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Old 03-03-05, 07:27 PM   #2
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Man Convicted of Copying Oscar Films Dies

Prosecutors said Russell Sprague received the films from Carmine Caridi, an actor and academy member who appeared in "The Godfather: Part II." Caridi admitted in an affidavit he sent Sprague copies of several movies, but denied knowing about Sprague's criminal activities. He was never charged.

A man awaiting sentencing for illegally copying and distributing movies being screened for Oscar picks was found dead in his jail cell, authorities said.

Russell Sprague, 52, of Homewood, Ill., may have died of a heart attack, the U.S. Marshals Service said. His body was discovered yesterday morning and an autopsy was scheduled for today.

Awaiting Sentencing

Sprague was scheduled to be sentenced March 21 after pleading guilty last year to one count of copyright infringement. He had faced up to three years in prison.

Sprague was accused of copying 134 "screener" movies sent to members of the Academy of Motion Picture Arts and Sciences to solicit their votes for last year's Oscars, including "Kill Bill: Vol. 1" and "Seabiscuit." Films were made available for download over the Internet, authorities said.

Prosecutors said he received the films from Carmine Caridi, an actor and academy member who appeared in "The Godfather: Part II." Caridi admitted in an affidavit he sent Sprague copies of several movies, but denied knowing about Sprague's criminal activities. He was never charged.

Expelled Screeners

In November Caridi was ordered by a federal judge to pay Warner Bros. US$300,000 for providing copies of "The Last Samurai" and "Mystic River" to Sprague. A similar suit filed by Columbia Pictures against Caridi is still pending.

The academy expelled a member for leaking Oscar screeners last year. That member is widely believed to be Caridi, though the academy did not identify the member.

Caridi has said he received no money for the films. He allegedly told investigators he believed Sprague was a film buff and merely wished to watch them.

Movie studios routinely send copies of films to academy members, who view them in their homes as they prepare to vote in various categories for the Oscars.


No End To Lights, Camera, Action

When the 24th Hong Kong Film Awards pay their annual tribute to the film industry next month, the drop in the number of movies produced in the SAR in 2004 would be on everyone's mind. What was once among the most prolific filmmaking centres is facing perhaps its biggest challenge, for film productions are projected to fall further from last year's dismal 60.

But does that mean the end of Hong Kong films? Not necessarily, says Woody Tsung, chief executive of Hong Kong, Kowloon and New Territories Motion Picture Industry Association. On the contrary, the situation is "good", he says. Though focused on the health and future of HK films, Tsung surprisingly is not that worried about the falling numbers, for he says it's a natural result of the changes in people's lifestyle. And he refuses to blame the economic downturn or the SARS outbreak for that.

"Hong Kong can weather this storm, but we definitely need some changes to help it survive," he says. "Over the years, Hong Kong has changed a lot and the nature of the film industry too has to change... No longer can studios rely on an audience that accepts anything they churn out. People today have so many entertainment choices: the Internet, video and online games, karaoke. Or, they can go to Shenzhen for shopping."

Also, he says, "people today have more money... They go abroad, get exposed to other cultures and ideas. These raise their expectations... and they demand better quality." Films such as "Star Wars" and "Day After Tomorrow" have raised the bar, driving local audience's tastes for Hollywood movies. "Now HK films have to fight with these big budget Hollywood films. So it means we have to raise our standards."

While industry figures from the 70s and 80s, when Hong Kong regularly made more than 200 films a year, look impressive, the quality of most of them left a lot to be desired, says Tsung. "In the old days, Hong Kong had a manufacturing base. There were no computers, no Internet, so most people didn't know as much about what was going on in other countries. Also, they didn't speak a lot of English. So for them movies in their own language were the main form of entertainment. That's why local films were very popular."

Film studios minted money. "People would flock to the cinemas, irrespective of the quality of the films. So there was no incentive to do something new," he says. But now higher audience expectations "force studios to make better films", instead of run-of-the-mill productions or copies of successful foreign films.

Tsung says: "After 'Infernal Affairs', many films tried to make money by copying its formula. But that strategy doesn't work anymore." Local filmmakers should make bigger and better films on their own.

The fall in the number of films can be partly explained by the studios' present-day tendency to make fewer, but better, movies. They are putting more of their money into big productions such as the groundbreaking "Kung Fu Hustle". Many films still may be badly written or marred by bad acting, but "they have the right attitude... and are trying something new."

Raising of standards apart, the biggest hurdle for Hong Kong films is finance for promotion and distribution. A relatively big budget - say HK$40-million - film can do a lot with a 10-per-cent advertising budget. Such an amount is sufficient to draw enough viewers to rake in a profit. But a 10-per-cent ad budget would give a HK$4-million film only HK$400,000 for publicity. "How much advertising will that get you?", Tsung says. Not enough to draw people to the cinemas. "Medium-budget films don't attract investors, for fear of not being able to make money."

The lack of diversity is another problem plaguing our films, for they tend to focus on some recurring themes to capitalize on the commercial appeal of their Hollywood counterparts. In a city with a relatively small movie-going population, studios need to pay more attention to cinegoers' mindset, Tsung says.

"Art house films would never be popular in Hong Kong not because Hongkongers cannot appreciate such movies, but because there's no culture to support them. We need to have this if we want to diversify the kind of movies we make."

While other Asian cities may be busy raising the profile of their film industries, the reverse is true of Hong Kong. Its movies have always been popular in the region, especially in Taiwan and in countries such as Malaysia, but "what we need to worry about is the shrinking of these traditional markets".

The reason for this is piracy, he says. Since many HK films earn the majority of their revenue from outside the SAR, rampant piracy is costing the industry untold losses. Films that in the past could have been counted on to make money are under attack in the overseas market, Tsung says. "A pirated copy in Taiwan or Malaysia can be bought very cheap", so why should people pay to see it in the cinema? Copyright infringements cause huge losses to the industry, and piracy is an issue that "cannot be resolved". For, strategies like improving security or technology to prevent piracy wouldn't eliminate the problem.

"Piracy is here to stay. Softwares such as Bit Torrent (BT) make it impossible to stop it," Tsung says, referring to the peer-to-peer (P2P) data transfer technology that allows users to share files without logging on to a central server. Because the data is not transferred through a third party, there's no way to stop unauthorized copying of copyright materials such as films.

The only way to end piracy, he says, is by educating the public. "People need to see that buying pirated copies is a bad thing." But that is an uphill task - because it is the better educated, according to a recent survey, who are more likely to buy pirated copies or download contents illegally. But despite that, educating people is still the best option, feels Tsung. There's a need for a clear framework for protection of intellectual property and that can be achieved only through government action.

On the other hand, the mainland's film industry appears to be headed in the opposite direction. A record 212 movies were made in 2004, compared with 140 in the previous year, earning 1.5 billion yuan (US$182 million) in revenue. The mainland market offers a huge potential to HK film-makers, he says, but HK films still have a long way to go before being confident of turning a profit there.

Some sectors such as financial services are justifiably upbeat about the prospects offered by the Closer Economic Partnership Arrangement (CEPA). But the challenge for HK films is not trying go open up the mainland market, but to know what happens when they get there. Under CEPA, HK films are not subject to a quota on the mainland because they are treated as domestic productions. But what is needed for the mainland to salvage HK films is the right distribution infrastructure. And, says Tsung, "that has not happened yet".

The small number of firms authorized to release films on the mainland is another obstacle. Given the bottleneck, many HK films may not even make it to the mainland screen. The low penetration of cinemas and the exercise of releasing films in smaller towns and cities often mean having to deal with local mainland authorities, and that makes the process more complex, he says.

The wide income disparity between cities, especially in the eastern provinces, and rural areas, where cinema ticket is a luxury, is another major problem. The true potential of the mainland can only be realized when wealth is more equally distributed, Tsung believes.

Overcoming these difficulties is "not impossible, but the mainland market is not there yet". Despite the challenges, however, Tsung is optimistic that the HK film industry will survive. "HK movies will never die. Despite a great number of Hollywood movies and their success, local audiences will always want to watch something in their native language that tell stories about things that they know about."


Cinequest, a P2P Movie Fest
Alison Strahan

There's no need to don black tie or jewels to attend the 15th annual Cinequest Film Festival in San Jose, California, this week. In fact, there's no need to don anything.

Simply lounge in the buff while you check out the festival's lineup of nearly 200 films, most of which are available for download from the festival's website.

Running March 2 though March 13, the Cinequest event is an independent film festival with a digital twist.

Commercial-free, DVD-quality downloads of many of the festival's feature films are available for online viewing, powered by a video- sharing system from Kontiki that uses peer-to-peer technology to deliver movies to desktops.

Like its file-sharing competitor BitTorrent, Kontiki users download movies not just from one server but from many. Movie files are broken into small chunks that are shared between peers, making for fast and timely downloads. The more people downloading a particular movie at the same time, the faster the downloads.

The movies are delivered in Microsoft's Windows Media format, and are copy-protected. Unfortunately, Mac users are out of the picture. The system works only on PCs, which is bad news for the hordes of indie filmmakers using Macs and Final Cut Pro to produce and edit movies.

Mac users who wish to check out the festival's entries will need to get dressed and schlep on down to one of four venues in San Jose where the films are showing.

Halfdan Hussey, the festival's executive director and co-founder, said the Kontiki-powered system will be available to Mac users by next year. In the meantime, marginalized Mac users can still access some of the festival's online material, including trailers and festival news bulletins.

Hussey said he was excited by viewers' response to Cinequest movie downloads. "The internet will be a staging device for direct delivery of indie movies to a user's desktop or home entertainment center," he said. "My prediction is it will bring new revenue to independent filmmakers and distributors outside of the realm of Hollywood within the next two to four years."

The film choices are abundant and eclectic. The lineup includes My Big Fat Independent Movie, a satire in the spirit of Scary Movie that skewers independent flicks; Butterfly, a sexy lesbian drama from Hong Kong about a woman's metamorphosis; and Missionary Positions, a documentary about a pair of Christians trying to rid the world of porn.

The festival expects 60,000 flesh-and-blood visitors this year, up from 54,000 last year. Organizers expect more than 75,000 movie downloads during the festival.,1412,66755,00.html


Downloading: The Next Generation

As far as the licensed digital music services have come, they still have to clear some major hurdles if they are going to evolve into the vibrant alternative to online piracy that the record labels need them to be.
David McGuire

Kelly is the type of person who gives music industry executives hives. She arrived at college in 2001 having never downloaded music -- illegally or otherwise -- in her life. Within a week of her arrival, a classmate turned her on to Kazaa and she was well on her way toward building an illicit library of 500 songs.

"I've watched enough MTV to know that most of the rock stars whose songs are being stolen the most live so comfortably that I can't possibly feel sorry for them," said Kelly, a college senior in Maryland, who asked that she not be identified further for fear of legal reprisal.

Dislodging Kelly and millions of her peers from services that give them all the copyrighted music they want, free of charge, is challenge enough, but the record labels realize that it's also only half the battle. Entertainment-industry leaders know they'll never stamp out illegal file swapping on the Internet, but they hope they can tarnish the experience enough to drive otherwise law-abiding users off of the underground peer-to-peer -- or "P2P" -- services and into the waiting arms of licensed digital services like the remodeled Napster, Rhapsody and Apple's iTunes.

Kelly, who said she has "absolutely no qualms" about downloading the major labels' latest releases, is a little uneasy about all the lawsuits that are being filed against song swappers, and about the nasty "adware" that's been gumming up her computer since she started downloading. For all the fun she's having, Kelly said she'd probably quit stealing music after college, in large part to avoid the mounting dangers and hassles that go along with it.

The entertainment industry is doing everything it can to encourage that sort of thinking. In a multi-pronged campaign against illegal downloading, the industry has taken on everyone involved with file sharing, from the companies that distribute the software to the people who use it.

Meanwhile, the options available for licensed downloading, including the size and quality of online music catalogs, are getting more attractive for potential users. Consumers can buy or rent their songs, pay as they go or in one lump fee, and pick from more than a million tracks, all for less than a dollar apiece. But as far as the licensed services have come, they still have to clear some major hurdles if they are going to evolve into the vibrant alternative to online piracy that the record labels need them to be.

"It's not realistic for anyone to think that they can eliminate piracy online," said Cary Sherman, president of the Recording Industry Association of America. "The ultimate success of the online marketplace is going to be, first and foremost, a matter of marketing and business models. Control of piracy is imperative to support that, but in the end it's the business model that has to work."

In a phone survey of 2,201 U.S. adults, the Pew Internet & American Life Project found that 11 percent owned digital music players. This means at least 22 million players are in the hands of Americans over 18 years old, while millions more are likely blasting tunes into adolescent ears. Spurred by the enormous popularity of its iPod players, Apple Computer Inc. has seen its iTunes Music Store sell more than 250 million songs as individual downloads for about 99 cents apiece since its April 2003 launch.

And while Apple is the nascent industry's undisputed 800-pound gorilla, other companies are posting impressive growth. Several competing services, including RealNetworks Rhapsody, the reformed Napster, Yahoo's MusicMatch and MusicNet, all of which offer unlimited "tethered" music downloads for about $10 a month, combine for more than 1.5 million subscribers.

That upward trend will continue, according to a 2004 report by JupiterResearch, which predicts that online music sales -- both subscriptions and individual downloads -- will top $1.7 billion in 2009, or about 12 percent of consumer music spending.

For all the growth, the volume of unlicensed downloads continues to dwarf that of paid transactions. In January alone, file swappers traded more than 1 billion tracks over the most popular networks, according to Atlanta-based BigChampagne LLC, a company that tracks file-sharing activity. That figure has remained fairly steady throughout the entertainment industry's anti-piracy campaign, BigChampagne President Eric Garland said.

Still there are indications that the digital market may be slowly swinging in the industry's favor. In a survey of 1,112 people conducted earlier this year by Ipsos-Insight, 11 percent said they'd paid to download a song at least once. An identical percentage of respondents said they'd downloaded at least one song from a file-swapping network. In 2002, the first year of the survey, only 2 percent of respondents said they'd paid to download a song, compared to 19 percent who said they'd downloaded songs for free.

"I think that everyone agrees it's headed in that direction. It's just a question of when is it going to be a significant slice," said Matt Kleinschmit, Ipsos- Insight's vice president.

Finding the Right Carrot

To feed the new distribution engine, record companies are shoveling their catalogs into the electronic furnace as fast as they can.

"We've licensed any piece of music that we have the rights to," said Thomas Hesse, president of global digital business for Sony BMG Music Entertainment.

"The total number of tracks that we're licensing is 200,000. We generally make our releases available [when they're cleared for radio play] and we sometimes make available B-sides from singles or live recordings that haven't actually been released 'on record.'"

Ted Cohen, EMI Music's senior vice president for digital development and distribution, said the labels' efforts to throw open their catalogs to the online stores have paid dividends for consumers. "I think over the past year there's been a tremendous increase in the amount of variety. You have virtually unlimited choice and you can take it with you."

Like Sony, EMI offers unique "digital box sets" and will often license tracks from foreign artists for sale electronically, even if the CD isn't being sold in U.S. stores. Cohen said EMI has licensed 60,000 songs for online distribution in the United States -- more than 99 percent of its U.S. catalog, according to the company.

For nearly a year, EMI has also been in the process of reorganizing its internal structure to interface more smoothly with the digital marketplace. The company abandoned its CD pressing plants, and Cohen said the firm is spreading the gospel throughout its operation. "We're integrating digital into the operational business units. ... It was never going to be a real business if we kept it sitting on the side."

According to EMI spokeswoman Jeanne Meyer, that means the digital side of the business isn't "three guys in a garage," but the responsibility of every employee in every department. When the hip-hop artist Chingy put out his second album, his first single was made available as a cell phone ring tone before it was released on radio.

The download services, meanwhile, are racing the unlicensed P2P operators --and each other --to find the magic formula that will attract and keep users. Earlier this year, Napster offered users of its basic service -- which allows users to download as much music as they want, but prevents them from listening to it away from their computers -- the chance to pay a little extra for the privilege of taking their playlists with them on an approved portable player. RealNetworks' Rhapsody service will soon be offered in portable form as well, said Richard Wolpert, the company's chief strategy officer.

So far, bulk-subscription or "rental" models like Rhapsody and "Napster to Go" have lagged behind iTunes' pay-per-download model. But devotees say it offers an experience closer to that of the illegal services, in that users can download songs on a whim without adding to their bill. JupiterResearch predicted that the subscription market would eventually eclipse the market for a la carte songs.

Consumers may soon have a third option in the form of licensed file sharing. Using technology developed by Shawn Fanning, who created the original Napster in the late 1990s, several companies are planning to launch file-sharing services that let users swap songs with one another, just as they would if they were using one of the unlicensed services like Kazaa or eDonkey. The technology simply requires users to pay for the trades that were once free.

Among the legal download services, only iTunes has the resources to mount a big general advertising campaign, but the underdogs are aggressively hunting down new customers where they think they're most likely to find them -- on college campuses. Starting in 2003, when Napster inked a deal with Pennsylvania State University to give students free access to the company's all-you-can eat download service, online music sellers have flooded college campuses with deals and arrangements designed to snare young consumers with legal options before they're tempted by the fruits of file-swapping networks. Two of the smaller, newer players in the online-media market – Herndon, Va.-based Ruckus Network and Englewood, Colo.-based Cdigix – so far serve nothing but college campuses.

Competing With Free

"What we're doing is to try to create a service that does [the] best it can to mirror the experience of peer to peer. What we do to get people away from peer to peer is give people the best service we can," Napster spokeswoman Dana Harris said of the young firm's strategy for attracting users.

It's a refrain repeated throughout the industry. A good pay-to-download service should include everything that's good and fun about peer-to-peer, minus the incomplete files, adware and viruses. EMI's Cohen said users don't want to think about their service as anything other than an always-on conduit for music: "The most compelling interactive service is the one that you don't actually interact with unless you're having a good time."

Observers broadly agree that the pay services have moved closer to that aim over the past year, but buyers of licensed electronic music still can stumble into glaring reminders that they aren't in the freewheeling early days of Napster anymore. Download from iTunes "and for 99 cents you get a guarantee that you're getting the thing you want," said Roger Kay, a vice president and market analyst for IDC in Framingham, Mass. "But if you put in the word 'Beatles,' ... you'll get John Lennon and Elton John singing some schlock tune together. ... You'll get nothing else, because Apple [the Beatles' record label] won't play."

The number of mainstream artists who won't provide their recorded music in digital form is dwindling. But licensed downloading also still lacks the hundreds of concert sets, rare studio outtakes and unreleased B-sides that made the original Napster so appealing, Kay said. "Once you fence the prairie, there's no more 'Wild West,' but it's also not quite as much fun."

And contrary to what some online music executives believed at the outset of the pay-to-download business, the depth of the catalog has a direct impact on business. In a 2003 interview, RealNetworks' Wolpert questioned the need for a digital service to have millions of tracks in its catalog, saying, "Eighty to 90 percent of the songs people download [on free services] are the same couple hundred songs."

After nearly two years of watching his own customers, Wolpert jettisoned that supposition. "Catalog does matter," Wolpert said, noting that the company's customers download 90 percent of RealNetworks' million-song catalog every month. That monthly figure remained steady even as the company doubled its catalog.

"In digital there is a 'long tail' of tracks that will sell," Sony's Hesse said. "There is a great opportunity here to go even deeper in the catalog. People will actually find this stuff." Added EMI's Cohen, "The whole promise of this unlimited digital shelf is playing itself out."

Which One Is the Betamax?

Those who argue that legal downloading is just as good as file swapping, for a small fee, face another uncomfortable reality: Concerns over compatibility

among the various players and digital formats -- known as "interoperability" -- seem to be increasing.

For example, Napster to Go users are told that for $5 a month extra, they can take their downloaded sounds wherever they want to go -- unless their portable player is an iPod, because iPods aren't compatible with the Microsoft software that Napster uses to protect the playlists.

With each player and service using slightly different file formats, standards and security tools, users may have less freedom to use their music than they think. IPod owners who buy music from iTunes might get a shock if they buy new devices from Creative Labs or Dell and try to pull their iTunes songs onto them.

"That is something that we struggle with and it is a definite obstacle. I hope at some point digital music will be simpler in that respect, but I think that's still a long way off," Napster's Harris said. Wolpert called interoperability concerns "potentially the biggest obstacle to mass consumer adoption."

Sony's Hesse and EMI's Cohen say that they may need to lean on the retailers to make their services more interoperable. "I think we need to make significant strides in 2005 to improve that situation," Hesse said.

The company that did the most to get legal downloading off the ground may also be the lead weight on a market whose consumers like to shift among different players and services, taking their libraries with them. In addition to shutting out Napster, Apple also prompts iPod owners to use iTunes as their PC media player and online music store, making it difficult or even impossible to buy tracks from other retailers and move them directly to their devices. About 90 percent of the hard-drive-based music players sold in the United States are iPods, according to Piper Jaffray analyst Gene Munster.

"Apple has opted to keep iPod proprietary and not let people who own them choose how they want to get digital music," Harris said.

Representatives for Apple reached by telephone and e-mail repeatedly declined to be interviewed for this story. While its adherence to a proprietary model may eventually become an obstacle to widespread adoption, Apple's strategy is sound business and unlikely to change any time soon, said Gartner G2 analyst Mike McGuire.

"In a perfect world it would all be interoperable, and everybody would make money, but in a market-driven world, is there a business case to be made for making the iPod interoperable? I don't know," McGuire said. Apple chief Steve Jobs "is doing what any business would do," he added.

'An Introductory Price'

Finally, the question of how much digital music should cost remains unanswered. Some market observers and retailers say the current prices, particularly

for individual downloads, may be too high. One-time promotions aside, the industry's standard rate for downloads has hovered fairly steadily at the dollar- per-song level since its inception.

RealNetworks offers both the Rhapsody subscription service and an a la carte download store. When the company offered downloads at 49 cents a song during promotions, sales tripled, Wolpert said. But RealNetworks took a loss to offer those promotions, he said, because the record companies won't lower their per-song rates.

IDC's Kay said more pricing flexibility would help, but added that he doesn't see much downward pressure on prices: "If Apple has managed to sell a quarter of a billion songs, it would be hard to tell them they're overpriced, but I would like to see it cheaper and more portable."

But others argue that 99 cents a song is actually too low. Ditto the $14.95 a month for Napster to Go. "I think [that] can only be an introductory price," Sony's Hesse said. He acknowledged that record companies save money by not having to manufacture and ship CDs, but noted that the labels still bear substantial artist-development costs, which don't fit well into a one-track-at-a-time economic model.

This means runaway success of services like iTunes could end up threatening the music industry's bottom line more than widespread file sharing, which is still somewhat marginalized, BigChampagne's Garland said. "At 99 cents you'll succeed yourself right out of business if you're not careful."

And whatever the correct price point and proper distribution model is, the music industry doesn't have the luxury of a lot of time to figure it out, said Gartner's McGuire. "They're all part of the big media conglomerates. It's not like they can go to their corporate heads and say, 'Hey, can you give us a couple years off from contributing to the bottom line, because we've got to figure out this whole digital music thing.'"

Meanwhile, the specter of unlicensed peer-to-peer trading looms, and would-be consumers like Kelly face a choice between unrestricted -- and unlawful -- file swapping on unlicensed networks, or a legal experience that may not be exactly what they're looking for.

"The legality thing is a definite bonus and if it had been like that the whole time, it would be easier to adapt to," the Maryland student said. "But if you're used to downloading illegally ... and getting away with it, I can't imagine most people I know would pay to get less. ... Why buy the cow when you can steal the milk for free?"

The (Legal) Digital Music Marketplace

ITunes: Spurred by the runaway popularity of the iPod player, Apple's iTunes has grown to become the nation's most successful download store, selling more than 250 million tracks -- typically for 99 cents each -- since its launch in 2003.

RealNetworks: Best known for its ubiquitous "RealPlayer," the company offers one-song-at-a-time downloads as well as $10 monthly subscriptions to the unlimited-download Rhapsody service.

Napster: Named for the underground file-swapping service that started it all, the reborn Napster offers a subscription similar to Rhapsody, with a "To Go" service allowing transfers to approved portable players for an additional $5 a month.

MusicMatch: Owned by Yahoo, MusicMatch offers a range of services including a la carte downloads, Web radio and a subscription service.

MusicNet: Unlike its peers, MusicNet doesn't operate a retail store. Instead it provides the back-end download technology for companies like America Online and Virgin Digital.

Wal-Mart: The retail giant sells a la carte downloads at 88 cents a song. The Internet retailer offers 79-cent singles from major-label artists. Launched by the founder of the now-defunct downloading site, the service offers 88-cent downloads of songs from independent artists.

Emusic: This smaller service specializes in independent labels, offering bulk downloads for a monthly fee.

Peer Impact: Still in its testing phase, Peer Impact would allow users to share files while digital rights management technology automatically determines what fees they owe.

Ruckus Network: Ruckus specializes in the college market, offering music and movie downloads through arrangements


Resurrected Napster Raises Revenue Guidance

Napster - which was once put through the legal ringer for running a free platform that allegedly implemented illegal peer-to-peer, file-sharing among users - today offered additional hope for its new life via a paid “Napster To Go” music-download subscription service. The Los Angeles company raised guidance for the fourth fiscal quarter ending March 31, 2005, saying it now expects to report revenues of about $15 million versus prior projections of $14 million.

"We are raising our guidance based on robust growth in our subscription service," said Chris Gorog, Napster's chairman and CEO. "Since the launch of Napster To Go, we have experienced exceptional demand for all aspects of our business. Our new marketing campaign is already delivering strong returns by generating unprecedented interest in both our regular and portable music subscription offerings.”

Napster’s on-line digital music business allows sampling and purchase of MP3 downloads over the Internet and includes year-long subscription options. The new strategy essentially competes against traditional retail CDs and is being fueled, in part, by built-in compatible MP3 players from personal computer manufacturers and better network security for transactions.

The company also said it had net cash and investment balance of approximately $188 million as of February 9, 2005 and approximately 42.8 million total outstanding shares.


Can eBay Continue To Defy Gravity?

When eBay reported its 2004 financial results on January 19, it looked like business as usual. Annual revenue was up 51 percent from a year ago, and net income jumped 76 percent. But then the company cut its outlook for 2005 and rankled customers with a fee increase. On Wall Street the Internet darling got panned as shares tumbled 19 percent in one day (January 20).

Are these issues short-term growing pains or the beginning of something worse? Is eBay becoming a mature company that won't be able to keep up its heady growth? And what competitors are targeting eBay? Wharton experts say there's no need to get too worried about eBay's prospects right now. In the future, however, things may become more interesting.

Wharton management professor Saikat Chaudhuri says eBay is going through a natural evolution of companies in relatively young markets. First, one dominant player emerges due to first mover advantage as eBay did. Then, a company gains near monopoly status in its new segment such as electronic auctions. Next, large competitors such as Yahoo and Amazon get interested in the market and even smaller rivals adopt similar business practices. And finally, the dominant first mover matures and the rate of growth slows.

"I'm not worried about eBay's performance, but the question eBay has to ask is when it will reach the limits of its growth," says Chaudhuri. "It won't be today, but it could be five years from now." Marketing professor Yoram "Jerry" Wind, co-author of a recent book entitled “The Power of Impossible Thinking”, agrees. "eBay is positioned well, but the longer you go with strong percentage growth the harder it is to keep going," he says.

Worries about eBay were triggered by its fourth quarter earnings results. The company reported pro forma earnings of $226 million, or 33 cents a share, on revenue of $935.8 million, up 44 percent from a year ago. While those results were strong, they fell short of Wall Street estimates by a penny, prompting analysts like Merrill Lynch's Gregory Smith to note "a few chinks in the armor." The outlook for first quarter earnings and 2005 was also slightly cut because eBay is planning to spend $300 million on expanding globally.

On the company's earnings conference call, eBay CEO Meg Whitman said the company faced the same lumpy results over the holiday shopping season that traditional retailers experienced. "We saw some very unusual trading patterns in November and December," noted Whitman. "As a mainstream shopping destination, the eBay marketplace was affected by the same delay in holiday shopping that occurred in much of offline retail."

Can eBay continue to defy gravity? "We believe eBay has shown signs of becoming a victim of its own phenomenal growth success as the law of large numbers begins to impact results," wrote Smith in a report. "Taking a step back, we realize that eBay still has an outstanding business model and overall fundamentals remain intact."

Challenges ahead

While worries about eBay's future are premature, the company has some challenges ahead, say Wharton faculty.

One example: eBay may not have the pricing power it thought it had. A recent price increase in fees for posting photos and other advanced features wasn't handled well, and some customers revolted. Following complaints, eBay issued an open letter to customers and announced it reduced listing fees on items below 99 cents to 25 cents from 30 cents. eBay raises fees annually.

Chaudhuri acknowledges that eBay could have handled its price increases better. "eBay wasn't savvy about it. At other companies like Procter & Gamble there's a more formal process and a scientific way to evaluate the impact of price increases. eBay has been so successful that it didn't expect any pushback."

That kind of flub shows just one of the challenges eBay faces. Another issue is growth. In 2004, the fourth-quarter growth rate for eBay's U.S. auction business slowed to 25 percent from 40 percent in the first quarter. International auction growth, however, picked up the slack, but analysts say that can't last forever. The trick for eBay will be to keep its growth rates while managing Wall Street and customer expectations. "The challenge is to temper investor expectations for boundless growth and to avoid the temptation of overreaching to satisfy Wall Street," says Wharton marketing professor Peter Fader.

Bottom line: eBay is a mature company, and growth has to slow at some point. Not today, maybe not next year--but over the next five years or so, slower growth is definitely possible. "If maturity isn't here it's certainly on the horizon," says Fader.

Slowing growth will also mean that eBay will have to keep its current customers and lure new ones. As they mature, all companies have to fuel repeat purchasing, attract new customers and minimize churn. Wharton experts say eBay to this point has had it easy. Its network, growing base of buyers and sellers and wide availability of products have come with minimal marketing. eBay hasn't had to try all that hard to grow. Wind says eBay's biggest challenge will be to maintain the edge it had as a smaller company. "Can eBay manage its growth internally with its people and processes?" asks Wind. "Or will it become big, complacent and arrogant like most big companies?"

No need to panic

Fader says there's no need to get overly concerned about eBay's fourth- quarter performance, even if it did disappoint a few skittish investors. "I am as upbeat as ever about the prospects of eBay," he notes. "They have a gold mine there." Given eBay's winning streak of strong quarters and solid performance from the day it went public, "at some point, you have to just sit back and trust them."

According to Fader, eBay has entrenched itself as a bona fide distribution channel, and that's really hard to displace, especially because the company maintains its focus on core markets. Whitman cited eBay research showing that 430,000 users depend on eBay for some or all of their livelihoods. "Compare eBay to Amazon, which is really just a bookstore," says Fader. "eBay is a distribution channel that's only growing. Amazon is diluting itself." The company, with its reputation as a one-stop shop for things ranging from old football jerseys to stadium naming rights to automobiles, doesn't have any competition in the near term, he and others add.

The wild card is what eBay will do when its growth begins to slow. Will it branch out into retailing? Will it enter new businesses? eBay has branched out somewhat, but acquisitions such as PayPal, and complement its core auction business. Meanwhile, with each eBay move, the company becomes more secure. "It would be very difficult for any company to replicate eBay," says Wind. "The rating system, the infrastructure, the incredible trust between buyers and sellers are really priceless."

As for customer losses, Chaudhuri says there's no need to worry because customer churn is a natural issue with maturing companies. "Some customers are going to leave anyway. eBay still offers a compelling value to customers."

Future competitors

Although Fader, Wind and Chaudhuri were unanimous about the lack of competition for eBay, all agree that the real threats may not even be created yet. "You really have to look for competition from left field," says Wind. "A bank isn't worried about the bank across the street; it is worried about Wal- Mart."

In the U.S., no competitor provides the network and scale of what eBay provides--although some players such as are nibbling at eBay's market. The real battle will be abroad. "The next decade of growth will come from the rest of the world, not the U.S.," Wind predicts. Overseas, the competition to eBay is more intense. On the international scene, the most obvious competitors are Yahoo and Google, which have the resources to take on eBay directly. Some rivals even have first mover advantage: Yahoo Japan, for example, is the leader in auctions in Japan.

eBay, however, has done its best to acquire international players such as India's The strategy is to buy strong eBay-like clones to gain entry into a new market. In 2004, eBay launched two new sites in the Philippines and Malaysia, consolidated ownership of Internet Auction Company in Korea, and made two acquisitions in Europe. "The potential in expanding eBay's global marketplace is enormous," said Whitman, adding that eBay will continue to grow internationally, especially in China.

The real unknown for eBay is the competition under the radar. Wharton legal studies professor Dan Hunter says he expects U.S.- based local sites, including Craigslist, a minimalist local community site that features classified ads and local information, to become a viable threat to eBay. "Sites like Craigslist could nibble at eBay by providing a trusted local network of good products and recommendations," notes Hunter. "Sites like Craigslist won't be a direct challenge, but whenever distance matters the local sites could win." eBay may already see the threat from local merchants. It recently bought a 25 percent stake in Craigslist.

According to Hunter, social networking software and services like Friendster could also form a commerce network. The benefit of these social networking sites is that a level of trust between buyers and sellers would already exist due to peer referrals. "eBay spends a significant amount of time on disputes and keeping the reputation of sellers high," says Hunter. A commerce network of "friends of friends" could be powerful. "These social networking sites would in theory eliminate the need for that cost. You drive down costs as you start to build the network."

Fader expects peer-to-peer networks to also become a formidable eBay rival in the future. These "P2P" networks are typically used to swap music and video files but ultimately could be used for commerce, says Fader. "With P2P you could line up millions of people to buy and sell easily. It won't happen right away, though, because the technology has so many legal clouds." A P2P commerce network would be able to do what eBay does but without the centralized servers, infrastructure costs and overhead. "It could be a threat, and I wouldn't be surprised if it weren't on the back of someone's napkin somewhere."

eBay's next steps

The ultimate question is how eBay should fend off encroachment from rivals, maintain its focus and build the infrastructure and management team to continue to evolve. Chaudhuri says eBay's first mission is to maintain its focus. "eBay's big advantage is that it is focused on one area, and that's good," he says. "eBay has a first mover advantage that it can build on even if it ultimately changes its business. eBay will always be associated with commerce."

As growth slows, eBay will also have to find ways to lure consumers such as Fader, who likes eBay's business, but isn't much of a fan of the company as a shopper. "I go there as a last resort," says Fader, who doesn't care for the auction format in general. "eBay will have to reach out to get customers like me without diluting its core auction business." eBay can go more mainstream perhaps with acquisitions of consignment or "drop off" stores, which take goods and sell them on eBay. Those stores appeal to potential customers who may not be inclined to start and follow an auction on eBay.

At eBay's analyst meeting shortly after its earnings report, Whitman outlined plans to expand its PayPal unit. PayPal can be now used to buy music downloads on iTunes and Napster, and eBay is pitching PayPal as an option for merchants both off and on eBay. To support its initiatives, eBay is bolstering its management ranks. The company recently swapped executives running PayPal, and the North American and international businesses. eBay also named a new chief technology officer. According to Whitman, the moves will "effectively spread expertise throughout the company and help set the stage for our next phase of growth."

Wind says that kind of focus on management depth will serve eBay well in the future. For example, eBay executives will learn from their mistakes when it comes to managing expectations and rolling out price increases. "I think they realize that they could have done this smarter." According to Chaudhuri, eBay is up to the task. eBay, he says, "is one of the most mature companies in an immature industry."


Peer Impact Licenses EMI Catalogs

EMI Music became the fourth major recording company to agree to make its music available over a legal peer-to-peer service that hopes to lure customers away from illegal sharing programs.

Peer Impact, which Wurld Media Inc. plans to debut by the end of March, had announced license deals in November with the three other major companies: Universal Music Group, Sony BMG Music Entertainment and Warner Music Group.

"Our agreement with EMI Music is essential to Peer Impact's viability, as we now have all the major record labels' entire catalogs available for download," Greg Kerber, chairman and chief executive of Wurld Media, said Wednesday.

Peer-to-peer services like Kazaa and LimeWire allow computer users to swap files among their hard drives. But since the rise of Napster, record companies have tried in court to shut down "P2Ps" that allow users to download copyrighted songs for free.

Peer Impact is among a new breed of legal P2Ps run in cooperation with media companies and designed to compete with centralized download services like Apple Computer Inc.'s iTunes. Proponents say decentralized P2P networks ease strain on servers and require less bandwidth.

Like iTunes, songs on Peer Impact will cost 99 cents, although users can earn up to 10 percent credit on a song if they agree to share it with other network users, Kerber said.



Record Deal For Fanning's Swap Service
John Borland

Snocap, the new company started by Napster founder Shawn Fanning, said Thursday that it struck a deal with SonyBMG Music Entertainment to help distribute the record label's music through file-swapping networks.

Fanning's company has developed a range of tools that allow songs to be identified as they're traded online, and lets those trades be turned into sales. Labels see the technology as a potential way to turn anarchic peer-to-peer networks into profitable distribution tools equivalent to Apple Computer's iTunes.

The deal is the second for the young service. Late last year, Universal Music also agreed to put its catalog of music into Snocap's song- identification databases.

Snocap's technology "will help to curb copyright infringement, and will facilitate the creation of legitimate, authorized P2P services," Thomas Hesse, president of SonyBMG's global digital business division, said in a statement.

The deal highlights labels' growing willingness to experiment with peer-to-peer distribution of their music, as long as it is done on their own terms.

Snocap's system allows the creation of swapping environments where individuals can essentially sell each other their favorite music. It's designed so that peer-to-peer networks can plug the identification technology into their own software, blocking unauthorized trades and turning others into sales.

At least one company, called Mashboxx, is planning to launch a service based on Fanning's work later this year.

File-swapping network Imesh is also planning to transform itself into a place for authorized song swaps later this year, but is developing the service using different song-identification technology from a company called Audible Magic.


The Record Empire Strikes Tampa Bay
Anthony Salveggi

The burgeoning effort to make music and movie downloaders pay for their entertainment has hit the Tampa Bay area.

Two Bay area residents are the latest named defendants in complaints recently filed by a Miami law firm in the U.S. District Court in Tampa. In both cases, the plaintiffs are a who's who of top record companies, which are accusing private citizens of illegal distribution of property.

But the defendant in one of the cases is Dunedin single mother Christina Berry, 27, who works as a waitress while raising four children. Her annual salary: between $12,000 and $13,000.

"I heard about Kazaa and downloaded music, but I didn't think I was doing anything wrong," she said.

Of the 1,117 songs she's being accused of stealing, she said she owns 85 percent of them on CDs. She said she doesn't have a lawyer, hasn't answered the complaint and doesn't know what to do.

She's not alone.

On Jan. 24, the Recording Industry Association of America sued more than 700 individuals across the country for illegally sharing files, the organization said in a press release. Among the "John Doe" defendants, 68 are users of computer networks at 23 colleges, including the University of South Florida.

In response to the illegal sharing of music files, record companies have filed more than 8,400 federal lawsuits since the RIAA initiated the first wave of litigation in September 2003. Similarly, the Motion Picture Association of America has increased its anti-piracy efforts with a new round of lawsuits and a media campaign warning would-be thieves to "think again."

Industry pushes fast forward

The effort shows no sign of slowing down. Last month, the MPAA and RIAA asked the U.S. Supreme Court to overturn the Ninth Circuit Court of Appeals' decision that file-sharing networks such as Grokster and Morpheus are not liable for copyright infringements that occur over their networks. The highest court is scheduled to hear those arguments in late March.

Specific legislation has been passed that addresses the transfer of copyrighted material by digital means.

"The No Electronic Theft Act criminalizes sound recording copyright infringements occurring on the Internet regardless of whether there is financial gain from such infringements," the RIAA Web site published. A copyright is considered infringed when a song is made available to the public by uploading it to the Internet for other people to download, regardless of whether that individual stands to gain monetarily.

Amidst its efforts, the industry has been criticized for muscling Internet users. But they aren't backing down.

"They are clearly out there hunting," Brent Britton, an intellectual property lawyer with Akerman Senterfitt, said of the music industry.

In the Tampa cases filed in January, one was against "John Doe" on behalf of Sony BMG Music, BMG Music, Capitol Records and Warner Bros.

The complaint against Berry, also filed Jan. 27, is on behalf of BMG Music, Elektra entertainment, Interscope Records, Arista Record, UMG Recording and Virgin Records.

That powerful music industry plaintiffs would go after private citizens for downloading music speaks to the seriousness with which they consider the issue. Universal Music Group, EMI Group, Sony, Warner Music Group and BMG accounted for nearly 75 percent of the global retail market share in 2003, the International Federation of the Phonographic Industry reported. And according to the RIAA Web site, the music industry takes in $40 billion globally each year.

Miami firm takes lead role

Karen L. Stetson, an intellectual property lawyer with Broad and Cassel in Miami, has filed the recent complaints and has been active in similar cases in Florida during the last eight months.

Last July, Stetson represented record companies in winning a $1.9-million judgment against Beker Enterprises Inc., a Sebring-area convenience store and gas station that sold, among other things, pirated music CDs, a report in the Entertainment Law Reporter said.

A judge entered a default judgment against Beker for $35,000 in statutory damages for each of the 54 recordings where copyrights were infringed, plus more than $15,000 for the record companies' attorneys' fees.

In another Stetson case in late December, two federal judges in Tampa allowed movie companies to obtain the identities of several "John Doe" defendants accused of operating a peer-to-peer file-sharing system that allows individuals to download movies. The rulings came in two lawsuits filed by Columbia Pictures Industries Inc., Disney Enterprises Inc., Twentieth Century Fox Film Corp., Universal City Studios Productions and Warner Bros. Entertainment Inc.

Defendants allegedly operated a BitTorrent server that allows computer users to trade copyrighted movies without authorization. BitTorrent is a peer- to-peer file-sharing system people use to trade files including music and movies.

According to Entertainment Litigation Report, at issue is whether the BitTorrent server is used for legitimate purposes or for illegal activities and that depends on how that server's operator configures it. The complaints allege that defendants set up their servers to facilitate large-scale copyright infringement of the plaintiffs' movies.

The defendants' Web sites are hosted by Sago Networks, a Tampa Internet service provider. A call to reach someone at Sago for an update on the case was not returned.

Stetson would not comment on any pending cases, a spokesperson said.


Sony BMG Ramps Up CD Copy-Protection Plan
Ed Christman

It looks like music retailers will soon be getting their wish: At least one major is getting aggressive with copy-protected CDs.

Sony BMG Music Entertainment is stepping up the rollout of what it calls content-enhanced and copy-protected CDs, according to company executives. It began with the Chieftains' "Live From Dublin" album, released Feb. 22. Upcoming albums that will receive the treatment are from Kasabian (March 8) and Susie Suh (March 29).
Sony BMG expects that by year's end a substantial number of its U.S. releases will employ either Sunncomm's newly enhanced MediaMax or First4Internet's XCP to address piracy concerns. No matter which technology a CD uses, it will include such extras as photo galleries, enhanced liner notes and links to other features.

"What matters the most to us is the consumer experience," Sony BMG Sales Enterprise co-president Jordan Katz says. "Both technologies offer playability across all standard players, including CD players, boomboxes, DVD players, PCs, Macs, car stereos, video games and clock radios."

Katz says the company wants to alert the industry that it is implementing the content-protection technology, because extensive consumer research indicates widespread customer acceptance of it.

BMG has used MediaMax on a number of titles, including Velvet Revolver's "Contraband" and Anthony Hamilton's solo album. In all, it has shipped more than 5.5 million content-enhanced and protected discs, which have been met with positive consumer reactions, according to Katz.

After testing XCP on promos, Sony BMG is using it for commercial releases. Katz notes that XCP and MediaMax are constantly being improved, and that Sony BMG will test each upgrade on promos before employing it commercially.

The albums coming out now and in the immediate future will allow for three copies to be made. "We haven't set on what the number of copies should be, other than there should be a limited number; it shouldn't be infinite," Katz says. "Our research shows that the consumer thinks that's fair. So you are seeing Sony BMG taking a leadership role in this area, with increasing traction throughout the year in terms of a number of (our) releases."


Moore’s law

Intel Says New Chip-Making Technology on Target
Daniel Sorid

Intel Corp., the world's largest chip maker, is seeing good results with an advanced manufacturing technology it plans to use in products next year, an executive said on Wednesday.

The Santa Clara, California-based company today produces chips with features as small as 90 nanometers, or billionths of a meter. Its plants in Oregon, Arizona and Ireland are currently being upgraded to handle 65-nanometer production, improving efficiency and cutting per-unit production costs.

"All indications today, right now, is that we will be good on 65 nanometers," said Steven Grant, a vice president in Intel's technology and manufacturing group, at a company-hosted technology conference. "It's in very good shape."

Notebook computer chips to be introduced early next year will be the first to be made with the technology.

Intel, which will spend about $5 billion on factories and equipment this year, will probably be the first chip maker to reach high-volume production with 65-nanometer technology, said Risto Puhakka, president of market research firm VLSI Research.

International Business Machines Corpand Texas Instruments Inc. will follow quickly thereafter with 65-nanometer production, he said.

Intel stumbled through several product introductions last year, with at least one delay caused by a manufacturing glitch. The company has tried to put those missteps behind it, and executives have reiterated repeatedly at the conference here that its product introduction plans are on target.

More than half of Intel's 85,000 employees work in its network of factories and assembly plants in the United States, Ireland, Israel, China, the Philippines, Malaysia and Costa Rica.

In an interview, Grant said the company's move to 65-nanometer manufacturing was going about as well as prior transitions to smaller geometries. "I think it's comparable," he said.

Intel has historically moved to smaller chip features every two years, helping to sustain Moore's Law, the 40-year-old industry maxim named after Intel founder Gordon Moore that calls for the continuous shrinking of chip features.

Grant, however, said he was not yet ready to declare the 65-nanometer technology was home free.

"There are still some problems to fix," he said.


Bad days for Ma Bell

Cable Raises Its Voice
Ben Charny

For 130 years, traditional telephone operators have been kings of the home phone castle. But watch out--Ma Cable is making herself heard.

As never before, cable providers, from the giants on down to small operators like Northland Cable TV, are winning the phone wars against local phone giants BellSouth, SBC Communications, Verizon Communications and Qwest Communications International, collectively known as the Bells.

Each week, cable operators are adding hundreds, thousands, even tens of thousands of new local phone subscribers, while significant numbers of the Bells' local phone customers cut their home phone lines.

The result is the "Revenge of the Cable Giants," as organizers of next week's Spring 2005 Voice on the Net Conference & Expo in San Jose, Calif., put it. Once given no chance in the phone business, cable operators are now at the tipping point of becoming a legitimate threat to topple the Bells.

"It's now cable's show," said InfoTech Research analyst Warren Williams. "The cable operators' voice business is starting to blossom. They have everything to gain, while the Bells have to worry about the effects of price cuts or even (offering) their own VoIP services."

VoIP, short for voice over Internet Protocol, allows a phone to be plugged into a broadband data connection, sending calls mostly over the unregulated Internet--which keeps the service cheaper than traditional telephony. A number of companies sell just VoIP services, but lately, the cable companies have been adding the service and offering it to their millions of existing broadband customers.

To be sure, the Bells still dominate the home phone industry; each still has tens of millions of phone lines in service. There are about 3.5 million U.S. cable phone subscribers. But growth rates are heading in the opposite direction. The number of cable phone subscribers is skyrocketing, with Time Warner Cable reporting a 1,000 percent increase last year.

At the same time, homes served by traditional local phone lines are dwindling. Qwest, the smallest of the Bells, lost about 88,000 lines just in the last three months of 2004. As of Dec. 31, BellSouth had 21.4 million access lines in service, down 4.1 percent for the year.

Top-tier cable operators each add between 6,000 and 11,000 new phone subscribers per week; telephone revenue per operator is set to pass $1 billion this year; and subscriber rolls bulge at a rate of 1,000 percent a year. The Bells, on the other hand, each lost up to 5 percent of their local-line customers last year as local-phone revenues declined hundreds of millions of dollars.

"Cable is definitely leading the charge," Williams said.

And they're charging en masse, which could further accelerate the trend. Most cable operator are getting into the voice business, led by Comcast and Cox Communications, which now have ambitious plans to blanket their territories using a new technology over the next few years. Even scores of tiny cable operators are taking on the Bells at their own game--and winning. Northland, which specializes in very small markets, introduced an unlimited North American calling plan using broadband two weeks ago in a small sliver of North Carolina. About 500 people a week are signing up, many of whom are coming from incumbent BellSouth.

Cable's voice foray not only represents an incursion into the Bells' territory, it's also a defensive move against competition from satellite television. In the 1990s, the cable giants invested an estimated $75 billion to $80 billion to upgrade their networks into their current network of hybrid coaxial lines, a move in response to digital satellite services that could offer more channels and a clearer picture.

The investment is paying off for cable since broadband Internet access has become an incredibly profitable business. Modernizing their networks also opened the door for selling digital cable, high-definition TV, digital video recording and, of course, voice.

The Bells aren't standing still. Each local provider is investing billions of dollars to upgrade its antiquated copper wire networks with much faster, more efficient fiber-optics to better compete with the cable operators and their multifaceted service packages--including TV programming.

Cable VoIP actually represents a second major challenge to the Bells. Much of the Bells’ line loss now is thought to be the result of "cord cutting," in which customers replace their home phone service with a cell phone. But only the hardiest of souls will cut the cord, given cell phones’ notoriously unreliable service. On the other hand, VoIP services feel much like the old-style lines they’re aiming to replace.

Breaking the circuit

The rapidly changing dynamic results from cable's embrace of VoIP, which allows any Internet connection to double as a phone line. The Bells use circuit switches, which--while time-tested--are also antiquated, expensive to operate and wasteful of bandwidth.

The difference between the two technologies is dramatic. VoIP calling plans from standalone providers such as Vonage are about $20 a month cheaper than the Bells', owing largely to VoIP's operating efficiencies and the calls being unregulated, while the Bells face state and federal rules. Cable companies often sell their voice service for significantly more as an individual service, but the cost drops dramatically when packaged with other services.

Also, while it can take years to install traditional phone equipment, VoIP expansion can be lightning-fast. To go into the VoIP business, a company doesn't actually need to own or operate its own network. So VoIP has allowed practically anyone with a modicum of venture capital to become a phone service provider in just a few months.

One such VoIP-only provider, Vonage, is the largest provider of Internet calling in the United States. But Vonage's lead might not last much longer against cable operators, which own their own networks and have huge existing customer bases. At Time Warner Cable's current pace of 11,000 new subscribers a week, it will pass Vonage by year's end.

Rousing the giants

At first, the nation's top two cable operators, Cox and Comcast, were hesitant to invest the time and money in VoIP service, pointing to its untested- in-combat experience. The companies preferred the more expensive, but proven, circuit-switched route used by traditional phone companies. Seven years ago, Cox became the first cable operator to offer voice service, but it used circuit-switch technology to put together its "triple play" offering of voice, television and Internet connectivity.

That move mostly earned Cox jeers--critics said "Ma Cable" had no place in the phone business. But with the Bells only able to counter with a double-play bundle of voice and data, Cox began to draw customers. At present, the cable carrier has about 1.2 million phone customers using circuit switches.

And in the last several months, Cox has aimed to increase that success with a complete embrace of VoIP. After using VoIP services to expand into five new markets, Cox plans on blanketing the rest of its territory using the technology. At the same time, Comcast has made a similar commitment, with plans to use the software to reach 15 million or more homes this year.

Other cable providers are making similar moves. VoIP service suppliers such as Net2Phone have made it possible for even the smallest of cable operators to get into the phone business, forcing the Bells to brace for an assault on more of their turf.

"It's one thing when the big cable companies can do it; Cablevision, Time Warner Cable, Comcast, they all have the resources," said Sarah Hofstetter, a cable phone veteran at Net2Phone, which supplies cable operators with VoIP to resell. "But when even the small guys can go head-to- head with the Bells, then (their) competitive edge of even the last mile is lost."


Port blockers busted

Telco Agrees To Stop Blocking VoIP Calls
Declan McCullagh

A North Carolina telecommunications company accused of deliberately blocking Internet phone traffic has reached a deal with federal regulators to halt the controversial practice.

The Federal Communications Commission said Thursday that Madison River Communication will "refrain from blocking" VoIP, or voice over Internet Protocol, calls and will pay a $15,000 fine to the government.

"We saw a problem, and we acted swiftly to ensure that Internet voice service remains a viable option for consumers," FCC Chairman Michael Powell said in a statement. The consent decree prevents Madison River from VoIP blocking for 30 months.

Based in Mebane, N.C., Madison River reported $194.4 million in revenue for the 2004 calendar year from 120,649 residential voice subscribers, 60,563 business voice subscribers, and 39,562 DSL customers. The company has filed a registration statement for a proposed initial public offering.

VoIP provider Vonage confirmed that Madison River was the broadband provider it complained to the FCC about earlier this month, leading to the FCC's investigation.

"We're very pleased that the commission took very swift action to address the concerns that we had regarding an Internet service provider's ability to block our customers' communications with each other," Vonage CEO Jeffrey Citron said. "This sends a clear message that port blocking will not be tolerated."

Port blocking occurs when a company may prevent certain types of Internet traffic from traveling through its networks, for instance in an attempt to prevent voice subscribers from switching to VoIP.

Port blocking isn't reserved for high-profile VoIP carriers like Vonage. Nuvio, a small Net phone service provider based in Kansas City, Mo., says its customers' calls have been affected by at least one cable operator. Nuvio has yet to make any formal complaint to the FCC, however. In September, Nuvio told the FCC that port blocking was inevitable, given just how easy it was to do and the economic incentives for doing so.

Vonage's Citron said Madison River was the largest company to attempt port-blocking against Vonage customers. "We've identified one or two others that are very small," Citron said, adding that the information will be forwarded to the FCC. Many large cable companies have pledged never to engage in the practice.

Madison River did not immediately return phone calls.


Local news

Tool Helps Seize Cars of Tax Delinquents
John Christoffersen

NEW HAVEN, Conn. (AP) -- Sam Byers heard a commotion outside his house, but by the time he got to the window his Ford Explorer was gone. City marshals, armed with a new tool that photographs auto license plates and instantly matches them against a tax scofflaw database, had towed Byers' car right out of his driveway.

"That's like kidnapping your car," Byers, a 58-year- old truck driver said as he stood, leaning on the crutches he got after a foot operation. Byers was in a long line of people outside the New Haven tax collector's office who were waiting to make delinquent payments so they could get their vehicles back.

Cash-strapped New Haven is a pioneer in using the so-called BootFinder system. The objective: snare people who haven't paid car taxes. (Connecticut is among a handful of states where local governments levy annual fees, typically a few hundred dollars per vehicle, based on the value of residents' automobiles.)

New Haven officials are overjoyed at the results. They've towed about 1,800 cars and recovered more than $1 million in delinquent taxes since the program began in September, including from people whose cars they removed from a Wal-Mart parking lot.

But privacy advocates are concerned.

To them, BootFinder, originally developed to help police departments identify stolen cars, represents yet another ominous step in government surveillance of the citizenry.

The BootFinder system was first introduced for catching tax laggards by Arlington County, Va. So far, New Haven is the only other municipality using it, though Connecticut's largest city, Bridgeport, is among those considering a purchase.

The system is comprised of an infrared camera that rapidly scans license plates and, connected to a laptop computer in the New Haven system, scours a list of car tax delinquents. Previously, New Haven officials had to rely on mailed notices and phone calls to try to collect overdue car taxes.

The car tax collection rate, at 80 percent before BootFinder, has now risen to 95 percent, said C.J. Cuticello, New Haven's tax collector.

"I think the results are fantastic," he said. "We're going to continue it until we exhaust every vehicle in New Haven."

Arlington County has had similar success, reaping about $100,000 in unpaid car taxes and parking tickets since employing BootFinder despite not towing tax delinquents' cars. Its treasurer, Frank O'Leary, says the county is expanding the program this month to go after delinquent business and meals taxes owed by restaurant delivery companies.

"We're expanding to include all the items we can think of," he said.

That is precisely what alarms privacy advocates such as Cedric Laurant, policy counsel for the Washington, D.C.-based Electronic Privacy Information Center.

"It's a very slippery slope into which the authorities may be tempted to go," Laurant said. "You could use that technology to enforce any type of law that requires people to file their taxes."

Privacy advocates fear BootFinder could lend itself to "function creep", in which a technology intended for one purpose evolves into other uses.

Indeed, the president of the company that developed BootFinder, Andy Bucholz of Alexandria, Va.-based G2 Tactics, says he is in talks that he hopes will one day lead to a BootFinder-like system getting access to the National Crime Information Center database.

Bucholz said the talks are addressing privacy and security.

Such issues were paramount to a number of states that pulled out of a federally funded database program launched in 2002 called the Multistate Anti-Terrorism Information Exchange - "Matrix" for short - that was compiling billions of pieces of information on potential criminal suspects.

Laurant complained, additionally, that New Haven's towing regimen is disproportionate punishment for relatively small tax bills.

Kathy Martone was doing her dishes one night last week when the city came to get her Plymouth Neon, for which she owed $85 in taxes.

"I didn't know till I went to walk my dog," Martone said.

Motorists who have had their vehicles seized say they are given little warning and must miss work to get their car back.

New Haven officials say, however, that delinquent taxpayers are given five notices and warnings before their vehicles are seized.

In Bridgeport, Mayor John Fabrizi got a demonstration of BootFinder last week and said that within five minutes he had identified three cars whose owners owed a total of $900 in taxes.

"I was very impressed," Fabrizi said. "I feel we're going to go with the program."

The city's tax collector, Bob Tetreault, says it is currently owed more than $20 million in car taxes and its collection rate is below 70 percent, "which is just embarrassing."

The BootFinder remains a work in progress.

O'Leary of Arlington County said it sometimes fails to work when lighting conditions are variable due to cloudy weather. But he predicts big things for the technology.

"I compare it to buying a plane from the Wright brothers 100 years ago," O'Leary said. "It's a very clever device. This thing will fly. Give it a little time."


Heels dug in

European Commission Stands by Patent Proposal
Matthew Broersma

The European Commission has turned down the request that a controversial IT patenting proposal be thrown out, the latest twist in the European Union's software patents drama. The decision gives the go-ahead to send the proposal through to the next stage of the legislative process.

The proposed European Union-wide law on the "patentability of computer-implemented inventions" is heavily opposed by the European Parliament, which believes the measure would legalize software patents in Europe—bringing the EU closer to U.S. patent practice

The implications for intellectual property issues worldwide are far-reaching, given the amount of legal entanglements between software (and operating system) competitors in the United States over patents—as in The SCO Group's lawsuit against IBM, Novell Inc. and others.

The current proposal, which dates from May 2004, is opposed by open-source organizations and SMBs (small and midsized businesses), but it is backed by many larger IT companies, including Microsoft Corp.

In a letter Friday, European Commission President Jose Manuel Barroso told the president of the European Parliament that its request for a restart would not be accepted. In the letter, Barroso said the commission will not submit a new proposal on the IT patents issue, an EC spokesperson confirmed to

Read also: EU Patent Crisis: Pressure Mounting to Scrap IT Changes.

Barroso went on to say that the EC expects the EU Council—the third branch of EU government—to formally adopt the proposal "as soon as possible," after which the proposal would pass to the EP for a second reading. All of the views expressed would be considered during the second reading, Barroso said.

Critics of the current proposal have sought to block it from going into a second reading, which operates to a strict timetable and where any changes must be supported by more substantial majorities than in a first reading.

The EU Council, comprising representatives of the EU's 25 national governments, approved the proposal's current version last May, but even most EU Council members now formally oppose the draft, partly because of the arrival of new member states. The council still has not formally adopted the May 2004 draft, due partly to the opposition of Poland and other EU member states.

Click here to read about Poland's stand against the patent proposal.

The national parliaments of Spain, the Netherlands and Germany have recently approved formal resolutions supporting the EP's call for a restart.

The EP itself has bolstered its stance with three decisions: On Feb. 2, the legal affairs committee decided to ask the EC for a restart, and on Feb. 17 the decision was ratified by the EP's Conference of Presidents, the chairs of the various groups. On Feb. 24, in a plenary session, the EP unanimously approved a motion urging the EC to take action.

In the face of such clearly expressed political will, many of the proposal's critics expected the EC to comply with the parliament's request. The EC's decision "negates democracy," said Florian Mueller, manager of the campaign.

The EU Council is now expected to adopt the resolution on March 7, in a session of the Agriculture and Fisheries Council. Because the text was discussed during the negotiation of the "Common Position" of May 2004, it can now be adopted without discussion by any of the council's specialized bodies.

"We call on the EU Council to demonstrate a more democratic attitude and to reopen negotiations of its Common Position," Mueller said in a statement.

It is possible, though unlikely, that the council will choose to conduct further discussions of the proposal rather than immediately adopting it. If the current proposal proceeds to a second reading in the EP, it is possible that ministers will be able to summon the voting power to substantially modify the proposal or effectively throw it out, Mueller said.

Check out's Enterprise Applications Center for the latest news, reviews and analysis about productivity and business solutions.,1759,1770806,00.asp


China Toughens Internet Censorship During Annual Parliament Session

China said it will toughen its already rigid censorship of the Internet during its annual parliamentary session to keep at bay those with "ulterior motives".

The Xinhua news agency said there would be strict 24-hour monitoring of Internet chat rooms and forums of major Chinese portals by "security guards". "Any messages submitted by Internet users will go through rigid censoring and filtering before appearing on the Internet," it said Tuesday. Qin Rui, deputy director of the Public Information and Internet Security Supervision Bureau, added that "some messages on the Internet are sent by those with ulterior motives". He did not elaborate. While communist China welcomes the Internet, as it helps the economy leapfrog into the 21st century, it is also worried about the way it enables people to access information considered subversive or politically sensitive. It closed down more than 12,000 Internet bars last year alone. Chinese lawmakers begin their annual parliamentary session on Saturday with tight security throughout the Chinese capital. The government expects China to have a total of 120 million Internet users by the end of this year, consolidating the country's position as the second largest cyber market in the world after the United States.



China Predicts 120 million Net Users By Year-End

Internet usage in China is expected to accelerate this year, as personal computers find their way into more homes and access to telecommunications networks grows, according to a report released Tuesday.

China's Internet user base is expected to grow 28 percent this year to 120 million, according to the official Xinhua news
agency, which cited an official with China's Ministry of Information Industry, or MII. The gains would represent an increase over 2004, when the number of Internet users grew 16 percent to 94 million.

China is the world's No. 2 PC market, with nearly 16 million units shipped last year and the number expected to grow another 13 percent in 2005, according to IDC.

It is also the world's largest telecom market in terms of subscribers; there were 316 million fixed-line users and 340 million mobile users at the end of January, Xinhua reported Tuesday, citing new data from the MII.

The new fixed-line figure represented an increase of 3.2 million subscribers from the end of December, while the mobile number represented a gain of 5 million.

Experts predict that China will have 402 million mobile subscribers by the end of this year, with fixed-line subscribers expected to reach 360 million, according to Xinhua.

China's telecom industry is dominated by fixed-line players China Telecom and China Netcom Group, and mobile carriers China Mobile and China Unicom.


Microsoft Trades Windows Discount For Piracy Info
Winston Chai

Microsoft has extended its antipiracy olive branch to China, offering users of bootleg copies of Windows a 50 percent discount on a legitimate version if they come clean on how they got their pirated copy.

As part of a two-month promotion that started in February, the company is offering a Chinese version of Windows XP Home Edition and Professional Edition at 786 yuan ($95) and 1,270 yuan ($153) respectively. According to Microsoft's Web site, the two products normally retail for about $199 and $299.

To qualify for this offer, users with unlicensed copies of Windows installed on their machines need to complete an online form in which they disclose how they obtained the bogus software.

For example, they will have to specify whether their existing Windows packages were installed by an independent reseller, bundled with their PCs at the point of sale or purchased from street peddlers. A discount voucher will then be e-mailed to these users following their submissions.

The promotion mirrors a similar effort introduced in the United Kingdom last November, where Microsoft offered to swap fake copies with genuine versions of Windows XP for free. However, the piracy rate in China is much higher than it is in the United Kingdom, which could significantly raise costs for the Redmond, Wash.-based software giant if it were to go with a similar approach.

In a further attempt to stem piracy, Microsoft now requires businesses and consumers in China to verify that their copies of Windows are genuine before they're allowed to download security patches and other OS updates.

The mandatory validation measure, which was also implemented in Norway and the Czech Republic last month, will be expanded to all other countries by the middle of this year.


Code busters

A Sense Of Insecurity
Robert Lemos

Last year was a bad year for the Secure Hash Algorithm. This year has been worse.

A key technology used in digitally signing documents and programs, the Secure Hash Algorithm, or SHA, is used by U.S. federal agencies and by corporations. It's used to reduce long documents to a smaller unique digital fingerprint, or hash, which is then signed using public-key encryption.

Last year, researchers found holes in various techniques used to create the numerical fingerprints. Among the results was a successful attack against the first version of the SHA algorithm, SHA-0.

This year, two of the researchers responsible for finding that attack--Xiaoyun Wang and Hongbo Yu of China's Shandong University--teamed up with Yiqun Lisa Yin, an independent security consultant in the United States. Together, they broke the more popular version of the algorithm, SHA-1. The paper describing that break will likely be published in May.

Though the complexity of the technique for attacking SHA-1 means it is not practical with today's computers, the research will have far-reaching consequences. CNET recently spoke with Yin to learn about the ramifications of the team's research and whether security can be more than fleeting.

Q: When did you start analyzing SHA-1 for weaknesses?
A: Last October, I went back to Beijing to visit Tsinghua University and met with Professor Wang, who was also visiting there. We decided to do the research together.

What gave you the idea to try and break the algorithm?
Professor Wang and her students have been doing research in hash functions since 1996. Over the years, they have developed a set of powerful techniques that led to their breaks of several hash functions.

In addition, there were two other major results reported last year on hash functions at the Crypto 2004 conference. One team found a way to produce collisions in SHA-0. (A collision is when two different files result in the same fingerprint, or hash, and is considered a failure in the system. --RL) Another team found that reduced versions of SHA-1 can been broken.

We thought that there was the possibility of combining these existing techniques and some new techniques to create a new method for breaking the full version of SHA-1.

It was estimated that the existing techniques cannot be used to attack SHA-1 greater than 50 rounds.

What is a round--a measure of complexity?
SHA-1 consists of 80 steps of operation. Each step is also called a "round." Usually, more rounds imply more security, and hence harder to break.

What is the difference between SHA-0 and SHA-1? Is SHA-0 used anymore?
SHA-0 was issued by the (National Institute of Standards and Technology) in 1993 as the secure hashing standard. Then in 1995, NIST issued SHA-1 as a more secure version of SHA-0. The only difference between the two is an extra operation in the file preprocessing step, before the execution of the 80 rounds.

In general terms, what weaknesses of SHA are being exploited by your analysis techniques?
This is quite difficult to explain in general terms. Roughly, we exploit the following two weaknesses: One is that the file preprocessing step is not complicated enough; another is that certain math operations in the first 20 rounds have unexpected security problems.

Should companies worry that their data might be at risk because of this?
There is no immediate threat. It just shows that SHA-1 should be phased out faster than people originally anticipated.

The estimate that we made is that a collision could be found in about 2 to the 69th operations (about 590 million billion operations). Finding the collision in SHA-0 last summer took about 2 to the 50th operations, requiring more than 80,000 hours of supercomputer time.

That means that finding a collision of SHA-1 using our method will take 2 to the 19th times longer (about 5 million years). That is certainly out of the reach of our computing resources.

So finding one of these collisions is still nearly impossible?
No, that's not true. A distributed computing effort cracked a RC5 key three years ago. (That effort took almost 6 years. --RL) That was 64 bits, so the 69 bits of security for SHA-1 is not that far away.

And doing those years of calculations would break a digital signature?
No, it only allows you to find a pair of collisions.

Let's imagine we can find a pair of collisions every minute. That doesn't give you an immediate threat, because the pair of collisions is generally garbage messages. You would have to find meaningful messages. However, it is possible that with all these new techniques we will be able to improve this in the near future and find meaningful messages.

Are there unbroken hashing functions that can be used instead of SHA? What makes them stronger?
NIST issued several new hash functions (SHA-2) in 2002. They are, generally speaking, more secure than SHA-1, since the size of the hashes (fingerprints) are much larger, and so the expected security level is much higher.

Would your techniques help find problems in those other algorithms?
It's still too early to tell. Historically, though, major advances in cryptanalysis tend to have broad applications. The new techniques can give cryptographers more tools to tackle other hash functions.


Alleged Piracy Ring Member Pleads Guilty

A man accused of being a part of an underground network that distributed pirated software, games, movies and music over the internet pleaded guilty to criminal charges, US officials say.

Joshua Abell, 24, of San Antonio, Texas, entered the plea before US Magistrate Judge Nancy Nowak in San Antonio, Texas, the Justice Department said on Monday.

According to court documents, Abell was a member of the "warez scene" - an underground online community using the internet to engage in the large-scale, illegal distribution of copyrighted works.

Officials say warez groups often obtain copyrighted products such as Hollywood films before they are available to the general public, sometimes circumventing digital copyright protections, and making them available on the internet.

Abell is the third person to be convicted in what officials called "Operation Fastlink," described as the largest multi-national law enforcement action ever taken against online software piracy.

Abell pleaded guilty to a two- count felony information charging copyright infringement and conspiracy to commit copyright infringement, officials said.

Abell faces a maximum sentence of 10 years in prison when he is sentenced on May 26.

"Today's conviction, the third in conjunction with Operation Fastlink, demonstrates the Department of Justice's continuing commitment to the aggressive pursuit of intellectual property criminals," said Assistant Attorney General Christopher Wray.

"The Department is committed to prosecuting all forms of intellectual property theft, including piracy over the internet, and today's felony plea sends a clear signal to others that online piracy is not a consequence-free activity."

Operation Fastlink, which is still ongoing, resulted in some 120 searches in 27 states and 12 foreign countries, and has identified about 100 individuals as leaders or high-level members of various international piracy organisations.


Industry Sues 753 More People For Music Swapping
Joyzelle Davis

The US recording industry has filed lawsuits against another 753 people as part of its legal fight against individuals who it claims swap music illegally over the internet.

The suits include complaints against people at 11 universities suspected of using the colleges' computer networks to send music over the internet. The people who were sued used a variety of file-sharing services, including eDonkey, Kazaa and Grokster, the Recording Industry Association of America said in a statement.

The $US32 billion ($40 billion) music industry credits the crackdown on piracy with helping US music album sales rise 1.6 per cent in 2004, the first increase in four years. Legal music downloads in the US and Europe leapt tenfold last year after demand surged for Apple Computer's iPod digital music players. Record companies including EMI Group and Universal Music Group have stepped up efforts to make their catalogues available online.

"The lawsuits are a critical deterrent," RIAA president Cary Sherman said in a statement. They had helped "arrest the extraordinary growth of illicit" online file sharing.
RIAA members include Sony Corp's Sony BMG Entertainment and Warner Music Group.

The music companies have sued more than 6500 people on allegations of copyright infringement. Most of them have opted to settle for about $US3000 to $US5000 rather than face a court battle.


British Record Industry Extends Illegal Filesharing Battle To Eight P2P Networks
Jennifer Whitehead

LONDON - The British record industry is stepping up its war on illegal filesharing with 31 new cases against users of major filesharing sites including eDonkey and Soulseek, as it revealed that 23 internet users had paid compensation.

The compensation has been paid to settle 23 out of 26 cases brought by the BPI in October last year against people who had been sharing files over the internet.

The users, 17 men and six women, have paid an average of more than £2,000 to settle their cases, while two of the filesharers are paying over £4,000 each. They have also undertaken not to fileshare illegally again.

Kazaa and Grokster users were the biggest targets in the first swoop, accounting for 17 out of the 23 settlements. The BPI said that they ranged from students, to a local councillor and the director of an IT company.

However, the BPI, which represents UK record companies, is not stopping there and said today that it was undertaking further litigation in the UK to cover all of the popular peer-to-peer sites.

It said it would go to the High Court to seek orders for the disclosure of the identities of a further 31 people who have been illegally sharing files on networks including Kazaa, eDonkey, Grokster, Soulseek, DirectConnect, Limewire, Bearshare and Imesh.

Geoff Taylor, general counsel for the BPI, said: "If illegal filesharers think that they can avoid getting caught by staying away from the most popular networks like Kazaa, they're wrong.

"We are going to continue bringing cases against people who distribute music illegally, whichever filesharing network they use, for as long as it's necessary. Legitimate music services can only prosper if we continue to fight the theft of music on the internet."


Tech Industry Outlines File-Sharing Argument
Jefferson Graham

Imagine a future where the iPod and the TiVo TV recorder weren't allowed to exist.

That's the picture the tech industry tried to paint Tuesday as it outlined its opposition to the potential overturning of a digital file-sharing case to be heard by the Supreme Court later this month.

"No case is more important to the future of our industry," said Gary Shapiro, CEO of the Consumer Electronics Association. "It's about the principles that have allowed our economy to surge ahead for the last 20 years."

The entertainment industry wants the Supreme Court to overturn two lower-court rulings that said the owners of file-sharing services Grokster and Morpheus aren't liable for unauthorized downloads via their software — their users are. The court will hear arguments on March 29.

The CEA filed briefs Tuesday to counter earlier written arguments from the music and film industries. Joining in the paper trail: chipmaker Intel, Internet providers Verizon and SBC, associations representing computer manufacturers and libraries and many law and computer science professors. Recording artists also chimed in, including Ann and Nancy Wilson of Heart and songwriter Janis Ian.

"What's at stake here is whether Hollywood will get to control technological innovation," said Michael Weiss, CEO of Los Angeles-based Morpheus.

The techies are worried the court might gut its 1984 "Sony Betamax" decision, which ruled that devices with "substantial non-infringing" uses such as the VCR were legal. That led to a host of new copying devices, such as the CD burner, iPod music player and scanner.

Former solicitor general Ted Olson, who is working with the studios and record labels, says his law firm won the Sony case then and opponents are "exaggerating" the decision. Grokster and Morpheus "were designed for unlawful uses," he says. "Technology will not stop if the court rules in our favor. Technology will be stopped if the inventors and creators are not protected."


Court Is Urged to Shield File-Sharing Companies
Jon Healey

An array of companies, musicians and academics from across the political spectrum urged the Supreme Court to uphold an appellate ruling last year in favor of companies behind the popular Grokster and Morpheus file-sharing networks.

The 23 briefs, whose authors included Intel Corp., the Consumer Electronics Assn., the American Conservative Union and the American Civil Liberties Union, urged the court to maintain the principle it set in the 1984 Sony Betamax case: Companies that produce technologies with substantial legitimate uses are not liable for acts of piracy committed by their users.

The high court is set to hear arguments March 29.

Last month, the Bush administration and copyright holders, technology firms and academics joined record firms and studios in urging the court to reverse the ruling.


Unlikely Alliances Form In File-Sharing Case
Alex Veiga

Religious and other conservative groups have shown little love for Hollywood or the recording industry over the years, decrying everything from explicit rap lyrics to Janet Jackson's bared breast at the Super Bowl.

But a cadre of those groups are stepping up to back the entertainment industry in its moment of need: a high-stakes battle against online file-sharing services that has reached the nation's highest court.

File-swapping services make pornography easily accessible to minors, the social conservatives submit. The entertainment companies, meanwhile, blame sharing for declining sales and lost revenue.

An unlikely alliance thus formed.

"Hollywood is definitely a strange bedfellow to most of us," said Jim Backlin, vice president of legislative affairs for the Christian Coalition of America. "Our goal was to cut down child pornography and other kinds of pornography, and if for some reason we were allied with the Hollywood types this time, so be it."

On the other side, the file-sharing companies have also found unlikely allies, including libraries concerned that tighter copyright controls would stifle free speech.

The Supreme Court is scheduled to hear arguments March 29 in the Internet file-sharing case, with briefs from defendants and their allies due on Tuesday.

The case stems from a lawsuit filed by Hollywood movie studios and recording companies against Grokster Inc., which distributes the Grokster peer-to-peer software, and StreamCast Networks, which runs Morpheus. Lower courts have ruled that the companies are not liable for what computer users do with their software, even if it's illegal.

Literally billions of dollars are at stake.

On the entertainment side of the dispute are online services that legally sell music or movies, including Napster Inc., MusicNet and CinemaNow as well as professional sports leagues including the National Football League and the National Basketball Association that worry about unauthorized distribution of their broadcasts.

Attorneys general for 39 states and Guam, meanwhile, have sided with the social conservatives, raising concern over the potential for minors to stumble upon pornography.

The federal government also filed a brief. It argues that while file-sharing technology has legitimate uses, Morpheus and Grokster profit by encouraging computer users to copy music and films without paying for them.

Not to be outdone, file-sharing companies have support from a big slice of the technology sector.

"If Hollywood gets its way, they'll be granted de facto control over, frankly, the vast majority of communications and technology today," said Will Rodger, director of public policy for the Computer & Communications Industry Association, which represents Sun Microsystems Inc., Verizon Communications Inc. and 28 other companies.

The Consumer Electronics Association, which represents upward of 1,700 technology companies, including Sony Corp., Intel Corp., TiVo Inc., is also planning a brief in support of Grokster and StreamCast.

The companies fear a ruling against the file-sharing services would leave them susceptible to lawsuits if they develop devices or technologies not approved by the entertainment industry.

They point to a long history of copyright holders trying to quash new distribution models or products, going back to the player piano and including the VCR, MP3 player and digital video recording pioneer ReplayTV.

"This is the Hail Mary pass on the part of the content industry to try to put the entire technology sector under their thumb," said Fred von Lohmann, an attorney with the Electronic Frontier Foundation, which is representing StreamCast. "That's something they could never get Congress to do, but that's precisely what they would like the Supreme Court to do for them."

Four other trade associations officially are not supporting either side but oppose tinkering with established copyright law.

"We think there's a distinction between analyzing the legality of a technology and analyzing the legality of a company or a company's behavior," said Jonathan Potter, executive director of the Digital Media Association, which counts Apple Computer Inc. and Microsoft Corp. among its members. "We don't think companies who create technology should be liable for other uses of the technology."

The outcome of the case and its impact on current copyright laws will undoubtedly shape the ongoing relationship between the entertainment industry and companies that make the products people use to watch movies or listen to music.

Mitch Bainwol, chairman of the Recording Industry Association of America, says the industry understands its future is intertwined with the technology sector.

"We have no interest in getting in the way of legitimate business," Bainwol said. "We simply say that you have to find a balance ... all of innovation, both technological innovation and creative innovation, has to be protected."

In building a wider coalition of support, Bainwol said he sought to find a way to ensure that the "mainstream of America would embrace our position."

Bainwol's predecessor, Hilary Rosen, doubts a cozier relationship between conservatives and the entertainment industry will ensue.

"There is a bizarre but cool irony to the conservatives who hate the media we produce but defend to the death our right to make money when we produce it," added Rosen, whose tenure at the RIAA coincided with the 1999 congressional hearings over violent lyrics that followed the Columbine High School slayings.

Several artists, including Don Henley, Avril Lavigne, the Dixie Chicks and Sheryl Crow, are lending their names to the entertainment industry's case, saying they lose potential royalties to file-sharing.

It's unclear whether any well-known performers will step forward in support of the defendants.

Not unclear at all. See above. – Jack.


Dell CEO: Less Regulation on Digital Movies, Music
Ed Oswald

Dell CEO Kevin Rollins told the Associated Press in an interview Wednesday that he thinks the government and regulators should step back and resist any temptation to regulate the digital movie and music industry.

He also suggested that entertainment companies should try to be a little more cooperative with the technology industry in creating new ways to deliver digital movies and music to consumers.

"There are many new ways to deliver content to users without having to bar them from access to content or entertainment," Rollins explained, saying that such action stunts growth rather than promoting it.

On Tuesday, Dell partner Intel told the Supreme Court to not get involved with the argument between the entertainment industry and file sharing networks over peer-to-peer file sharing. Even some artists have come out in support of file sharing networks, saying it gives them exposure they'd otherwise not receive.

Rollins did want to make it clear, however, that Dell as a company was not coming out in support of illicit P2P activity. Instead, Dell and other technology companies would like to work with the industry on standards and innovating delivery of content to users "rather than try to put artificial barriers up."

Dell does have a financial interest in digital music's success, as it produces several portable audio players.


MGM Takes Heat on Anti-P2P, File-Sharing Court Action

A confederation of consumer, industry and public advocacy organizations is strongly urging other such groups and individuals to intercede at the U.S. Supreme Court with amicus briefs aimed at upsetting a Metro-Goldwyn-Mayer Studios (MGM) lawsuit which effectively wants to hold peer-to-peer (P2P) software product developers indirectly responsible and liable for users’ copyright infringement violations via on-line file-sharing.

The MGM case against P2P developers Grokster, Ltd. and StreamCast Networks appears to seek judicial imprimaturs - and even on-going court reviews - of potential prior knowledge-type violations by P2P vendors whose products could be used in purported acts of Internet piracy and copyright infringement. This ostensibly goes well beyond the entertainment business’s successful legal actions against the likes of Napster, the service provider whose P2P enterprise served as a platform for alleged illegal swapping and downloads of music and videos among Internet users.

Attorneys for Grokster and StreamCast as well as representatives of advocacy groups Public Knowledge, the Electronic Frontier Foundation (EFF), the Consumer Federation of America, the Consumer Electronics Association and the Computer and Communications Industry Association yesterday led a 90-minute press conference in Washington, DC to blast the MGM petition. EEF has seemingly led the charge against MGM with an amicus brief at the Supreme Court, but the session revealed that large numbers of such positions were being filed, including by individual academic experts.

The collection opinion in favor of Grokster and StreamCast was that there are numerous historical cases and legal decisions which adequately enforce copyright infringement, yet never at the expense or accountability of technology developer/ provider initiatives; the concern expressed was that any success by MGM essentially could result in a dampening of invention, innovation, investment and deployment of state-of-the-art P2P technologies and file-sharing applications for both personal and business purposes.

The groups also said policy shifts on such matters are supposed to be the prerogative of the U.S. Congress and not the courts. The current legal standard regarding the entertainment establishment's infringement complaints about technology stems from the 1984 case against Sony; which was sued by the movie industry over its then-emerging Betamax recorders because copying TV programs allegedly violated copyright laws. The Supreme Court, however, ruled that making a copy for later viewing was an acceptable personal use plus it broadly held that device makers were not responsible for users’ illegal acts if their products were merely capable of substantial violations.

Until next week,

- js.


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