In a presentation at the Boston Book Festival last weekend, Jon Orwant, a Google engineer involved in the company’s Book Search project, made a memorable and, I thought, quite perceptive remark about the e-book business.

“Think about the books you have at home and how you organize them,” Orwant said. “Some of you may not organize them at all. Some of you may organize them based on the person who reads them—Mom’s books, Dad’s books, the kids’ books. Some may organize by subject or genre. I’ll tell you one way you don’t organize them: you don’t say, ‘Here are the books I bought from Barnes & Noble, here are the books I bought from Amazon, and here are the books that were given to me as gifts.’ We need to be very careful to make sure that we don’t create an environment in which digital books end up that way.”

What Orwant was talking about, of course, is the siloing going on in the nascent e-book industry—the fact that if you buy an e-book for your Amazon Kindle, you can’t read it on a competing e-book device such as Barnes & Noble’s new Nook, or vice-versa. That’s because book publishers, who are understandably spooked by the music industry’s implosion, are worried about losing revenue if people can copy, transfer, and share their digital content too easily. It’s also because many of the companies getting into the e-book market aren’t happy just selling you a gadget or a couple of megabytes of digital content—they want you to buy into a whole ecosystem (i.e., the Kindle family of devices and the 360,000 books formatted for them, or the Nook and its claimed one million titles).

And so far that plan is working, at least on early adopters like me. I bought a Kindle 2 in May, and since then I’ve purchased about $120 worth of books for the device, plus subscriptions to The Atlantic and The New Yorker, and multiple Sunday editions of the New York Times. All of this content is protected by digital rights management (DRM) technology that would prevent me from opening it on, say, a Nook or a Sony Reader device—and that quite likely will prevent me from reading my books 10 or 20 years down the road, when my Kindle will be dead or obsolete and reading technologies and content formats will undoubtedly be completely different. But those restrictions haven’t kept me from scarfing up more e-books: since I became a Kindle user I’ve bought about 20 Kindle editions and exactly four physical books (two that weren’t available as Kindle editions, and two that were gifts for other people).

But while I’m not particularly concerned about the fact that my Amazon e-books are tied to my Amazon hardware (hey, I’ve also bought hundreds of songs and videos from Apple’s iTunes Store that only play on my Apple MacBook and my Apple iPhone), a lot of people are more skeptical toward the Amazon model. As e-books gradually catch up to and surpass physical books as the main way many people access book-length content—which they will, mark my words—continued reliance on proprietary formats and DRM could wind up fragmenting our common literary inheritance in exactly the way that Orwant warned about.

But I have a feeling the story isn’t over, and that market pressures may eventually push all of the big players in the still-young e-book business toward a more open future. The day before the Boston Book Festival, I had a long conversation with Steve Haber, president of the Digital Reading Division at Sony, and I got an earful about …Next Page »

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It can’t hurt for Rhapsody to offer an iPhone app. However, they are going to have to compete with rampant iTunes, Pandora, and rampant piracy. While Pandora has a paid option, their free option satisfies many of the needs mobile users have for music. If RealNetworks offers a similar “free” option, it could provide a natural up-sell path to a paid subscription. Further, having such a free version, combined with MP3 music download micro-purchases, could boost the sales of both their subscription services and their MP3 sales. That would be goodness.

As I see it, subscription services for music, while viable, is going to be a relatively small niche of the music business. Users are pursuing music across multiple devices, and the burden to carry DRM [digital rights management] along with the music creates adoption hurdles that limit the size of the total addressable market.

If you look at Rhapsody subscription growth, it is largely driven by inorganic customer acquisition. The integration of Yahoo! Music Unlimited customers and Verizon Wireless probably accounted for all the growth, possibly offsetting declines that would have otherwise occurred. I think this is a mixed signal. On the one hand, at best there has been little to no growth in the business in the prior six months. On the other, adding new modes of consumption, like Verizon Wireless mobile devices, has resulted in some growth. Though they did not split-out the latter in their last quarterly report, I suspect that most of the growth in the six month period ending on June 30th was probably the result of the Yahoo! Music Unlimited integration.

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Digital rights management took another hit today. MOD Systems, a Seattle, WA-based creator of digital delivery systems for media, announced it has signed deals with Universal Music Group, Sony Music Entertainment, Warner Music Group, and EMI Music, along with several groups of independent labels, to sell more than 5.2 million music tracks and 4,000 movies to customers via retail stores, DRM-free.

Not only will there be more outlets for consumers to get music, but they will be able to play and transfer the music without the restrictions that are often a part of DRM-protected media. This allows people who dislike getting media directly from the Internet to buy music and movies from traditional retail outlets but still have the convenience of digital media. Customers will be able to put the media they buy onto portable devices as well as USB and SD card systems. “The market has not yet taken advantage of digital delivery in retail,” said Anthony Bay, chairman and CEO of MOD Systems, in a press release.

Making music and movies without DRM fits the current trend of media producers stepping back from the heavy-handed prosecution and protection of copyright that has led to many embarrassing situations—memorably, the suing of dead people for copyright infringement, as well as creating CDs and DVDs that stop working after a certain number of plays and that cannot be copied, even legitimately, onto different media players.

Using retailers as middlemen means MOD, and the companies it signed deals with, will reach consumers who might otherwise never use its system. And removing DRM from the media improves accessibility and appeal to those still adapting to the Internet age of media acquisition.

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[Addendum, 10/6/08: RealDVD has been offline as of this weekend---the result of a restraining order requested by the Hollywood studios and granted by a federal judge. The RealDVD site says, "Due to recent legal action taken by the Hollywood movie studios against us, RealDVD is temporarily unavailable. Rest assured, we will continue to work diligently to provide you with software that allows you to make a legal copy of your DVDs for your own use."]

Last week, we reported on the lawsuit filed by the big Hollywood studios against Seattle-based RealNetworks—and Real’s countersuit against Viacom and the DVD Copy Control Association. At issue is whether Real’s new DVD-copying software, RealDVD, violates digital copyright law, as the Motion Picture Association of America contends. The software, which has been on sale since last Tuesday, enables users to copy DVDs to their computer’s hard drive and a limited number of other computers.

For some informed local reaction, I reached Seattle-based Cozi’s chief technology officer, Bill Baxter. He knows a thing or two about digital rights management, having been the founder of Snaptune, which some described as “TiVo for the radio.” True to form, Baxter had some compelling thoughts on the impending court case, and on the interpretation of copyright laws for digital media.

“Real has a rich history of pushing ‘fair use’ to the limit,” Baxter writes in an e-mail. “Real Jukebox was the industry’s leading tool for enabling illegal file sharing to reach massive scale. Real Jukebox made ripping CDs very easy and, hence, accelerated the illegal file sharing revolution. But, were there substantial non-infringing uses of it? Yes. Hence, they could not get in trouble. Here, I think they have a similar opportunity. At least in this case, they do not allow ripping to non-DRM’d movie formats. Therefore, it is highly unlikely this could result in a legal way to power illegal file sharing networks.”

Here’s the problem: “I think there are two questionable features of RealDVD,” says Baxter. “First, and this has nothing to do with copyrights, per se, did they violate the DRM protections on DVDs meant to allow copyright holders to control their content? If so, they are in violation of the DMCA [Digital Millenium Copyright Act]. I think it is clear that they have. Second, they seem to be gaining monetary advantage by enabling multiple PCs to view these ripped DVDs, for which they have circumvented copy protections. I think the studios would rather set the rules for how many PCs and for how long can a user watch a DVD. You see this in legal alternatives like iTunes and now, more recently, TiVo. I think this may expose them to liability. Real is going to argue… ‘fair use.’ The MPAA is going to argue that it violates the DMCA. Fair use is not an argument you can use to defend against the DMCA. Real is in trouble.”

But the case strikes at the heart of an even deeper issue: what constitutes “fair use” of digital media? “In my mind the biggest problem is that U.S. copyright laws and the DMCA are so antiquated or are so inflexible in protecting legitimate technologies that the only recourse is to litigate,” says Baxter. “Ignoring the alleged DMCA violation for the moment, it is clearly the case that anyone who uses RealDVD is violating U.S. copyright laws. The question that must be asked is whether the copyright infringement constitutes a ‘fair use’ infringement. There are four tests that were established by the Supreme Court that must be applied in order to determine if the infringement is fair use. These tests are vague at best and require a court to address and, most likely unless there is a negotiated settlement, it will land in the Supreme Court. A company like RealNetworks has deep enough pockets to fight this battle. Because of this cost, small technology companies are squashed because they cannot afford it.”

“If the substantial application of RealDVD is deemed to not fall under the fair use doctrine, then RealNetworks could be found to be a contributory copyright infringer which makes it liable for all the infringements of its users,” Baxter continues. “I hope it goes to the Supreme Court. I hope consumers win by being given more control over their content. If I buy a DVD, I should be able to rip it and watch it anywhere, on any device and any time I want to. I should not be limited to watching that movie on a DVD, which the MPAA hopes will get scratched, lost, etc., which implies I will have to pay for again the content I’ve already purchased.”

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Digital rights management, here we go again. First, it was the music industry. Now Seattle-based RealNetworks and Hollywood’s big movie studios are suing one another in California federal court, after yesterday’s release of RealDVD on RealNetworks’ site. The software, which costs $30, allows DVD users to make copies of their videos on their computer and transfer the copies to no more than five other computers (paying an extra $20 for each). The studios, which include Disney, Paramount, Sony, Twentieth Century Fox, NBC Universal, and Warner Bros., assert in their complaint that RealDVD violates the Digital Millennium Copyright Act, and are asking for a restraining order on its sale.

RealNetworks saw this coming, but went ahead with its release anyway—and fired back with its own lawsuit. In a statement, the company said, “RealNetworks took this legal action to protect consumers’ ability to exercise their fair-use rights for their purchased DVDs…We are disappointed that the movie industry is following in the footsteps of the music industry and trying to shut down advances in technology rather than embracing changes that provide consumers with more value and flexibility for their purchases.”

The reaction in the media so far has been fairly non-committal. The New York Times and others point out that RealNetworks thought its software would be legal, in part because of a recent court case involving Kaleidescape, a maker of media servers, in which the ruling was favorable towards media duplication. The Los Angeles Times says the case may hinge on the exact wording of the license RealNetworks obtained from the DVD Copy Control Association; the article quotes Stanford law professor Mark Lemley as saying, “If Real has a legitimate license to do this under the contract, the circumvention claim goes away, because they’re not cracking the encryption system.”

Meanwhile, the Seattle P-I says the suit is about the money, not the copyright law. Which, of course, it is—movie studios and retailers stand to lose up to $16 billion in annual DVD sales (2007 figure from the Digital Entertainment Group) if people can just borrow or rent the discs and copy them instead of buying them. The impact on DVD rentals, a $7.5 billion market, is less clear.

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Leonardo da Vinci, the most productive and free-ranging mind of his generation, filled his notebooks using a mirror script that no one else could read. Thomas Jefferson, while serving as Washington’s Secretary of State, invented a wheel-cipher device to protect his diplomatic correspondence from prying eyes. So perhaps it’s not such an unusual irony that the new dean of the Faculty of Arts and Sciences (FAS) at Harvard University—an institution with a deep commitment to freedom of expression—is the inventor of a software technique designed to keep unauthorized people from reading electronic documents.

Liquid Machines, a Waltham, MA, startup founded in 2001 by Harvard’s Michael Smith, showed up on our radar a couple of weeks ago when the company announced a $10 million Series D funding round, led by a New York-based IT venture fund called RRE Ventures. I scored an interview last week with CEO Michael Ruffolo, who explained that the company has raised a total of $37 million in venture backing, has had products on the market since 2005, and has tripled its sales in the last year. And all that progress is founded on a clever idea pioneered by Smith—who is a professor of computer science and electrical engineering at Harvard, in addition to leading FAS—that the company calls “application injection.” The technology takes over word-processing programs, e-mail software, and the like, automatically encrypting digital documents and then decrypting them for authorized users without requiring users to exchange passwords or cryptographic keys or attend to other special chores.

“Our technology and our patents are really around how we’re able to persistently control information across file types and from origination to file-sharing and all the way through to archiving,” explains Ruffolo, who, to illustrate the costs of not controlling sensitive corporate information, cites a recent public-relations debacle at Eli Lilly. An outside lawyer for the pharmaceutical giant inadvertently e-mailed a confidential document about Lilly’s reported $1-billion-plus settlement negotiations with the government over faulty marketing of its antipsychotic drug Zyprexa to a New York Times reporter, who, naturally, published the information—resulting in a huge embarrassment for the company.

“Tens of billions of e-mails are sent each day,” says Ruffolo. “Just ask yourself, how many of those have proprietary information, and how many of those are sent erroneously? You look at that, and you start to say, ‘I need something to control the flow of information that’s leaving my company.’ The most dangerous breach is the one that you’re not aware of.”

I won’t comment on how useful those occasional breaches can be to curious journalists. Instead, I’ll turn back to application injection, which is essentially the process by which Liquid Machines’ main product, called Liquid Machines Document Control, fuses itself into and takes control of virtually any other program that can play or display digital content—such as Microsoft Word and Adobe Acrobat. The “injection” happens at the moment the display program is loaded …Next Page »

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