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| Disc Piracy It costs more than you think. By Dan Daley Also see sidebars: Back in the 1980s, VHS piracy reached an estimated $100 million in copyright losses worldwide, enough to push the issue onto the front burners and front pages. But once the losses from CD Audio and ROM discs became more widely known, the media attention it began to generate echoed the words of the immortal Al Jolson when he said, "You ain't seen nothing yet!" According to the Recording Industry Association of America (RIAA), the global audio industry loses about $5 billion every year to piracy worldwide - $1 million a day in the United States alone - in just physical product; the losses in ancillary revenues, including airplay, drive the figures even higher. If the problem is larger in audio and ROM, the benefit is that it has affected a larger number of market sectors, ranging from music companies to internationally based mega-corporations, which, in turn, has resulted in a more organized response to the problem. The film industry's Motion Picture Association of America (MPAA) is bringing its veteran eye to the pirated disc problem, and the Software Business Alliance (BSA), a consortium of major software developers including IBM, Sun Microsystems and Microsoft, are attempting to stem lost revenues from pirated computer software, a pursuit they've been engaged in since the days of the floppy disk. But audio piracy seems to touch all of these sectors: music CDs increasingly include ROM-type data, and film soundtracks are one of the fastest-growing segments of the music industry, one which Hollywood filmmakers regularly participate in financially via publishing interests, if not by outright ownership of music manufacturers, such as the umbrella ownership of MCA Pictures and Records by Seagram Corp. Thus, the RIAA has been the point group for piracy in audio, and in recent years it has dramatically increased its level of activism and accomplishment. In addition to raising awareness through statistics - the organization estimates that the $5 billion annual loss figure represents nearly 50 percent of the total worldwide market; in some countries up to 98 percent of the software applications in use are illegal copies, it asserts - and through an increasingly proactive alliance with legal and law enforcement agencies globally. The zeal with which the RIAA has gone after pirates has been comprehensive, and in some cases legitimate disc manufacturers have been snared in its net; several replicators have agreed to pay fines for replicating (knowingly or unknowingly) pirated discs, and litigations are pending against several others, including MPO. But some in the industry wonder whether even such intensive measures can stem the tide of piracy in the disc business in the face of widening global markets which are now transitioning from linear to disc media; in a world which is witnessing the release of multiple new formats yearly; and at a time when recordable digital media are making perfect copies ever more attainable at ever-lower costs. Compliancy with anti-piracy measures comes with a significant and visceral cost to replicators, they will tell you. However, citing the tension that this issue has created, not to mention the litigation it has sparked, many replicators prefer to avoid speaking on the record about the matter. In the words of the president of one large U.S. replicator, "It's not worth the problems that calling attention to one's business can cause by discussing this matter on the record. Simply put, the cost of compliance is being unfairly placed upon the replicators and those costs are substantial, in terms of the amount of work it generates which requires new personnel and procedures. And those costs act as a hindrance to being competitive in an environment of continually declining prices. There are no efficiencies that can be found to offset the additional costs of compliance." Dan Petersen, president of replicator American Media in Burlington, NC, recently felt the wrath of the RIAA's stepped-up enforcement efforts; the company settled a suit brought by the Washington, D.C.-based organization last year. "It's changed everything," says Petersen of the intensified climate surrounding piracy issues, from the scrutiny to which incoming orders are vetted to procedures during the replication process. American Media now requires customers to provide substantial documentation for each order regarding their status vis-a-vis the copyright of the program. In addition to the costs that additional processing incurs, it's also caused American Media to refuse some orders which could not provide sufficient documentation. (American Media does provide non-disclosure assurances to clients, which Petersen says has lessened resistance to documentation supply.) "There has been an economic impact on us as a result, with these steps requiring more time and more employees," he concedes, adding to the cost of replication and further shaving already thin margins. However, at the same time, Petersen says he feels much more comfortable about the company's work in this regard, noting that anti-piracy efforts across the board have "raised the bar" throughout the industry. But he adds that customer awareness of the issue is still lagging; he has not seen a rise in customer-initiated anti-piracy measures, such as watermarking. "A lot of people out there still don't realize what's going on and the extent of the problem," he says. And, like a number of other replicators, Petersen feels that replicators are bearing a substantial portion of a burden whose weight should be carried more broadly by the industry. "[Replicators] undoubtedly do feel as though they are bearing an unfair portion of the burden," says Brian Wilson, executive vice president of sales & marketing at Allied Digital and participant in a recently convened IRMA/RIAA working group aimed at mitigating a growing consensus among the ranks of replicators that they are bearing the brunt of enforcement efforts. "There is the sense that the onus has been placed on the replication sector to police the industry. I want to make it clear that the RIAA has been trying to be fair, but in particular, the rhetoric of the last six or seven months has generated no small amount of paranoia among replicators about the risks." That, he adds, has caused some larger replicators, including Allied, to choose not to work with some smaller clients, and has made the lot of smaller replicators which rely on independent clients even more tenuous. The RIAA has been aggressive in terms of its pursuit of replicators in recent years - the organization confiscated 23,858 illegal CD-Rs during the first half of 1998, as compared to 87 in the same period last year. But now the RIAA has a fight on several fronts - it has been forced by technology changes to put a particular emphasis lately on piracy which involves CD-R, in the wake of the format's dramatic growth. Operation Copycat - a joint investigation by the RIAA, the MPAA and the New York Police Department - saw 43 individuals arrested in May, 1998, for illegally manufacturing and selling CD-Rs, as well as the shut down of 15 illegal manufacturing locations, including the biggest CD reproduction lab to date capable of producing music on CD-Rs that the RIAA asserted would cost the industry over $10 million a year in displaced sales. But even the RIAA concedes that the "burn-on-demand" nature of the CD-R makes it better suited to smaller, more flexible - and easier to hide - operations than conventional replication processes. In the case of CD-R piracy, the RIAA's documentation acknowledges that "individuals typically work in their homes - filling specific orders - [rather than] in large warehouses or underground factories." Another trend driving the explosion in pirated discs of all types is that CD-R is being driven largely by tens of millions of individual computer users, a sector which has driven down the costs of blank media and spurred the equipment manufacturing industry to create an entirely new category of desk-top replication "factories," the results of which littered the floor of the 1998 REPLItech North America Show last year where there had been virtually none the year before. According to an article on audio piracy in the Chicago Tribune late last year, Cary Sherman, senior vice president and general counsel for the RIAA, expressed fears that CD-R bootlegging could get out of control. "If you can make a CD that will play on a CD player - and there are already 550 million CD players - you're already taking advantage of an existing infrastructure," Sherman told the Tribune. Technology Solutions Beyond educational and legal remedies, there are several technological approaches to combat disc pirates, such as fingerprinting and watermarking, though without specific endorsements from trade groups replicators must determine which ones suit their purposes best, a decision which not only means achieving piracy deterrence but also conveying to watchdogs like the RIAA the perception of a proactive stance. CD-Cops, a Danish technology, uses glass-master fingerprinting technique which imprints the master and every disc made from it with an ID and an access code (TapeDisc Business, February 1999). Replicators license the technology, which is actually implemented by the company for a one-time fee of $1950 plus a one-percent fee based on the retail price of the projected volume per title. " [Our prices]... should be compared to how much your legal sales increase with a good protection strategy. If your sales go up a few percent you actually made money," said company president Hans K. Pedersen. "One of our good customers reported an estimate of two pirate copies per original before they started protecting. Ideally this would mean a possible increase in sales of 200 percent, though more realistic is 20 to 50 percent." Do replicators and content providers feel they are getting sufficient support from law enforcement agencies in piracy matters? Pedersen is again blunt. "Some of the larger companies join organizations such as BSA and ideally they would want zero piracy with no protection. Do we believe in Santa Claus? In the real world we all carry a set of physical keys to our home, work and car... even though theft is illegal and any lock can be broken. Data security should be viewed the same way: as a necessary, balanced means to maximize profits and to discourage ordinary users from doing illegal things." Pedersen also acknowledges that pirates are getting better at hacking away at all types of protections. "It is an ongoing war," he says. "Most hackers know how to break last year's protection, though few are original enough to solve the new problems they face. The Internet has stimulated communication between hackers, mainly spreading known solutions and proven tools. Protection should be revised regularly and you should not trust standard shell-type protection to last for years." (Pedersen also acknowledges that his company has to maintain a high level of security, as well, to prevent theft of technology keys; "We're very careful whom we work with and make sure that they are happy," he says, with a tight laugh, adding that all customers and their subcontractors must sign non-disclosure agreements.) And Pedersen also concedes that protection is getting costlier as time goes by, much of it stemming from the need for companies like his to stay on the leading edge and ahead of technologically capable pirates, and the cost of adapting existing encryption technologies for optical disc applications. "With high security you need to use a lower layer inside the PC and these layers are not always implemented correctly," he explains. "You must therefore make work-arounds and fixes for certain hardware and software." MP3 - shorthand for the ability to download music files using the MPEG format via the Internet - has become the most recent focus of the record business and, by implication, other content owners. A recent court battle between the RIAA and Diamond Multimedia, which manufactures the RIO, a hand-held device which can download and play back these files, remains ongoing, but the most recent volley has allowed its sale to continue. The conflict centered on a legal definition of the device; if it was judged to be a recording device, as the RIAA asserted, it would fall under the purview of the Home Recording Act and its use could be restricted as a digital recording system. One federal judge agreed with that definition last year, only to have a higher court decide that the RIO was actually a playback device and thus not subject to digital recording restrictions. (According to the RIAA, the judge concluded that although the RIO is likely to be covered by the Act, the absence of serial copyrighting technology - the feature designed to prevent unauthorized duplications - was merely a technical violation and the RIO would likely be certified by the Secretary of Commerce as complying with the Act. The RIAA and other organizations have since filed an expedited appeal; Diamond has filed a countersuit against the RIAA.) In the meantime, the RIAA is actively pursuing sites it asserts are pirating music. Last May, the association sued two music archive sites that were illegally distributing full-length songs for download. The two sites have been shut down and the defendants have agreed to enter into a preliminary injunction. The success of the RIO has been spurred in part by the proliferation of Web sites which are offering downloadable programming, much of it for free by musicians and independent record labels using MP3 to promote their records. The ruling has apparently also opened the doors to new MP3-based ventures. Several new ones were shown at January's CES Show in Las Vegas, including one from MpegTV which will allow existing hand-held computers to download and play back compressed audio files without the need for dedicated hardware. The show also saw the release of a flash memory card capable of holding 100 MB; since the average MP3 audio file requires between 3MB and 4MB, that means several albums can be held on a single card. The RIAA was at the show and reiterated its warnings about MP3's piracy potential (and reminded attendees that it is continuing to pursue a suit against Diamond Multimedia), but it hasn't been able to quantify the extent of damage. According to a statement on its Web site, "Currently, we are only able to provide anecdotal information of losses to the industry based on evidence uncovered in the discovery phase of our past litigation against illegal music archive sites using MP3 technology." To an extent, this part of the issue becomes removed from replicators since the music products never really pass through a manufacturing stage. However, the economic impact is palpable, since many of these independent customers are increasingly a critical component of the revenue streams of major replicators, either directly or via brokers. Technologies are trying to catch up with this trend, however. For instance, CD Cops now offers a product called DialCops, used mainly to access encrypted books via an access code specific for the end-user's PC. This system requires changes to the browser and manual telephone contact to the end-user. Another component is CD-Cops Crypto, which controls access to encrypted books without changes to the browser, allowing it to be used with Acrobat Reader, with data decrypted on the fly. CD-Cops Crypto verifies a correct CD before giving access to encrypted books. A combination of the two systems, under the name WebCops, provides a system where manual dialback is avoided and browser changes are avoided. All of the foregoing is applicable to DVD, which is already experiencing piracy problems. Even though these problems exist on a much smaller scale for DVD at the moment, they are sure to increase exponentially as the format's sales increase globally. (An important note: all of this will impact economically on replicators in the future.) Recordable DVD-Audio is imminent, and most computer-based audio carriers anticipated for the future will have recordability as a component. Thus, replicators can expect to continue to find themselves in a pivotal position between the entertainment industry's desire to increase sales and its need to protect its content. For more information about the organizations mentioned in this article, contact: IRMA, Tel: 609-279-1700; Fax: 609-279-1999; Web site: http://www.recordingmedia.com; RIAA, Tel: 202-775-0101; Fax: 202-775-7273; Web site: http://www.riaa.com; BSA, Tel: 202-872-5500; Web site: http://www.bsa.org Combating Piracy Through Packaging Piracy is a growing problem in every corner of the world today. Billions of dollars are lost annually to pirates - a solution must be found. Hub Folding Box Company, Inc., Mansfield, MA, believes it has invented a package to fight piracy - the Teddipackª. The Teddipack, a paperboard replacement for the traditional jewel case, incorporates anti-piracy and anti-counterfeiting elements. There are various options that can be incorporated in the package to assure authentication such as holograms, a thread woven into the package that can be removed or revealed by simply rubbing it (many bank notes use this feature), and intaglio printing, to name a few. For the creation of these protection features, Hub Folding Box Company turned to England-based De La Rue, one of the largest bank note suppliers in the world. De La Rue has a unit that focuses solely on "keeping two steps ahead of the counterfeiter" (for various industries - financial, software, tobacco, alcohol, film, etc.). "We offer a revolving door of technology solutions," said Susanne Hasselmann, business mngr. brand protection De La Rue. Teddipack is slightly taller than a traditional jewel case, but does fit in current CD retail bins. Since it is made out of paperboard, it is much lighter than a jewel case and will allow for saving in shipping. According to the company, the same amount of Teddipacks can fill one truck bed as it takes 4 truck beds of jewel cases. The package is also automatable, but only on Hub engineered packaging machines. These machines, which are being designed by Hub engineers, will be available through Hub in the future. "It is a very tactile product," explained Anthony DiRico, president of Hub, but more importantly, "we understand the risks of piracy and we are offering a complete solution [to the industry]." The Teddipack will be targeted at three industries plagued by pirates - DVD, software and music. For more information contact Hub Folding Box Company, Tel: 800-334-1113/508-339-0005; Fax: 508-339-0102. - Susan Rush The RIAA's Anti-Counterfeiting Guidelines The RIAA has a program in place to help replicators spot illegal CDs. The following is part of the guidelines the organization has compiled. To determine if a CD is counterfeit or pirated, check these seven points:
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