's money and financial statements.  But when your boss is Steve Jobs and he tells you the board has cleared something, who is going to question him?  Jobs' cult of personality helped him save Apple and it is why we are all so fascinated by him, but everything has its downside.

If Apple keeps announcing record earnings and Jobs keeps out of the SEC's crosshairs, investors won't care.  It's like the Fake Steve Jobs says:

I wish I could describe for you how it feels to be inside Apple right now. It's just this feeling of unconscious greatness, like those basketball dudes when they're playing out of their minds and every shot they throw up just goes whoosh, through the hoop. Unfortunately you'll probably never experience this, so you'll just have to take my word for it. Trust me, it's mind-blowing. It's like the best acid you've ever done, only it's really happening.

Oops, gotta go. My management team just showed up with a cake. They're going to carry me down to the lobby on their shoulders ... .

Then we're going to bust open a keg and totally get hammered. Then we're going to burn Nancy and Fred in effigy

The Options Mess at Apple

  Steve Jobs 
  Originally uploaded by Roberto_Garcia.

The SEC will not bring charges against Apple (AAPL) over its options backdating imbroglio, and it looks like Steve Jobs may slip through unscathed.  (He's so wily, that Steve Jobs).  The SEC, though, did charge two former Apple executives.  One, former CFO Fred Anderson, settled for a $150,000 fine and a $3.5 million disgorgement of illicit gains from the backdating of his own options.  The other, former general counsel Nancy Heinen, is fighting the charges.

In a statement, Anderson explicitly points the blame at Jobs, asserting that he warned Jobs of problems with the backdating, but went ahead and approved them anyway when Jobs assured him the board had signed off on the action.  But it wasn't so simple.  If anyone needs more evidence why backdating is a bad idea, read this account of the SEC lawsuit by the NYT:

While Apple finalized the terms of the 4.8 million option grant in February 2001, when its shares were trading at nearly $21, the complaint says, Ms. Heinen caused Apple to backdate the grant to Jan. 17, when Apple’s share price was $16.81.

In the complaint, the S.E.C. asserts that on Jan. 30, Ms. Heinen provided Mr. Jobs with a list of daily closing share prices earlier in the month, when Apple’s share price was lower. The particular dates were selected, an e-mail message sent by Ms. Heinen said, to “avoid any perception the board was acting inappropriately for insiders prior to Macworld,” a trade show in early January at which the announcement of the iPod caused the stock to rise.

Even as Apple execs were trying to avoid one impropriety (backdating the options before Macworld, when the stock was even lower), they got themselves into another one by not handling the paperwork properly.  Then there was this cover up associated with a separate set of options for Steve Jobs himself:

On Dec. 18, 2001, a day the stock closed at $21.01, Mr. Jobs and the compensation committee came to an agreement: the date of the 7.5 million-option grant would be Oct. 19, 2001, with an exercise price of $18.30.

To cover up the backdated grant, the complaint asserts, Ms. Heinen directed her staff in January 2002 to document “a phony special meeting” of Apple’s board at which all directors except Mr. Jobs had met to discuss his pay on Oct. 19, 2001. In fact, no meeting had occurred.

This whole mess comes down to accounting and disclosure.  Apple was negotiating compensation with its top executives, and tying their options to dates that had already passed.  The lesson here is if you are going to grant stock options, don't make them retroactive because you are just going to wind up creating a tortuous situation that will be difficult to explain.  Apple would have done better to take a lesson from its product design team: keep it simple.

Ms. Heinen denies any wrongdoing.  And Jobs, of course, later swapped those options for restricted stock, the accounting of which is not in question.

(Read more from Apple 2.0 on Anderson's parting shot and expectations about Apple's earnings announcement later today).

Update:  Here's B2 Beta's liveblog of the conference call.

MoveOn.org Mashup on YouTube is Fair Game, Says Viacom

When Viacom demanded that YouTube take down 160,000 videos which supposedly violated its copyrights, caught in the crossfire was a MoveOn.org parody (above) of Comedy Central's "The Colbert Report."  (Viacom owns Comedy Central). The video was taken down per Viacom's request, which resulted in a lawsuit from the Electronic Frontier Foundation and Stanford Law School on behalf of MoveOn.org.  Responding to the lawsuit, Viacom realized that the video indeed was a parody, and thus covered under the fair use doctrine.  Viacom withdrew its objections and took further steps to remedy erroneous takedown notices in the future. As a result, the lawsuit has been dropped.

While the video in question is clearly a parody and creates a new work based on excerpts from "The Colbert Report" (with interviews from folks like Al Franken and David Brock), Viacom's capitulation raises a thornier question.  Like: How many of those other 160,000 removed videos could also be considered fair use? 

Any video clip cut straight from a TV show with no new material added is probably still not fair use.  Although, you've gt to wonder whether the mere act of posting a video to YouTube is "transformative" simply because it is an act of communication.  That's probably a stretch. But most mashup videos may qualify, even if just a new soundtrack was added, especially for parody purposes.

You can be sure that Viacom is going to be asked to revisit many more of those 160,000 takedown requests.  Viacom's lawyers may have caused more problems for themselves than they solved.

Music Streaming About to Be Silenced

  Broken 
  Originally uploaded by Vovien.

Small Internet radio stations and startups who rely on cheap music streaming may be put out of business by a decision of the Copyright Royalty Board upholding an earlier ruling that would nearly triple the royalty rates on music streamed over the Web.  The ruling can still be appealed, and a petition to Congress has been started.  But those efforts are unlikely to stop the change.  Soon, there will be a lot less (free) music on the Web.  Sites like Pandora, Last.fm and Live365 could go out of business.

The music industry may think this is a victory, but as Mike at Techdirt puts it:

The end result, of course, is actually going to hurt the music industry greatly. Webcasting has always been a huge promotional driver for artists -- especially niche artists who wouldn't get any publicity any other way. The recording industry apparently still hasn't figured out that it can expand its market by letting people promote the content for it. Instead, it wants to charge for that promotion, in a short-sighted effort to charge for every use of the content, even ones that expand the market and allow the overall industry to make much more money.

Of course, there is simple compromise solution here.  Instead of charging a flat rate for all Webcasters, there could be a threshold above which the new rates could take effect. And below that—for small players, college radio stations, music bloggers, etc.—the current low rates could remain.  That way, the long tail of music promotion won't be killed, but any sites that break out into massive popularity (and, presumably, profits) can be taxed accordingly.

As the culture of participation takes hold and listeners become broadcasters, treating every Web broadcaster the same is tantamount to silencing the audience.  And as any music executive can tell you, that is the most powerful source of marketing any song or band can get.