COPYCENSE

Commentary by K. Matthew Dames, executive editor.

The lead story in last weekend’s edition of The Wall Street Journal was a profile on the Walt Disney Co., and its business strategy for providing content to audiences who, increasingly, are less available via television or the movie theater. Included in the article is a discussion of how one Disney executive bought several Sony PSP units for her team (with the units loaded with episodes of “ABC News” and the movie “Pirates of the Caribbean”) so the team could see what “their shows looked like playing on a smaller screen.”

At minimum, the story suggests that the movie industry’s big players generally have been quicker to revamp their respective business models to accommodate a changed environment than their counterparts in the music industry. (One could make a legitimate counter argument, however, that the movie industry has had more time to learn from the music industry’s mistakes because America’s broadband capabilities allow for easy transmission of music files, but do not yet accommodate the easy movement of movie files, which are significantly larger.)

Any news story that discusses of a large company’s digital content strategy must mention how that company plans to implement digital rights management so that the content is monetized efficiently. And to this end, I find the following paragraph interesting.

The push into new technologies means Disney has to worry more about the growing problem of unauthorized digital copies. [Disney CEO Robert] Iger recently had discussions with Ivan Seidenberg, chief executive of Verizon Communications Inc., about a programming deal for Verizon’s online services and nascent television operation. Before cutting the deal, Mr. Iger insisted on a provision that requires Verizon to send warnings to its broadband customers identified by Disney as unauthorized copiers of Disney content. The provision was significant because Verizon, intent on protecting the privacy of its customers, had balked at demands made by the music industry in its effort to battle piracy.

The Journal‘s characterization of Verizon’s privacy battle with the music industry is not inaccurate, but it is wanting. In fact, Verizon battled the music industry tooth and nail over a Digital Millennium Copyright Act provision (Section 512(h) of the Copyright Act) that allows an expedited subpoena procedure. The procedure allows content owners to request a subpoena through a court clerk instead of a federal court judge.

Verizon’s battle with the music industry ended in December 2003, when the U.S. Court of Appeals for the District of Columbia overturned a lower court’s ruling that the music industry subpoenas were valid. The Court held that Section 512(h) does not authorize the issuance of a subpoena to an ISP that acts solely as a conduit for communications where the content of the communications is determined by users.

Given Verizon’s history of protecting its users’ privacy from entertainment industry inquiries, why would the company agree to engage in preemptive warnings to its users based upon an entertainment company’s allegations that the user is an “unauthorized copier”? Has Verizon decided to abandon its commitment to user privacy?

This agreement seems like an extraordinary accommodation for a company that has pledged to protect its users’ privacy — and has backed up that pledge with notable and expensive litigation. One difference between the music industry’s approach and what Disney has done is that the music industry engaged in several rounds of litigation; it was never reported that music labels tried to approach Verizon or any other ISP in the way that Disney approached Verizon. Instead, the music industry’s tactic failed to slow file trading, and perhaps more importantly, started a public relations debacle.

Disney, on the other hand, presumably learned from the music industry’s mistakes and sought to resolve the issue preemptively in direct meetings with the ISP. Verizon likely has three legitimate business reasons for agreeing to Disney’s request. First, Verizon sees an opportunity to make money doing business with the movie industry. That opportunity can only come to fruition if the m movie companies are satisfied that Verizon is committed to protecting content from unauthorized duplication and distribution.

Second, Verizon likely wants to avoid looking like it is insensitive to the issue of copyright infringement that could occur across its networks. Such a stance brings Verizon its own public relations problems. To this end, Verizon can distinguish Disney’s approach from the music industry’s approach by claiming that the music industry’s approach not only compromised the privacy of its customers, but also was an end run around the judicial process. By approaching Verizon up front, however, Verizon can claim that Disney has sought to avoid bad publicity and litigation, which are anathema to publicly held companies.

The third reason possible reason Verizon agreed to Disney’s approach may be because the company suspects that the Grokster decision requires them to do so. In June, the Supreme Court held that the companies that own and operate file sharing networks could be held liable for acts of copyright infringement that are committed by its users pursuant to an inducement theory. The inducement theory of infringement essentially says where a party induces, entices, or persuades another party to commit copyright infringement, then that party is, itself, liable for copyright infringement.

While Verizon is different in several ways from file sharing networks like Grokster and Streamcast, the inducement theory could apply to its actions, and possibly to its failure to act. The impact of the inducement theory is yet unknown, but again, litigation is anathema to a publicly held company like Verizon.

Whatever the reasons, Verizon’s agreement to warn users that Disney alleges are engaged in unauthorized copying seems to be a retreat from its pro-privacy stance. Then again, the inducement theory of copyright infringement did not exist when Verizon first adopted its pro-privacy stance. It will be interesting to see how the Verizon-Disney agreement (which almost surely will become the norm for all movie companies with which Verizon deals) affects Verizon’s commitment to customer privacy.

Merissa Marr. “In Shakeup, Disney Rethinks How It Reaches Audiences.” The Wall Street Journal. Oct. 1-2, 2005. Page A1.

CopyCense™: K. Matthew Dames on the intersection of business, law and technology. A business venture of Seso Digital LLC.