The Attack of the Unholy Alliance

Thanks to artists standing up for their human rights, the ugly truth that publicly traded companies in the US are profiting themselves from the theft of the intellectual property of creators was uncovered last year.  The enormity of this enterprise is difficult to get your mind around at first, but no more difficult than say, Google’s participation in the sale of controlled substances and counterfeit drugs or Google writing a check for $500,000,000 of the stockholders’ money to keep their executive suite (and possibly board of directors) from being indicted for those bad acts.

Confirmation of the scope of the income transfer from artists to giant tech companies comes in the recent written testimony of Google’s lobbyist before the House Judiciary Committee hearing about the Stop Online Piracy Act: “The DMCA notice-and-takedown process continues to be a cornerstone of our content protection efforts. During 2010, we processed DMCA takedown notices for approximately three million items across all of our products. Already in 2011 we have processed takedown notices for nearly five million items, and we have done so more quickly and efficiently than ever before.”  Five million so far in 2011 and that’s just Google.

I used to joke about whether the drafters of the DMCA were intending to provide a little latitude for reasonable people acting reasonably or whether they intended for one company to get a million notices in a year–because that seemed like a high end guess in an environment where we had little information about what was actually happening.  Now we know that my guess was very low–not only was it low, but underestimated the 166% growth rate in DMCA notices on Google alone year over year.

I think we are at the point where the raw number is so startling that it makes it even clearer that there is something radically wrong with this picture and stops looking less like an occasional defense to unwitting infringement by a company whose focus is elsewhere, and starts looking like a company whose entire focus is getting away with massive theft.

The cost of sending a DMCA notice in my experience is approximately $100 without a lawyer’s involvement.  That means that creators collectively spent about $500,000,000 this year alone on sending take down notices just to Google.

In the words of the old Depression-era song, Hey brother–can you spare me $500,000,000?

So ask yourself this:  If the princes and princesses of Silicon Valley can sleep at night knowing they are making blood money from endangering the public health and forcing artists to spend their dwindling resources sending expensive DMCA notices, and knowing that profiting from the human misery of their countrymen paid for their luxury homes and designer fashions, do you think for one second that they lose any sleep over profiting by stealing jobs from “Hollywood”?

The Unholy Alliance

An unholy alliance evolved over the last decade among search companies, ad serving companies, credit card companies and rogue websites.  People seeking illegal digital property use unfiltered search engines to find it, ad serving companies facilitate users by serving ads to these search pages and to rogue sites, and credit card companies facilitate the sale of illegal content subscriptions.

The adservers and credit card companies split their revenue with the rogue sites. Everyone makes money efficiently–except the people who create the stuff that’s  being ripped off, whether its movies, music, high fashion or pharmaceuticals. This is hardly a level playing field.

Missing from this cash machine? Responsibility. Like Sergeant Schultz, nobody sees nothing—nod nod wink wink—rogue sites are all someone else’s fault, and that someone always seems to be a couple steps outside the law in China, the Ukraine or somewhere from which they reach the valuable US market without the burden of US laws. This unholy alliance is a serious economic attack—large commercial interests that are global, well funded (often from the public markets) and cagey.

Should online property rights be different that offline property rights?

Nobody likes the idea of the government seizing private property, but nobody likes having their property stolen, either. The point is to help create a level playing field to encourage the launch of legitimate services which in turn support the jobs of those who produce the legitimate goods.

I’ve worked with many technology companies and creators who struggle to play by the rules. Some gain a toehold. But if  entrepreneurs can’t enforce their rights effectively, that’s not market failure, that’s anarchy. Many give up in despair and will not launch another business in the space or finance another independent movie.

The police investigate organized theft in the physical world, why not online? Thanks to IPEC Victoria Espinel, ICE Director John Morton and many agents, the good guys are starting to turn the tide.

And I would guess that this is what has got companies like Google worried to the point that they are simply inventing horror stories out of whole cloth.  My favorite is that somehow enforcing property rights online will encourage foreign dictators—yes, Robert Mugabe tells his henchmen to hold off executing the resistance until he sees what Leahy does.  Al Zawahiri will say let us guide ourselves by what the Crusaders do.  The Haqqani Network only moves when the American Congress gives them cover to do so.

Floyd Abrams wrote an extensive letter regarding rogue sites legislation to the Senate Judiciary Committee  expressing views he recently affirmed at a House IP subcommittee:

“I am aware that [such legislation] has been criticized on First Amendment-related grounds by organizations such as the American Civil Liberties Union and certain human rights groups, organizations for which I have the highest regard….[But such] legislation does not impair or overcome the constitutional right to engage in speech; it protects creators of speech, as Congress has since this Nation was founded, by combating its theft.”

I’m not the leading First Amendment lawyer of our time, so I will say it a bit more pointedly.

This is the cheapest sort of bunk.

There is No Market Failure if There’s No Market

Creating a new market is difficult–government has largely stayed out of the Internet which is a good thing, assuming the basic legal system provides a reasonably level playing field.

The current state of massive online theft is often referred to as a “market failure”—but it is more than a mere inefficient allocation of resources. It is a serious indicator that property rights are under attack. There can be no market failure without a market, and there can be no market without enforceable property rights.

The online story is not entirely dire, but nowhere near a level playing field. Where entrepreneurs choose to respect property rights, some firms–such as Apple, Netflix and Spotify–attract investment and customers for legitimate business that pays everyone in the value chain. Imagine if these entrepreneurs did not have to compete with stolen?

Somebody Call the Cops

It should come as no surprise then that when Chairman Leahy introduced rogue sites legislation in the last Congress and the Protect IP Act in the current Congress, it was met with broad support from the broader creative community including the Directors Guild of America, the American Federation of Musicians, the American Federation of Radio and Television Artists, the Songwriters Guild of America, Nashville Songwriters Association International, the International Alliance of Theatrical and Stage Employees, the Teamsters, and the AFL-CIO. Chairman Smith has introduced the companion bill in the House, the Stop Online Piracy Act, and Senator Klobuchar has introduced the vitally important Commercial Felony Streaming legislation in the Senate.

All this legislation was a bipartisan effort to bring common sense to the Internet madhouse but has severely raised the ire of the unholy alliance and its bottomless pit of lobbyists.  Think about this:  If Google had to take a $500,000,000 haircut from promoting the sale of illegal drugs, how much of a hair cut do you think that it will have to take from being prosecuted for promoting the sale and distribution of illegal intellectual property?

It is hard to know how much of Google’s profits are made up of revenues from illegal activities. As Santa Clara Law School Professor Eric Goldman told the New York Times, “’How much of Google’s overall revenues are tied to product lines that are questionable?’ he said. ‘For investors, I think they just got a little bit of a jolt that maybe Google’s profits are due to things they can’t ultimately stand behind.’” These potential misrepresentations and the “liar’s discount” are certainly a core claim in the stockholder suit filed against Google in San Diego.

ICE stepped up enforcement actions with court-ordered seizure orders of rogue sites whose illicit activities have exceeded the scope of the DMCA takedown notice. ICE is not a private prosecutor for Hollywood studios as it has been portrayed in some writings–ICE Director Morton confirmed that ICE and the courts sought a court ordered seizure of about 50% of the private sector referrals–seizures subject to full due process protections for defendants.

Rogue sites—who earn revenue for themselves and adserving companies selling all manner of stolen goods–receive thousands, or even hundreds of thousands, of DMCA takedown notices. It is unrealistic to think that entrepreneurs, especially independent creators, can fight this alliance with DMCA notices alone. The DMCA should not be used as alibi for the unholy alliance.

Without the help of the rogue sites legislation and the Commercial Felony Streaming legislation, this “catch me if you can” game requires 24/7 monitoring for illegal copies of everything from movies to pharmaceuticals. Entrepreneurs and small business cannot afford 24/7 policing.

Protecting Property Rights

Not only is rampant piracy a fundamental attack on the rights of American entrepreneurs and workers, it undermines our cherished system of private property. This problem is not just about “Hollywood” or Prada handbags—it concerns the value of many industries, small businesses and jobs to be protected by Protect IP, Stop Online Piracy Act, the Commercial Felony Streaming legislation and ICE, as well as our bedrock economic principles.

Even Senate action on COICA last year and the ICE seizures have already created positive effects.  Right after COICA passed the Senate Judiciary Committee by a unanimous vote, Google announced voluntary changes to its Adsense policy–to determine if Google’s Adsense partners are “bad apples.”  A year later, we see that Google’s voluntary changes are pretty toothless and are, of course, designed to let them keep profiting from online theft.

If—and that’s a big if—they get to buy their way out of jail a second time.

When You’ve Got Them By the Bucks, Their Hearts and Minds Will Follow

When the Stop Online Piracy Act was introduced, I noticed one provision way down in the bill that began to explain why the venture capital community was so up in arms.  Not a lot of attention has been paid to this section, but given the way legislation works, the VCs’ lobbyists no doubt knew it was coming.



(1) IN GENERAL.—Using existing resources, the Intellectual Property Enforcement Coordinator, in consultation with the  Secretaries of Treasury and Commerce, the United States Trade Representative, the Chairman of the Securities and Exchange Commission, and the heads of other departments and appropriate agencies, shall identify and conduct an analysis of notorious foreign infringers whose activities cause significant harm to holders of intellectual property rights in the United States.”

Interesting…but here is the punchline that has no doubt got the VCs all up in arms:

“(b) REPORT TO CONGRESS.—The Intellectual Property Enforcement Coordinator shall, not later than 6 months after the date of the enactment of this Act, submit to the Committees on the Judiciary of the House of Representatives and the Senate a report that includes the following:

(1) An analysis of notorious foreign infringers 11 and a discussion of how these infringers violate industry norms regarding the protection of intellectual property…

(5) A discussion of specific policy recommendations to deter the activities of notorious foreign infringers and encourage foreign businesses to adopt industry norms that promote the protection of intellectual property globally, including addressing—

(A) whether notorious foreign infringers that engage in significant infringing activity should be prohibited by the laws of the United States from seeking to raise capital in the United States, including offering stock for sale to the public; and

(B) whether the United States Government should initiate a process to identify and designate foreign entities from a list of notorious foreign infringers that would be prohibited from raising capital in the United States.

And, dear readers, I would suggest to you that it is that last sentence that has got the venture capital community motivated.  That sentence means that they can’t keep getting richer from the human misery of their fellow citizens.

And that sentence also, of course, begs the question:  If notorious foreign infringers are prohibited from raising capital in the United States, then surely notorious American infringers should also be prohibited.

Yes, laws like that can ruin your whole day.  (See Fred Wilson’s laughable piece about how hard done by the VC community is by not being able to invest in rogue sites “The content industry’s lobbyists have forged two new bills, one in the Senate called Protect IP and one in the House called E-Parasites [huh?]. These bills were written by the content industry without any input from the technology industry. And they are trying to fast track them through congress and into law without any negotiation with the technology industry.”  I guess Wilson didn’t watch the two separate Senate hearings and two separate House hearings on rogue sites legislation–with Godaddy, Verizon, Rosetta Stone and…Google all testifying.  And maybe he isn’t involved in the extensive negotiations over this legislation with stakeholders.  I realize that VCs are used to getting their way, but just because the Google talking points didn’t address these hearings and negotiations…sorry…just because Wilson isn’t aware of these hearings and negotiations, doesn’t mean they didn’t happen.  And Wilson also doesn’t seem to be aware of the public health issues involved that are designed to protect people who are taken advantage of by counterfeit drug sellers.  Wilson’s piece is a prime example of the kind of unsupported and wild accusations and spinning of the facts that frankly seems to demonstrate an extravagant and irrational devotion to the grandiosity of “innovation” attributing near magical powers to these objects of consumption.)

The Importance of the Commercial Felony Streaming Legislation

 I have always been impressed with Senator Klobuchar.  I’ve been an observer of her service on the Senate Judiciary Committee for a while, and have often wondered how someone with such a strong moral compass could tolerate having to deal with some of the people she is forced by courtesy and protocol to endure.

This came home to me yet again at the recent Senate antitrust subcommittee hearing at which Eric Schmidt testified.  If I had to try to read the tea leaves, I don’t think any of the Senators who stayed to question Schmidt were having it.  The Members expressed their views in different ways, some bombastic, some prosecutorial, but as usual Senator Klobuchar often asked the most telling question without a lot of extraneous English on the ball.  (One of her fellow Minnesotans says that the only reason I find that ability remarkable is because I’m from Texas, but that’s another story.)

And so it is with the Commercial Felony Streaming bill.  It is, in many ways, the lynchpin of the whole package.  The criminalization of commercial streaming is another piece that I think is obviously driving them nuts out there in the Googleplex because they just dodged a stretch in the federal pen by paying $500,000,000 of the stockholders money in a forfeiture on a drugs charge.  Under “SOPA”, they also stand a good chance of being denied access to the U.S. public financial markets from which they effectively raised that $500,000,000, not to mention their litigation and lobbying budgets, and they know that video streaming of illegal content is a huge advertising business for them—particularly if a future version of Chrome turns every browser into a Bit Torrent seeder.

It’s the kind of threat to the unholy alliance that could justify ambushing a teenage pop star on a radio interview show with a mischaracterization of Senator Klobuchar’s bill.  (A jock and a popstar walked into a bar, see, and they were talking about like some bill, dude, and then the jock said, “Bill?  What bill?  Is that a $100 bill in your pocket or are you just glad to see me…”)

Senator Klobuchar’s foresight in carrying the felony streaming bill is to be commended, however.  As she has often said in the Senate, she understands the plight of the individual creator when confronted by massive corporate greed.  And judging by her reaction to Schmidt, she also understands that if they will profit from the sale of counterfeit drugs, there is not much else they won’t do.

If all government has to do to attract more entrepreneurs, investments and jobs to the online market is enforce the law against the “bad apples”, it should be done—carefully, but done. That is, after all, one of the main reasons we have government in the first place.