Calculating risk is a vital component of every new product launch, particularly in the consumer-electronics industry. Before going to market, a business not only must forecast high consumer demand and predict that buyers will pay a profit-sustaining price, it must also consider intangible risks such as litigation that may affect the bottom line.
So imagine a manufacturer that predicts high demand and profit potential for a legitimate new product, but could be sued under an obscure provision of federal law for literally billions of dollars for rolling a single prototype off the assembly line. No rational entrepreneur would launch that product.
If potential liability of billions of dollars for manufacturing a consumer-electronics device sounds crazy, meet the recording industry's biggest hit since the Beatles: massive copyright lawsuits against legitimate innovators and technologies. These lawsuits are not against pirates, but against so-called "secondary infringers."
Moving the Music
This is legalese for suing a manufacturer for something a consumer does unlawfully (even without the manufacturer's knowledge) using an otherwise lawful product. For example, when XM Satellite Radio (XMSR) made available to its subscribers an innovative satellite radio that allows listeners to time-shift their favorite music programs, the music industry sued. When Kaleidescape launched an innovative entertainment system that organizes and stores movies on a home server to be viewed in any room, the DVD industry sued.
Under a little-noticed change in law secured by record label lobbyists and the Recording Industry Association of America, the music industry trade association, such lawsuits can seek damages of $150,000 per copyrighted work infringed. Because a "work" can be defined as a single song, in the case of an audio device like an MP3 player that permits access to millions of songs, the potential risk is incalculable (see BW Online, 2/25/07, "Apple's International iTunes Controversy").
If this effort by copyright owners to squelch technology sounds familiar, it should. When the VCR was first introduced by Sony (SNE) more than three decades ago, the Hollywood studios tried to sue it out of existence. But the U.S. Supreme Court in the celebrated Betamax case found no secondary liability for a product that had substantial lawful use. The Court correctly rejected liability for unlawful use of an otherwise lawful product: Convicted drunk drivers don't sue to stop the manufacturing of automobiles. And given that Hollywood today makes most of its profit from movies watched in the home, the case against the VCR turned out to be a productive loss.
A Call for Legislation
Some in Hollywood are proving Machiavelli's maxim that "innovation makes enemies of all those who prospered under the old regime." In the technology sector, where digital media (including high-definition TV, satellite radio, next-generation DVDs, and portable MP3 and audio devices) are more popular than ever, copyright litigation is not only a risk—it's a near certainty. Technology companies that could profit from the seemingly insatiable consumer demand for new devices are deciding not to come to market because of the litigation risk.
But there is a bright light on Capitol Hill in the battle to protect innovation. Representatives Rick Boucher (D–Va.) and John Doolittle (R–Calif.) recently introduced H.R. 1201, the Freedom and Innovation Revitalizing U.S. Entrepreneurship Act of 2007 (FAIR USE Act). This legislation would amend the law to eliminate the abusive secondary infringement provisions that are deterring technological innovation.
This new legislation would protect the fair use rights of users of copyrighted materials, ensuring that consumers who purchase digital media can make full use of it without facing untold damages.
These freedoms also benefit technology companies by unleashing innovative new products that would never have come to market in the face of legal uncertainty. Meanwhile, pirates and those who engage in mass indiscriminate distribution of copyrighted content will still be punished.
To Embrace or to Sue
But echoing the early battle against the VCR, many in Hollywood are fighting this notion of fair use. Such behavior harkens back to the economist Joseph Schumpeter, who coined the phrase "creative destruction" to explain the transformation a business must undergo to adapt to rapid innovation.
Schumpeter's half-century-old theory—that businesses either embrace new technologies by giving up old methods and products, or they cede market share to those who will—is equally applicable to today's digital era. Unfortunately, many in the content industry refuse to adapt to new markets and products created by the digital media revolution, and these companies risk ceding the market to those that embrace new business opportunities rather than trying to sue new technologies out of existence.
One example of a company dynamically embracing change is CBS (CBS). At the 2007 International Consumer Electronics Show in Las Vegas in January, CBS President and Chief Executive Officer Les Moonves shared his keynote stage with Blake Krikorian, the co-founder of Sling Media.
Invention Free From Fear
Sling's signature product, the Slingbox, place-shifts content by streaming it to any Internet-enabled computer, letting consumers "sling" their TV content to another room in the house, or to their hotel room in Asia. The innovative partnership lets viewers select favorite scenes from CBS shows and "sling" them to friends. CBS recognizes the destruction of the old model of "appointment TV," and is creating new opportunities to expand the reach of content around the globe.
Businesses that rely on technological innovation should call for all content companies to embrace the creative destruction of the analog world. Our nation's economy is dependent on the technology sector. Consumer Electronics Association market research projects $155 billion in factory sales of consumer electronics in the U.S. in 2007, and the consumer-electronics industry (including manufacturing and retail) employs more than 1.9 million Americans.
CEA supports H.R. 1201 because it allows innovators and entrepreneurs to bring legitimate new technologies to market without fear of unfair lawsuits from content companies that refuse to adapt to the digital era. If the technology industry is to remain a vital contributor to this country's innovation economy, we must ensure that the risks of doing business do not outweigh the rewards.