Respond to this Article January/February 2003

Hollywood and Whine

Why are Democrats helping the entertainment industry stamp out new technologies that fuel economic growth?

By Brendan I. Koerner

It's a political tale as old as Capitol Hill: A lumbering industry selects a certain corporate-friendly party to be its Beltway patsy. In exchange for the requisite campaign donations and other perks, members of said party use their clout to push through the industry's legislative agenda--an agenda that would rip off consumers and harm the overall economy but enrich the corporate string-pullers immensely. Pundits and public-interest types grumble over the bald-faced cronyism, but as long as the money keeps flowing, the beneficiaries don't seem to care a whit.

Sounds like the buddy-buddy relationship between Republicans and the energy industry, right? The characters cited in the above scenario, however, are the Democrats and Hollywood, one of Washington's coziest couples. For years, Hollywood has poured money into the Democrats' campaign coffers and been rewarded with indispensable assistance on the industry's crusade of the moment--squelching new technologies that allow the dissemination of digital content in ways Hollywood can't control. One bill being hatched by Democrats would allow media companies to hack into networks like KaZaA, a file-sharing service which has replaced Napster as the most popular MP3 clearinghouse on college campuses. Another would outlaw high-tech devices that don't come equipped with government-approved hardware to make it impossible to copy digital media. And yet another would strip consumers of the right to play their legally purchased CDs on multiple devices. The Democrats' Pavlovian alignment with the grossest impulses of the entertainment industry was even written into the Democratic platform back in 2000, when the party urged "all steps necessary" against the leakage of copyrighted materials--a plank pushed on them by Hollywood.

From a purely pragmatic standpoint, this eagerness to support Hollywood's technophobia is easy to understand. The Republicans recently achieved total control of the government by back-scratching Big Oil, Big Pharma, and their ilk. The GOP's dominance, plus strong-arming from congressional leaders like Rep. Tom DeLay (R-Texas), has virtually grafted the corporate-money spigot to the Republican Party's bank account. A recent Washington Post analysis of the contribution patterns of 19 major industries, from liquor to health care, found that while those sectors split their contributions roughly 50/50 between Republicans and Democrats a decade ago, today they favor GOP candidates by nearly a 2-to-1 margin, which puts the Democrats at such a huge monetary disadvantage as to make them pathetically dependent on the few sources of campaign dollars they still have. The entertainment industry knows this well and is using its leverage accordingly.

As a matter of simple survival, then, Democrats would seem to have no choice but to carry Hollywood's water. But in fact, something like the opposite may be true. Democrats simply can't rent themselves out on as many issues as the GOP, and to attempt to do so will close off other, more rewarding avenues. Democrats lost the midterms, after all, largely by failing to offer a convincing alternative to the Bush administration's economic policy--a policy that consists of little more than handouts, subsidies, and protections to existing corporations, from tariffs for the steel industry, to anti-trust relief for Microsoft, to leaving emerging broadband providers to the mercies of the Baby Bells. Instead of helping Hollywood, Democrats can help themselves--and the country--by pointing out that such bought-and-paid-for policies are a recipe for long-term economic decline. Only by offering an alternative economic vision that promotes competition, innovation, and entrepreneurship can Democrats hope to rebound. But that's awfully hard to do when they're helping Hollywood stamp out the very technologies that will fuel long-term economic growth.

Broadband and Garage Bands

That Hollywood prefers to dine with Democrats isn't news. Save for a few notable exceptions--Arnold Schwarzenegger may head the GOP's gubernatorial ticket in California four years hence--the industry's major players have skewed slightly leftward for decades, especially on issues like abortion and the environment. It was sitcom powermeisters Harry Thomas and Linda Bloodworth-Thomas who burnished candidate Bill Clinton's powerhouse media persona during the 1992 elections; more recently, fundraising dynamo Barbra Streisand seemed on the verge of hara-kiri after last November's election catastrophe. Of the $30 million-plus that the TV, music, and movie companies spread around during the 2002 election cycle, nearly 80 percent of that sum went to Democrats--an unusually high percentage, even by Hollywood's standards. Of the top 20 recipients, only three were Republicans and only one--Noel Irwin Hentschel, a Bel Air businesswoman who got stomped during a special election--made the top 10. That snazzy $28 million overhaul of the Democratic National Committee's headquarters? It wouldn't be possible without a record $7 million donation from Haim Saban, the TV producer of "Mighty Morphin' Power Rangers" fame.

Payback has come in the form of several bills designed to clamp down on the free exchange of copyrighted music and movies, which entertainment companies deem the greatest threat to their future well-being. The most contentious of these measures is the Consumer Broadband and Digital Television Promotion Act (CBDTPA), sponsored by South Carolina's Sen. Ernest Hollings, which actually has zilch to do with promoting broadband. Along with placing new restrictions on the importation of foreign software, the Hollings bill would criminalize the sale of any digital hardware that doesn't come equipped with government-approved copy-protection controls. CD burners, DVD recorders, MP3 players, even Palm Pilots--all will be illegal unless their manufacturers are willing to render them incapable of making unauthorized duplicates. But Hollywood's definition of "unauthorized" is distressingly broad, encompassing actions usually regarded as integral to consumers' fair-use rights (such as recording a pay-per-view movie for private viewing).

Then there's Rep. Howard Berman's now-notorious H.R. 5211, a bill that would make it legal for entertainment companies to hack Napster-like music-swapping networks like Morpheus or BearShare. Or Sen. Joseph Biden's Anticounterfeiting Amendments of 2002, which would make it a felony, punishable by up to five years in prison and a $25,000 fine, to alter or forge digital watermarks, the electronic ID tags embedded in CDs and software. So if you should one day buy a new MP3 player that'll only play files with certain watermarks--say, those that denote approval of the Recording Industry Association of America--you'd have to break the law to make a non-watermarked recording of your garage band's "Freebird" rendition compatible with the device--even if that music was perfectly legal in the first place.

These bills are odious for many reasons, beginning with their blatant disregard for long-standing intellectual property rights. Copyright holders, for example, currently have no say over private performances of music or film--if I want to play the new DJ Assault disc on my laptop during the day, and then again in my stereo at night, I'm perfectly within my legal rights. But if Biden's bill becomes law, music labels could imbue their products with watermarks that would limit playback to certain devices. Changing a watermark, even if only to play your own jug band's basement recording, could mean time in the federal slammer. Hollings' bill would similarly diminish consumer rights by making it virtually impossible for people to copy digital media, even for uses now considered legitimate, such as creating a hard-copy recording of a TV show, or transferring a movie from an analog source (that is, an old VHS tape) to a digital one.

The Clone Wars

These proposed laws are bad enough for consumers. But the greater evil is their long-term impact on economic growth. By yielding to Big Entertainment's every whim, Democrats are harming an industry that promises to be a much greater engine of growth--Silicon Valley. Consumers demand such high-tech hardware as computers and TiVos precisely because they want to be able to take advantage of new technology and record TV shows, burn CDs, and swap MP3s, regardless of whether Hollywood deems such activities predatory. To give an idea of the promise this holds for new businesses, MP3 vendor SONICBlue, for example, had sales of $300 million in 2001 (without spending a penny on advertising). What Democrats tout as "anti-piracy measures" would strip these devices of their most marketable qualities, or at least make it illegal for consumers to use them to their hearts' content. "Any attempt to inject a regulatory process into the design of our products will irreparably damage the high-tech industry," testified Intel vice president Leslie Vadasz before the Senate Commerce Committee last March. "It will substantially retard innovation, investment in new technologies, and will reduce the usefulness of our products."

Though there's an element of Hollywood hyperbole to Vasdasz's alarms, it's worth noting that Silicon Valley's economic health is more vital to the nation than its relatively modest Beltway presence might indicate. The tech industry's annual revenues are more than 10 times those of Hollywood's, and it creates jobs across a much wider spread of the country. While Big Entertainment continues to be centralized in New York and Los Angeles, high-tech has roamed much farther afield from its Northern California roots, from Washington (Microsoft) to Texas (Dell) to Virginia (AOL).

Just as important, Silicon Valley has its own crusade, and one that inevitably conflicts with Hollywood's: the widespread adoption of high-speed Internet connections, which just 12 percent of American homes have today. The rationale is simple: Faster connections mean more productivity, and thus more demand for software and services. As Robert Crandall of the Brookings Institution noted in a report last year, even a modest upsurge in the number of homes equipped with broadband access would add $500 billion to the gross domestic product. So far, however, consumers are balking--because there's no "killer app" yet to convince them to spend $50 month on broadband access. What kind of killer app do consumers want? Movie and music downloads, the report concludes, that are "readily available, easily understood, and offered at reasonable prices."

Despite consumers' eagerness, however, Hollywood has been unwilling to respond to the competition offered by Napster and its descendants, preferring instead to enforce the status quo through crudely wielding its political clout. The industry has made a few token gestures, such as setting up its own file-sharing services like MusicNet and FullAudio. But perhaps unsurprisingly, these have failed, largely because they adhere to inflexible subscription models--pay a flat fee per month for a set number of songs from a limited roster of artists. So broadband growth remains relatively stagnant, especially compared to that in other Western nations such as France and Sweden, which have promised universal broadband access by 2005.

Hollywood argues that such suppression of emerging technologies is mere self-preservation. No movie studio will invest $100 million in the next Michael Bay blockbuster, the argument goes, if consumers will just end up downloading it for free, then burn DVD copies for 1,000 of their closest friends. The industry's survival depends on people's willingness to plunk down $9 for a movie, or $17.99 for the latest Britney Spears CD. Make that content freely available, say entertainment executives, and they will have no incentive to invest in expensive projects.

This may seem logical, but it's really just a tired retread of the industry's traditionally Luddite attitude toward new technologies--an attitude that has been proven time and again to be foolish. First it was the advent of the player piano in the early 1900s, which was cast as the certain end of the music business--if no one needed sheet music anymore, how would the nascent industry generate any revenue? Later the alarm was over the proliferation of cheap audiocassette recorders--why would anyone still buy music if they could just tape songs off the radio? More recently, during the late '70s and early '80s studio execs insisted that the VCR that would destroy box office receipts. Jack Valenti, president of the Motion Picture Association of America (MPAA), famously characterized that humble instrument as "the Boston Strangler" of electronic devices. Yet since the Supreme Court ruled in favor of the nascent VCR industry in its landmark Betamax decision--affirming the legality of technologies that have substantial legitimate applications--Hollywood hasn't exactly suffered. The studios figured out how to milk money from the new market by partnering with Blockbuster and other chains, and home rentals now account for more than $16 billion of Hollywood's annual revenues--almost double those from box office receipts.

Yet once again, moguls are warning that a new technology will destroy the creative impulse. In November, for example, Star Wars producer Rick McCallum went so far as to equate the fight against file-sharing to the hunt for al Qaeda, telling an Australian audience that the effort to thwart illicit movie downloads needs to be "as concentrated an international event as the war on terrorism." He went on to claim, without substantiation, that the music business had already lost 50 percent of its revenues due to Napster and its descendants.

There was a good reason for McCallum's failure to footnote: the figure is entirely bogus. Forrester Research estimates that music sales have dropped off only 15 percent over the past two years, and that the decline had little to do with music downloads. "There is no denying that times are tough for the music business, but not because of downloading," says John Bernoff, a principal analyst at Forrester. "Plenty of other causes are viable, including the economic recession and competition from surging video game and DVD sales." Of course, digital technology may eventually cut into Hollywood's revenues (welcome to the wonderful world of capitalism). But the damage will likely be nowhere near the levels predicted by Hollywood alarmists. Stan Liebowitz, a professor at the University of Texas at Dallas School of Management, recently published a comprehensive estimate of how free MP3s will affect the recording industry's bottom line which predicts as a worst-case scenario that sales will drop by 20 percent. "I wonder how far we, as a country, would be willing to go to protect the record industry from a 20 percent decline in business," he says. "Are recent proposals such as the Berman bill, which would allow record companies to tamper with other people's computers, going too far? My own view is that such proposals are going too far."

Moreover, as Forrester's Bernoff points out, that 20 percent figure presumes that Hollywood does nothing further to adapt to the new competitive environment. "[Record] labels will soon discover that there are several simple ways of satisfying today's sophisticated digital music consumers," he says, such as allowing per-song "micropayments" and the sort of computer-to-MP3-player transfers that current Democratic bills would stifle. Indeed, Hollywood's sky-is-falling shtick has more to do with opportunism than genuine fear. "The folks making the presentation to [Democrats] are obviously sugarcoating this as being all about copyright protection, and crying wolf that Napster is at the door," says John T. Mitchell, legal director of Public Knowledge, a public-interest group that tracks digital-rights issues. "But a lot of the solutions being offered don't really have as their objective copyright protection. They're designed to restrain perfectly lawful uses, in order to extract more compensation from the public."

Reading Hollywood's Script

Yet the Democrats continue to parrot the Hollywood line. Last February, for example, in a prelude to the introduction of his digital watermarking bill, Biden issued a 52-page report entitled "Theft of American Intellectual Property: Fighting Crime Abroad and at Home." Arguing that the entire entertainment industry will collapse "if technological advances [are] left unprotected," Biden wrote that "software piracy alone cost the U.S. economy over 118,000 jobs and $5.7 billion in wage losses" in 2000 alone. And where did Biden get these eye-popping figures? The Business Software Alliance, a Microsoft lobbying group whose statistics should be taken with a grain of salt. Not only do the alliance's numbers pertain to software rather than music or movies, they also assume that every pirate would purchase a copy if their free access was curtailed. The flaw in the logic here is easy to spot--it's as if The Washington Monthly contended that everyone who read a friend's copy of the magazine counted as a lost sale.

The concern over lost jobs is particularly ludicrous, given that Hollywood has avidly embraced digital technologies, such as the filmless cameras that shot the latest installment of Star Wars, in part because they can streamline the production process, and thus production budgets. Yet industry trade groups like the RIAA insist that their anti-piracy campaigns are all about protecting low-tier jobs and fledgling artists, an argument that's wormed its way into the patter of congressional Democrats. In a speech to the Computer and Communications Industry Association last June, for instance, Berman offered a Left Coast version of the trickle-down argument much beloved by Republicans: "Internet piracy threatens the jobs of the session musicians, actors, carpenters, seamstresses, writers, photographers, retailers and other folks in my district."

Berman is either being deceptive or naive. Take session musicians, whom the recording industry has been trying to shove into extinction since the advent of the synthesizer. Where was Hollywood's outrage when cheap Roland and Yamaha multi-instrumental keyboards began supplanting live musicians in the 1970s, especially for such life-sustaining gigs as commercials and film scoring? It wasn't in the industry's interest to play the anti-technology populist card back then. Berman's plea also assumes that the entertainment industry must forever be dominated by a small handful of conglomerates, the equitability of whose revenue distribution can charitably be described as abysmal. Music's infamous "Rule Number 4,080"--"Record company people are shady"--is as true today as it was in the 1950s, when top acts were kept in virtual indentured servitude. According to an October New York Times breakdown, an artist who racks up album sales of $17 million may end up with just $70,000 once the various producers, studios, flacks, and managers have taken their cuts. The Internet is actually good for struggling musicians, providing a means of alternate distribution and publicity that allows them to sidestep the major-label racket. As singer-songwriter Janis Ian recently wrote in a USA Today op-ed, "musicians, especially those without a major-label contract, can reach millions of new listeners with a downloadable song, enticing music fans to buy a CD or come to a concert ... they would have otherwise missed." And straight-to-computer recording tools are negating the need for expensive studio time or overpaid producers. Musicians don't need to make platinum to make a living when their per-record haul is closer to 80 percent than 0.4 percent.

The Democrats and Hollywood shouldn't treat file-sharing and related technologies as vulgar theft, but as the leading edge of an emerging new market. If consumers are willing to pay seemingly exorbitant fees for gizmos such as DirecTV, wouldn't it make sense that they'd gladly shell out a reasonable amount for monthly access to new music and movies? Early adopters like college kids may be enamored of swiping free content, but a nation that can't program its VCRs isn't likely to have the patience for dealing with KaZaA's buggy software and frequent hiccups. As a KPMG study noted last November, the energy that Hollywood wastes on cajoling politicians would be better directed toward figuring out how to pipe new services into homes. It might force labels to slash prices on those Britney CDs, but it would also bring delivery costs down dramatically. On the other hand, far fewer homes will crave broadband connections if they know that, should Berman's file-sharing bill pass into law, their computer could be hacked if it's suspected of being a "server" for a music-swapping network.

Hollywood Upending

Instead of blindly kowtowing to the anti-competitive demands of Hollywood, the Democrats could make real political gains by encouraging innovative compromises that recognize the crucial role that content can play in promoting broadband. One idea that merits further study is the Intellectual Property User Fee (IPUF), a small surcharge on ISP accounts akin to the taxes on telephone bills that support universal phone service. This money could then be used to compensate Hollywood for its "generosity" in letting flourish the file-sharing services that will drive broadband's growth--growth that, in turn, will eventually provide a new market for Hollywood's content. Economically, it's a win-win situation.

Even if entertainment companies balk at such communal solutions, and threaten to withdraw their financial support, the Democrats should resist being bullied. Hollywood's lobbying might is vastly out of proportion to its political usefulness, especially to a Democratic party that desperately needs to make inroads in red-state America. The entertainment industry is widely despised as both greedy and amoral in Bush country, where few workers earn their paychecks from music or movies. In Washington, there may be a certain je ne sais quoi to having Susan Sarandon grace your fundraiser, but Hollywood is small potatoes when it comes to the economic well-being of the typical American voter. Indeed, caving to Big Entertainment will only make it easier for Republicans to level charges of hypocrisy every time a Democrat inveighs against corporate avarice. Millions of voters couldn't care less about caribou habitats in ANWR. But imagine the reaction when they learn that Big Entertainment wants to make it harder for them to record nightly reruns of "Friends."

More importantly, the Democrats' traditional support in Silicon Valley is also at stake. The GOP already outscores the Democrats by approximately 20 percentage points on most lobbyist scorecards of "tech-friendly votes"--especially those that tend toward the laissez-faire end of the spectrum. But the Republicans' perceived stuffiness on social issues has prevented them from monopolizing geek support. In the 2002 election cycle, the industry's contributions split just about evenly between the two parties, and the techie rank-and-file is usually acknowledged to be solidly in the blue. The Republicans are keen to change this, a task made far easier by the Democrats' capitulation to Hollywood.

In short, the Democrats can afford to lose some Big Entertainment support, since they'll likely pick up additional fans in Silicon Valley by embracing tech-friendly policies. More importantly, toning down the pro-Hollywood act in favor of a more farsighted technology policy could help the Democrats earn the precious title of "The Party That Made Broadband Happen"--or, more broadly, "The Party of Economic Growth." The political benefits of that title should be obvious: Is it better to help add $500 billion to the GDP, or to ensure that Sony Records honcho Tommy Mottola can afford his $45-million Manhattan townhouse? There's little question as to which most voters would prefer.

The last time the Democrats triumphed, it was all about the economy, stupid. That message could still work in 2004, but only if the party wises up to Hollywood's self-serving role in curbing broadband and, in turn, stifling greater economic prosperity for those living outside the 90210 zip code. Hollywood, in its attempts to outlaw digital technology, has been compared to a dinosaur shaking its claw at the approaching comet. Note to the Democrats: The dinosaurs got creamed.

Brendan I. Koerner is a fellow at the New America Foundation.


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