Saturday, August 12, 2006

August 2006 Early Indications: Of Copiers, Counterfeiters, and Pirates

Enterprise computing is almost exactly 50 years old: the first purchase of a commercial Univac occurred in 1954. As the Economist pointed out recently, the personal computer is 25. This historical symmetry neatly sets the context for a problem that has been with us only a short time: software copying.

This is truly a problem without precedent. While the Xerox machine did not duplicate the printing (and particularly the binding) process, photocopying did have a major economic impact on at least two sub-sectors: textbook publishing and sheet music. Even so, these markets are small relative to software, music, movies, and proprietary research. Thus the business model changes, court cases, and other signs of market adaptation to photocopying do not compare to the issues we face today.

I could find surprisingly little literature on the historical arc of this issue. Nevertheless, given the prominence of Napster and its successors, Microsoft's interactions with the Chinese government and market, and the rise to economic power of the gaming sector, copying and its control have become central issues in a digital economy.

Duplicating a physical artifact means, at the least, having access to both raw materials and skills. Whether that's steel and metalworking, food and cooking, or wood and carpentry, the issue of copying has been nonexistent in some markets. Elsewhere, particularly branded consumer products such as watches and purses, copying -- as in imitation rather than replication -- can be a significant concern. Physicality also implies a moderate barrier to movement: successful counterfeiters still face the problem of getting merchandise to customers.

The Internet removes the barrier of getting raw materials because code is malleable, easily transported, and closer to idea than infrastructure. The skill involved in copying a file, whether of executable code or data, is miniscule in contrast to what was needed to create either the software artifact or a physical original. Unlike physical counterfeits, which typically lack material quality and/or craftsmanship compared to the original, or analog copies in which successive generations of cassette tapes, photocopies, or faxes rapidly degrade, digital copies are nearly perfect. Furthermore, the means of production (a PC) is inexpensive and ubiquitous, which makes tracing the origin of copies harder than locating activities with heavier infrastructure, such as radio broadcasts and LP record pressing. Finally, the digital distribution channel is not only faster than a physical counterpart, it is instantaneously global.

Owners of digital content have relied on three tactics to combat copying. First, there has been a series of attempts to make computer disks hard or impossible to copy, by hiding files, using proprietary formats (such as game cartridges), or doing something called nibbilizing that rearranged the bit sequence of a copy. (Similarly, Macrovision enforced copy protection in analog VHS recorders.) As software distribution goes increasingly online, such measures still have their place, but they have not slowed the spread of copying by a significant margin. An exception is the video DVD, which can be copied by nowledgeable users but not casual ones: proprietary protection of the digital bitstream in a DVD player or PC is enforced
in hardware.

Secondly, software publishers can make it hard or impossible to use a copy. Some companies required users to consult a paper manual ("what is the last word on page 67?") to generate crude authentication. One manual used symbols, and printed the manual in a color scheme that was impossible to photocopy. Still others relied on a hardware device called a dongle to activate a program in conjunction with the software and a generic PC (which quickly raised the problem of getting multiple dongles to interact gracefully on the same machine). More recently, a program can "phone home" via the Internet to see if software with a given serial number is in use on multiple machines. This approach can be made relatively robust for application software, and a variant called Fairplay prevents unauthorized copying of Apple's iTunes music files. Adobe is including auditing and monitoring of print materials in its LiveCycle Policy Server: if a user forwards an e-mail or file, or prints it, or otherwise interacts with it, the originator of the document can be informed. How this extensive reach will affect task design and business process remains to be determined.

Finally, software owners can lobby legislatures to change laws relating to copyright. The doctrine of fair use has been dramatically altered by both the duplication technologies of the past 100 years and the lobbying of content industries. There have been many unintended consequences: copying application software off a 5 ¼" floppy onto a USB stick would generally be illegal, but with rapidly outmoded storage technologies, what is the owner of the application to do if she owns a PC without the appropriate outmoded drive? At the enterprise and government level, archiving digital assets often turns into an exercise in curatorship of a technology museum: successive generations of outmoded hardware and software need to be maintained in the event that a given file or storage format needs to be read.

The whole question of software copying has many layers of complexity. The economics of digital goods means that the first copy is extremely expensive, representing as it does all the capital investment and years of r&d. Afterward, copies are effectively free to produce, which can lead to very high profit margins. The lack of effective channels for certain digital goods (single-song music downloads in the Napster era, for example) means that some markets might reject the arbitrary bundling or other pricing offered by copyright owners. After a copy is made, with whatever motivation, different parties might be financially liable for an individual's action, depending on how the law is written.

The content industry currently tends to reject copying as backup: if I buy an iTunes song (or 500 of them) and my host PC's hard drive dies, I'm generally out of luck even though all software was purchased and used under the terms of the license. Another example is DVDs: if I have two places of residence and want to watch a movie where I am, why must I buy a second copy of the same software rather than make a single copy for personal use? Once again, copyright law tends to prohibit any copying under blanket provisions Such a move blurs the distinction between copying and counterfeiting, which are overlapping but not identical concepts. As processor speeds, graphics capability, and bandwidth all improve, content owners have lobbied to engineer copy protection deeper into the computing platform.

This degree of restriction would be unprecedented. If I want to weld a Ferrari nose onto the front end of a dump truck, Ferrari (or Caterpillar) can't control what is done either with the purchased asset or, more important, an oxyacetylene torch. Governments have engineered protection into color copiers, for example, and it's hard to argue against some degree of action in the public interest to protect the integrity of the money supply. But being able to use small clips of published text in scholarly works, for example, is standard practice -- and essential to the expansion of knowledge in law or literary criticism. The parallel action of copying any portion of a movie for personal or scholarly use, however, might be illegal, depending on jurisdiction. Similarly the study of cryptography is highly regulated: scholars who decode copy protection algorithms run the risk of prosecution if they publish their findings.

Herein lies the conundrum. The digital asset copying problem is unprecedented, so new kinds and degrees of measures will be required. At the same time, the legitimacy of certain forms of copying -- for preservation, backup, or fair use -- means that broad prohibitions, enforced in a general-purpose computing platform, come at an extremely high price to the purchasers and users of software and other digital media. No single answer will apply in every market to every application, but there have been some noteworthy efforts:

-Use copying to build an installed base.
Software makers with sufficiently strong cash reserves and long planning horizons can consider letting copies go relatively unpunished to build up a user base. Once a large body of people is trained on the software and file extensions and other conventions are well established, there are high enough switching costs that there may be reason to buy later versions of the product, particularly if the registration process is tightened, the pricing is attractive, and/or competitors have been weakened.

-Use copying of entertainment to sell other entertainment.
The Grateful Dead's support of tape-swappers who were allowed to record concerts is a widely cited example. Other artists have used music downloads as an alternative path around the gatekeepers of radio playlists to build live audiences for concerts -- where the t-shirt concession is tightly protected against counterfeiters.

-Reconsider analog.
Several music labels, faced with plummeting CD sales, have turned to high-quality vinyl releases of both new and back catalog. Some high-end financial newsletters never left paper distribution. There are still many places where one can't conveniently read an electronic newspaper.

-Utilize advertising-supported distribution.
Archives are a perfect example: while a few newspapers have succeeded in charging subscriptions, most are failing to monetize their back issues with clumsy subscription or registration models which often don't support permanent linking from blogs or other sources of traffic. As paper newspapers continue to decline in circulation, the economic models of hybrid (digital + physical) production and distribution are ripe for reinvention. As a former big-city newspaper editor recently told me, this talk about the sky falling on newspaper ad revenues has happened before: in the late 1960s, political advertising moved overwhelmingly to television almost overnight, and the newspaper industry survived.

-Think of King Gillette and sell blades after giving away razors.
Giving away a multi-player game title free, or allowing users to copy it without restriction, provides software publishers with a powerful distribution channel (it used to be called "viral" back in the day). Recovering the cost can be more effectively achieved by making the proprietary on-line gaming environment a tightly controlled, for profit affair, with monthly or annual renewals: players will pay for access to other players, not for the plastic disc. Several online gaming environments (including Second Life) have spun off real economies based on cash flowing to merchants of virtual assets.

The list is not inclusive, but should suggest that there are enough viable responses to digital copying such that broad prohibition of all software copying will impose social costs that may outweigh proprietary benefits. It's important that there be open public debate to consider all of these potential costs, benefits, and risks of various courses of action. Copying and piracy, meanwhile, are not one and the same, but the rhetorical landscape tends to make this distinction harder and harder to draw. At the same time, true piracy -- illicit DVD pressing plants for example -- should be considered and addressed separately rather than being conceptually lumped in with the many gray areas of fair use.