Digital Divide

April 29, 2002

A recent congressional proposal that would legally require copyright-protection controls in all hardware could either go nowhere because of a battle between competing interests, or it could open up a new chapter in an old tug of war between Silicon Valley and Hollywood. The question being pushed is whose responsibility is it to ensure that content is distributed securely?

Beyond the Beige

It is a truism that computer hardware, and the dispersed industry around it has been transformed remarkably in the past decade. The PC has rapidly transcended its original intent as simply an intelligent enabler of work. It occupies an increasingly central place as a multipurpose extension of a lifestyle marked by a disappearance of the traditional boundaries between "entertainment" and "work". To some extent, the power of the processor was simply extended past its limits, and made all things possible. But a "sweet spot" evolved when the Internet assumed its all-encompassing role in the mid 1990's. This new environment is characterized by the sharing, forwarding and manipulation of information. These information assets, whether digitized to be relevant to electronic communication, or created specifically for the medium, have breathed new life into hardware manufacturing. Once the PC was transformed from an innocuous beige fixture into a lifestyle statement, the line between consumer electronics and the computer hardware industry also blurred. Bundled components such as CD burners and MP3 players have added to the blur.

How PC is the PC business?

The marketing and manufacturing shift caused by the increasing availability of digital content in the past three years has, contrary to prediction, resulted in a rift between Hollywood and Silicon Valley. Earlier predictions were hopeful of a closeness between the two ("Siliwood" was a term that took root, briefly, in the mid-90's), and conventional wisdom has long held that it was inevitable that technology developers and content creators would be inextricably linked. The high tech industry has continually voiced a dedication to secure distribution. But the technology genie, once released, cannot easily be corralled. Thus the innovation behind peer-to-peer has developed legs of its own, and this has content purveyors and owners crying foul. The latter see few revenue prospects from the unbridled exchange of digital content across a rapidly-growing platform. Some in the content industry hold the high-tech industry responsible for this trend, and are wary of the industry's plethora of enabling devices and software.

This tension became very public last February during a Senate Commerce Committee hearing about digital distribution, which also addressed a controversial bill created by Senator Fritz Hollings (D-North Carolina), The Consumer Broadband and Digital Television Promotion Act. Simply put, this bill would require any "interactive digital device" that is manufactured to include "certified security technologies" as specified by the government. This includes not only computers, but CD players, DVD players, MP3 devices, and all other players and recorders of digital media. It also would make it a crime to remove or alter the security technology from any such device. Thus secure content distribution would largely be the responsibility of the high-tech industry instead of Hollywood (and the resulting regime would be overseen by Washington).
The significance of the bill itself (which has been speculated to have little chance of passing), is minimal compared to the hot button issues it is raising. It was at this Senate Committee hearing that prominent figures from the technology and entertainment industries began airing very conflicting views about secure digital distribution. A particularly contentious point came when Disney CEO Michael Eisner argued that PC manufacturers had basically been growing an industry around the popularity of digital piracy.

"The killer app for the computer industry is piracy," the Disney chief said. "They think their short-term growth is predicated on pirated content," singling out Apple Computer as an example. Referring to the popular 2001 'Rip. Mix. Burn.' advertising campaign, Eisner said that in its efforts to sell the latest iMac, Apple was telling consumers, "that they can create a theft if they buy this computer."
Predictably, high tech has come out against against Eisner's claims and against the Hollings Bill. During the hearing, Intel Executive Vice President Leslie Vadasz accused the entertainment industry of "technophobia." It comes down to creating a technological cul-de-sac for our products, Vadasz said, cautioning the high tech industry against "abdicating a key design issue to the entertainment industry."

And technologically, this concept is dangerously limiting according to Microsoft, which was also one of the companies that was targeted during the hearing. "We believe the proposed Hollings legislation would have an incredibly negative impact on consumers," says Michael Aldridge, Lead Product Manager of Windows Digital Media Division Marketing. Microsoft's stand is, not surprisingly, very much against government intervention. Aldridge says that such a technology would result in one fixed and inflexible standard governing all digital content, resulting in an environment in which technological innovation and evolution would be frozen. "We believe that owners must accept the responsibility of protecting their own content. Broad mandates on consumer electronic device manufacturers will not ultimately solve the piracy problem."

Technophobia tendencies

Whether or not these current arguments are a result of caution or paranoia, technophobia has certainly been one of the Hollywood's sorest weak spots as it tries to argue to lawmakers about the future path of digital distribution. In the wings is a reminder of this weakness from times past. In the early 1980's, MPAA president Jack Valenti made several regrettable and arguably hysterical statements, that videotapes would be the ruin of the industry, eroding its entire economic core. "The growing and dangerous intrusion of this new technology threatens an entire industry's economic vitality and future security," Valenti stated while testifying before the House Judiciary Committee in 1982. Valenti went on to say that the new technology, "is to the American film producer and the American public as the Boston Strangler is to the woman alone." Valenti's prophecies were of course convincingly disproved: home video now accounts for over 50 percent of the revenue generated in the entertainment industry, (although it is also the predominant method in which billions of dollars are lost in the piracy industry). A more recent miscalculation by the entertainment industry towards new tech was the initial rejection of the first MP3 device, which the RIAA unsuccessfully tried to ban in court. Now every major hardware manufacturer from Sony to Compaq has been spinning out digital music devices, and the music industry is trying to sell its content to those device owners.

"The question of (whether) the hardware industry (is) promoting piracy directly or indirectly through its product offerings is a tricky issue," says Bridget Karlin of Redleaf Group. "The technology industry continually pushes the envelope on traditional aspects of business practices, and many times, (this) results in disrupting conventional, accepted methods of doing business. The entertainment industry is not precluded from this natural technology phenomenon. Unfortunately, the horse is already out of the barn on this one."

This new tension in the on again, off again marriage of Silicon Valley and Hollywood could be attributed to the inevitable conflict of one industry thriving on being far sighted, while its other half rejects anything that disrupts a comfortable business model, even if it holds the possibility of creating a new revenue stream. "The content people always cry foul when there's some new technology which they didn't see coming," says Chaz Austin of Austin Digital Media. "If they had been a little more farsighted, they might have found a way to get some revenue before something like Napster came up and surprised them. They want fair play for something they weren't visionary enough to see coming themselves."

The entire history of new distribution methods has always been met with apprehension, fear, and power struggle since content became a business. The challenge with adapting to these technologies to make them profitable won't be met through the creation of new laws and new digital rights management (DRM) technologies alone, but through a shift in business models.

"The 'battle' between tech and content has been with us off and on for perhaps a century, starting with the player piano, continuing with radio, cassette recorders, VCRs, etc.," says Andrew Frank, the author of The Copyright Crusade a research report from Viant on digital piracy, (which was cited by Valenti during the hearing). "PCs and the Internet are just the most recent chapter. But it's a very important chapter, because the future of entertainment is clearly digital, and the existing landscape (and the nature of "bits") makes for a very challenging environment for content companies to develop new models and services that can preserve their viability without taking enormous risks."

This new discord between Silicon Valley and Hollywood in some respects was unavoidable. Both industries have converged and been disturbed and challenged in an unprecedented way by this new method of delivering entertainment content. The current contention, as with any business marriage, will have to be resolved, by the simple fact that the union is, potentially, too profitable.

"My thought is that there is real common ground, and that it is this common ground that should be focused on rather than the areas of the difference in opinion," says Jim Ramo, the CEO of Movielink, the joint-studio VoD Internet to be launched later this year. "The common ground has to do with the availability of new applications and new ways to view content. That is what sells intelligent hardware and software, so there really is a symbiotic relationship between the content people and the hardware people. It's time to focus on that commonality rather than focusing on the potential for each of the entities to deal in an isolated world and go about their separate businesses."

this article was written by :

Wendy Hall
Larta Staff Writer

Rohit Shukla
Larta CEO