EU competition law and digital music distribution

Intellectual Property Law

There has been much controversy surrounding the European Union copyright directive, especially as this relates to the music industry. There have been several arguments that these laws are inadequate when taking into account new technological developments, especially with regard to the Internet. Indeed, when the media industry in general is taken into account, the rapid developments require adjustments in legislation. While the copyright directive is an attempt at such adjustments, it however falls short of the all-encompassing clarity required in specific situations, such as certain cases within the music industry.

The Changing Music Industry and EU Competition Law

Current digital technological advances have significantly changed the music industry in conjunction with other media. Digital technology has made possible the sale of music, on occasion combined with other creative media such as film and text, in a variety of different forms. Previously music was for sale exclusively in the physical form of tapes or CD's (Pereira). The fact that music is now also available as digital data, means that a large amount of users have access to music through these networks.

The problem for music producers and sellers, according to Pareira, is that music distribution in digital format is expensive in terms of infrastructure and conversion equipment. There is however also a need to distribute the product in as many ways as possible to as many people as possible in order to ensure the largest possible sales figures. This is why mergers such as joint ventures such as Vizzavi, and mergers such as the one of AOL and Time Warner occur. Through mergers, companies possessing software can join with large creative companies in order to distribute and profit from the music industry. This is where the EU Competition law plays a part. With regard to this, Pareira identifies three issues that impact the music industry when mergers between large companies such as the ones above are considered in terms of competition law. These include the gate-keeper issue, the source issue and the path issue.

The Gate-Keeper Issue

This issue relates to technology available to a certain company that allows this company to exercise a significant amount of market control and access. In terms of the music industry, mergers between large technological and music companies potentially possess a large amount of the Internet market. The technology to produce and allow users to access recorded music can potentially be in possession of a few powerful companies, allowing them control of the entire market. All other competitors would then be obliged to format their product according to the controlling company's standards. A single controlling entity in the market would then lead to price inflation and encourage piracy problems.

The Source Issue

At the heart of the source issue lies several copyright issues. According to Pareira, this is an issue giving the producing country control of corresponding copyrights, and thus prohibiting competitors from selling the same products, or requiring fees for selling these products. IOL/Time Warner for example, while possessing one of the largest music libraries in the world, would also be able to restrict access to this library by charging membership fees.

Thus, the simultaneous notification of the project merger between EMI and Time Warner led to the preferential access to EMI's music copyrights by AOL/Time Warner. This meant that the new entity would be entitled to half of all the music available for online sale in Europe. A similar problem is encountered with the company Vivendi, a leading company in multimedia and telecommunications products.

When merged with Seagram, the controller of the Universal music and film business, the combined company would not only have the second largest film and TV library in the world, but also occupy the number one position in recorded music. Furthermore concerning the issue of music rights, Vivendi and Vodafone have a joint venture running the Vizzavi portal, which was reported to the Commission only months before the Vivendi/Universal merger (Pareira).

The Path Issue

The path issue relates to the connection between the company and the customer. The traditional path to the customer is the physical distribution channels through which CDs and other media products are made available to the retailer and then the customer (Pareira). Distribution channels more recently developing as a result of new technology include satellite broadcasting, cable networks, mobile telephony and the Internet.

As with the above-mentioned issues, such technology lends itself to monopolizing practices by owners. The above-mentioned Vizzavi portal is an example of this. Vodafone's market position for mobile telephone Internet access was significant in a number of European countries. Their path to existing and future customers was therefore already established. Canal+, another partner in the new entity, again was the owner of a solid path for TV set-top boxes, through which Internet access was provided. The issue related to whether these customers could be migrated to the new entity, which would then be the exclusive providers for all these customers. Furthermore the question concerned the Universal music library, which would significantly impact the online music market (Pareira).

The problem with market domination is that it encourages high prices in both licensing and distribution, inflating music prices for the consumer. This in turn encourages piracy practices, which is becoming increasingly simple as technology evolves. The argument is then not against the copyright directive as a principle, but against the way in which it has been instated.

Problems associated with the EU Copyright Directive

According to Hugenholtz, many of the legislative acts under the EU copyright directive are vague, apart from the fact that some of them no longer apply in the light of current legislation. The reason for this is mostly the pressure in terms of time imposed upon the European Parliament and the Member States to finish the legislative process as soon as possible. Consequently the many controversial issues relating to copyright and its related issues did not receive the attention they should have (Hugenholtz).

Although the purpose of the Directive is repeatedly stated as increasing legal certainty, the opposite is actually the case. Hugenholtz cites article 6.4 (1) as an example of this. Although this article is meant to reconcile rights owners and their interest with the interest of users, the vagueness of the article does not appear to ensure the rights of anybody. Indeed, there appears to be an increased amount of uncertainty as opposed to the idealized certainty in the initial goal. Indeed, the legislation and its exceptions appear to create a singular amount of opportunities for abuse and misinterpretation. Furthermore there is a list of no less than 20 exceptions to the copyright law. Adding to the confusion, these exceptions are furthermore optional rather than mandatory, allowing Member States to pick and choose which to implement and which to discard. This implies that there is little change to the law already in place, which has further implications for the music industry and its copyright issues. Copyright holders could for example, as the cases mentioned above, charge exorbitant prices for their products, whereas piracy could be justified with the excuse of vague legislation.

The Repercussions of the Copyright Directive

According to Smith (2001), the music industry has made attempts via newly created software to prevent the public from copying CDs or playing these CDs on their PCs. The UK's Campaign for Digital Rights is an example of a group disgruntled with the Copyright Directive. The group is Web-based, and composed of computer users and music fans, who feel that the Directive impairs the rights of music consumers in an unnecessarily rigid manner. In order to prevent the introduction of copy-protected CDs, the groups has targeted stores in London, Birmingham, Leeds, Glasgow, Edinburgh, Newcastle-upon-Tyne, Rugby, Brighton and Cambridge have been targeted for its campaign.

The reason for the protest is not the anti-copy principle, but the fact that the industry is attempting to introduce these discs by stealth, and the claim that they are substandard in terms of audio quality and durability. The technology involves adding random noise to the data on the CD, which disables it to be copied or read by a PC CD drive. On a hi-fi this noise is eradicated by the error correction system, whereas a PC simply transfers the data and interprets it as corrupt. As for durability, the anti-rip system renders the disc lower in its resistance to scratches. The already faulty data on the disc then works cumulatively with the scratches in order to make the disc less likely to work as its gets older (Smith, 2001). This is why music fans feel that the technology infringes upon their rights.

The music industry and other professionals however claim that these effects are minimal, and any carefully looked after CD will work equally long, whether it's protected by the anti-rip system or not. There are however certain infringements upon the rights of the public that should be addressed by the music industry. One of these is the method of introducing the new technology. The trials, as mentioned above, are done by stealth, without informing the public about what they are buying. This method is unconstitutional. Each protected disc should state clearly that it contains this technology, especially as it is possible that listeners could experience considerable damage to their speakers if these CDs are indeed copied for whatever reason. Furthermore, if users are buying the CDs in order to listen by means of their PCs, it is only fair to warn users that this would not be possible. The fact that the music industry has been silent regarding the technology appears suspicious, and the question is whether these CDs are truly as minimally affected as they claim.

Smith (2001) cites an interesting case in the United States, where a programmer was arrested under the American equivalent of the Copyright Directive for decoding the encryption code on Adobe's eBook system for the purpose of creating a program that reads eBooks aloud for blind users. Cases should be considered on their individual merits in order to determine the effects of copyright breach, instead of applying rigidly the already flawed laws.

This case relates to the cryptography issue in terms of the Copyright Directive as examined by Midgley. According to the directive, research into cryptography is not to be hindered. However, the inherent flaw here is that researchers are not protected against prosecution, and prosecution does occur, as seen above. Academics or other professionals then researching cryptography with the best of intentions, as above, are indeed prosecuted, because there is no law protecting them.

A further article by Smith (2002) also claims that discs copied illegally could cause serious damage to hi-fi speakers. The anti-piracy system used by Sony's Music Entertainment is Cactus Data Shield, developed by Midbar Tech, an Israeli technology company. On principle, the system works the same as that used by Macrovision's SafeAudio, another anti-rip technology feature. However, the difference is that Cactus flags the noise as control information with the result that the noise created disrupts the error correction system of the copier. Furthermore, if the copy is played back at too high noise levels, speakers are damaged. The reason for this is that the waveform created by these copies is one to which hi-fi circuitry is very sensitive. What is worse, this damaging effect can be turned on or off at will by CD manufacturing companies. This can be done by changing the soundwave used to generate the noise data on protected CDs.

Again the issue of rights plays an important part here. Warnings to the effect that piracy could lead to damaged equipment should be issued not only as a deterrent but also as a courtesy and acknowledgement of the rights of the public. It should furthermore be acknowledged that users more often than not make copies of discs for their own personal use; not for the purpose of profit. Despite the fact that companies claim that the listening experience is not affected, the issue of consumer rights should be carefully considered before hasty anti-piracy practices could lead to expensive law suits.

According to Blincoe however, these issues seem to be ignored by manufacturing and anti-piracy companies. Midbar, mentioned above, has for example to date released one million anti-rip CDs in Europe, and plan to begin such releases in the United States as well. Of course Midbar disclaims accusations to the effect that music quality and listener's rights are affected. They cite the associations IFPI and RIAA, who gave the Cactus Data Shield technology the highest possible score for protection effectiveness. The rights issue is however not addressed at all.

Record companies should however keep in mind the fact that consumers who truly want to make illegal copies of music discs will do so. Smith mentions the example of Macrovision's technology that has been bypassed by a system converting disc tracks to.wav files in RAM, after which it mounts them as readable volumes. The VXD virtual device driver file is used to accomplish this.

The point is however that the majority of listeners make copies only for their own use, and anti-rip technology infringes upon the rights of music users, especially as they are not notified of the technology on the CDs that they buy. Companies however claim that the return rate of these CDs is not higher than unaffected CD's and that the only right consumers give up is the right to piracy.

But such technology does not only affect consumers. Indeed, according to Midgley, copy protection can be significantly inconvenient to professional music studios as well. Copy protection for example needs to be circumvented when a legitimate copy is created from existing recordings. Midgley cites the example of the Serial Copy Management System (SCMS). This is used on digital audio recordings, and prevents copying more than one of any recording thus protected. To enable music professionals to circumvent this inconvenience, DAT drives are sold that can disable SCMS features or enable them, as required. The problem is however that under the Copyright Directive, any users or sellers of this technology can be prosecuted under 296ZA. Any attempt to argue that the devices are used for other purposes (which they are) would again enable companies to sell similar devices to the general public without fear of prosecution. This again significantly detracts from the intent of the law. The obvious solution, according to Midgley, is to demand clarifying language that enables the professional use of the devices without fear of prosecution. Midgley also suggests that section 296ZB can be removed, which would still make the manufacture and sale of circumvention devices illegal, but would enable the professional use of these devices. Ideally however, would be specific legislation enabling professionals to use the device in clear and uncertain terms.

Technological Advance and Legislation

According to Hugenholtz, technological change, especially in the information age, occurs far too rapidly for the slow process of legislation to keep up with it. The initial proposal for a copyright directive was for example put on the table in December of 1997. It is indicative of the frantic pace of technology that the proposal has seen 58 amendments by the European Parliament, among revised proposals and other stacks of documentation kept as secret as possible from the public they were to affect.

The rapid development of the Internet and related technology precludes a rigid and unchangeable system of laws. Indeed, the copyright laws governing the Internet and music should be dynamic, like the industry itself. Most importantly, the changing needs and related rights of the public, consumers, creators and competitors should be kept in mind when creating such legislation. In this, the European Union Copyright Directive falls short.

Conclusion

In the light of the above, I would have to agree with the statement that the rapid development of information technology and the slowness of the legal process are incompatible. I therefore agree with the statement that technological advances make certain copyright laws as implemented under the Copyright Directive invalid. Indeed, many rights are infringed upon, whereas unfair rights are granted to the most prominent power holders in the industry.

Many areas of the Internet and music industry are affected by the Copyright Directive. Large players such as AOL and Sony for example are enabled to entirely monopolize a market that should be regulated by a number of different competitors. Music market monopoly however causes a number of problems, including the piracy temptation as mentioned above. The inflated prices infringes upon the right of the public to choose the music provider offering the best prices. Copyright is also granted without regulation in terms of contracts. Musicians for example are often required to sign contracts requiring "all rights." This prevents them from selling the particular music involved elsewhere. At the same time music studios in possession of these rights can offer the music in nearly any form to any market, thus enabling market monopoly. Both the public and music creators are therefore not protected, whereas the rights of the most powerful are guarded with vigor.

The same occurs in terms of anti-rip CD technology. The rights of music users are infringed upon by not exercising a policy of openness with the public. Anti-piracy technology, especially that which can damage equipment, should clearly be explained on CDs affected. Furthermore I do not see why it should be a problem to play CDs on one's computer CD Rom. Again, if a consumer buys CDs for this purpose, it should be clear whether it would actually be possible to use a PC for listening to the music.

Other professionals, such as recording studios and cryptographers are also not receiving the proper protection of rights that should duly be theirs. As Midgley states, clearly explained legislation particularly affecting the areas where cryptographers and music studios are allowed to conduct their work, should be implemented.

Basically, the problem as stated by Hugenholtz is one of haste. The legal process, slow by nature, should not be rushed in terms of an important issue such as copyright. Paradoxically however, it should also be able to keep pace with the rapid development of new technologies that could affect copyright and copyright holders. This is why a dynamic system rather than a rigid law system should be introduced. This should be flexible in order to reflect the rights of all persons involved, from the large and powerful to the individual music creator.

Sources

Hugenholtz, Bernt. "Why the Copyright Directive is Unimportant, and Possibly Invalid." EIPR 11, p. 501-502, 11.10.2000. http://www.ivir.nl/publications/hugenholtz/opinion-EIPR.html

Midgley, Julian T.J. "Critique of the Proposed UK Implementation of the EU Copyright Directive." 8.21.2002. http://ukcdr.org/issues/eucd/ukimpl/critique_uk_impl.html

Pareira, Miguel Mendes. "EU competition law, convergence, and the media industry." Law Society of England and WalesLondon, 23 April 2002. http://europa.eu.int/comm/competition/speeches/text/sp2002_016_en.pdf

Smih, Tony. "UK campaigners call for anti 'anti-rip' CD day of action." The Register, 10.04.2001. http://www.theregister.co.uk/2001/10/04/uk_campaigners_call_for_anti/

CD anti-piracy system can nuke hi-fi kit." The Register, 03.03.2002.