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Weekly Column

Snapster 2.0: This Time I Really Mean It

Status: [CLOSED]
By Robert X. Cringely
bob@cringely.com

There was a moment toward the end of last week when I was receiving an average of one e-mail message per minute about Snapster -- the plan I had described to change the music distribution business and become obscenely rich in the process. That one-per-minute pace continued for several days, and I am still 1,200 messages behind. So I am sorry if you haven't yet received an answer to your message, and there is a real possibility you will never receive one.

notes to write. Prior to the Snapster column I had received only 48,449 column-related messages so far in 2003. That number is now over 53,000 an d climbing. Clearly, I struck a nerve. People either loved the Snapster idea or hated it. Lawyers for the most part hated it except for lawyers from Dallas, Texas, who seemed to all want to invest in Snapster. What do they don't know that all the other lawyers do? Beats me. No wonder J.R. was shot.

My plan here is to characterize the reader responses, and I will get to that in a moment, but first I want to make clear what my final objective is with this particular column. I acknowledge that Snapster as presented last week was a flawed concept and probably not workable, but rather than just admit I am a dork and move on, I am going to PROVE I am a dork by proposing Snapster 2.0, which I honestly believe can work. Film at 11.

Among those readers who didn't like Snapster (most readers DID like it), the lawyers and non-lawyers alike felt that there were three areas of vulnerability in the plan as described last week. First was the concept of common ownership. The late MP3.com had a model very similar to Snapster's except it was based on subscriptions rather than ownership. MP3.com bought all the CDs and people subscribed to them, but that concept died in court along with MP3.com. I wanted to use common ownership to finesse this point and to do it not as corporate ownership, but mutual ownership as in a mutual fund. If you bought stock in a record store, it would not give you ownership rights to the CDs inside the store, but I reasoned that mutual funds are different. For one thing, they pass through to their shareholders financial liability for the property in the fund. That's why your mutual fund shares might go down in price, yet you can still have a capital gain tax to pay. If you own IBM shares, and Big Blue posts a loss for the quarter, the company doesn't pass the hat to its shareholders, but in a sense, mutual funds do just that. With responsibility comes rights, and I reasoned that this might be enough to cover my idea of shared fair use.

But the lawyers say it won't. Yes, you can make fair use copies of recordings as backups and to shift media, but you pretty much have to own a physical copy for every virtual copy you play, which defeats the Snapster concept.

The second problem readers found was with fair use, itself. Many readers sent me the same excerpt from the Electronic Frontier Foundation FAQ on fair use so I could understand the depth of my sin. I am quoting it here, wondering how ironic it would be if the very act of doing so violates some EFF intellectual property rights.

Here is what the EFF says:

How Do You Know If It's Fair Use?
There are no clear-cut rules for deciding what's fair use and there are no "automatic" classes of fair uses. Fair use is decided by a judge, on a case by case basis, after balancing the four factors listed in section 107 of the Copyright statute. The factors to be considered include:
  1. The purpose and character of the use, including whether such use is of a commercial nature or is for nonprofit educational purposes -- Courts are more likely to find fair use where the use is for noncommercial purposes.
  2. The nature of the copyrighted work -- A particular use is more likely to be fair where the copied work is factual rather than creative.
  3. The amount and substantiality of the portion used in relation to the copyrighted work as a whole -- A court will balance this factor toward a finding of fair use where the amount taken is small or insignificant in proportion to the overall work.
  4. The effect of the use upon the potential market for or value of the copyrighted work -- If the court finds the newly created work is not a substitute product for the copyrighted work, it will be more likely to weigh this factor in favor of fair use.

The lawyers argued that even if I could somehow convince a judge that communal ownership bestowed on every shareholder equal rights to the music, they saw Snapster as commercial, which violates point one; as stealing entire CDs, which violates point three; and as definitely hurting the commercial interests of record companies and musicians alike, which violates point four.

Readers didn't care much about the rights of record companies, but they were very bothered by the idea that Snapster would steal income from musicians. Helping the musicians was the single most common "improvement" to Snapster suggested by readers.

Of all the Snapster alternatives and variations suggested by readers, my favorite by far was from the guy who thought we could finesse fair use by creating a peer-to-peer streaming music system that would keep on every peer only as much of a song as could be legally played claiming fair use -- generally less than 30 seconds. So when you wanted to play a song it would be by streaming 28 seconds of music from a succession of hosts across the Internet. Playing a top-40 tune would require coordinating six to seven computers, but fair use MIGHT be preserved.

But I have a different idea I'm calling Snapster 2.0. This Snapster is still roughly organized the way I described last week as a mutual fund, and it still spends $1.4 million buying one copy of every CD. Here is where the lawyers tend to say that Snapster's millions of shareholders could copy or play that CD, but only one shareholder per song could be active at a time. Bummer.

Snapster 2.0 separates the concept of ownership from that of playing music or copying it. While those 100,000 CDs are still owned by all the shareholders, they really exist only as a central repository to simplify the sharing system from both a logistical and a legal standpoint. We are no longer claiming that fair use rights can be transferred in parallel to millions of users.

Instead, Snapster 2.0 shareholders gain the right to download music -- not only by buying a share of stock, but because they also have to contribute to the mutual fund usage rights for the CDs they already hold at home.

This concept works exactly the way that investors short stocks, betting that they will go down in value and making a profit from that decline. When you sell a stock short, it means that you sell it today expecting it to go down tomorrow. Then, when you buy the stock back for less money in a week or a month, the price difference represents your profit (or loss). But how do you sell a stock that you don't already own? By borrowing it. Stockbrokers borrow shares from their customers -- from you and me -- and these are the shares that are sold by the short investor who pays the broker a little fee for arranging the loan of stock. We get nothing for the use of our shares. If you turn up wanting to sell your shares that the short has already sold, the broker just borrows them from yet another customer, allowing you, too, to sell borrowed shares though you don't know that at the time. This is possible because one share looks pretty much like another -- they are a commodity.

For Snapster 2.0, then, the purchased copies act as masters that can be copied under fair use. But there can only be one copy in use at a time for every physical disk in the system. If 10,000 shareholders wanted to play the same song at the same time, we'd need to buy 10,000 CDs OR borrow 10,000 CDs. To do this (borrowing not buying), Snapster would have to be a big database that includes both music and ownership rights to that music.

Every time a shareholder wants to download or play a song, he or she must ensure that their download is matched on a one-for-one basis with a physical CD somewhere in the system. The database does that by locking and unlocking access records to the physical CD. The CD doesn't have to be in the possession of the shareholder, just under his or her control. The Snapster 2.0 database handles that by effectively borrowing control of the physical CD for a period of time, during which it is agreed that particular physical CD can't be played by anyone else. It is a token passing scheme, and only the shareholder with the token can play the song.

It is legal to loan your CDs and also legal to loan control of your CDs, thereby justifying possession of a fair use copy at a remote location. There is a cost for all this borrowing of ownership rights, and that is a transfer of some of the borrowing fee to the owner of the physical CD. In our $0.05 per song model from last week, perhaps a penny would go to the physical CD holder. Remember, these fees have to do with possession and control of the CD, not performance of the music, so it isn't technically a commercial system, just a system of ownership with associated overhead.

But is this automated scheme really fair use? I maintain that it is. The goal is not to deprive record companies of revenue, but to save money for music consumers. This is a critical point. Aiming to save money for people by making the system more efficient does not violate fair use. It does not violate the intellectual property rights of the artists or record companies. It just takes some friction out of the system. Automation is being used to make easy something that would otherwise be very difficult. If you wanted to play a copy of a song, you could run across town and make sure that the original was not being used by anyone else OR we can save the running and just do it electronically by locking access to the physical CD that sits far away. The more simultaneous users there are, the more CD copies there have to be in the system, but the CDs don't have to be centrally held, just centrally controlled.

If this scheme inadvertently hurts record companies, that is just too bad. They can always invest in Snapster 2.0.

What about the artists? Aren't they hurt by Snapster in either form? Frankly, they were already hurting and Snapster actually offers a way out of a bad situation.

The way to make this work is to think in terms of looking backward and looking forward. Musicians for the most part don't make money from their recordings. The record companies make sure of that by using clever accounting methods to make sure that almost no records ever break even. That's why the smartest musicians end up starting their own record labels to move up the food chain a bit.

Most musicians live on advances against royalties that may never come. So they constantly need to do new projects to keep money coming in because their old projects typically yield zip no matter how successful they appear to be on the Billboard chart.

Snapster does little to hurt the musicians if we look back at their earlier work. Looking toward future music, the thing to do is not produce a CD at all, but instead do a direct distribution deal with Snapster. This would be a deal that isn't based on the subjective opinion of some record exec, but rather, allows all music in and pays royalties based on downloads or streams played.

If musicians want marketing under this new system, let them pay for it or do it themselves.

Snapster 2.0 addresses all the problems raised last week except for one: What if Snapster 2.0 is itself Snapsterized? What if a Snapster shareholder decided to use the downloading and streaming rights conferred by ownership of a single share to completely duplicate the Snapster music library and go into competition with the advantage of an even lower cost structure? Fortunately, the best way to organize a Snapster-type business is as a mutual fund, and the only businesses that mutual funds are not allowed to hold shares in are mutual funds.

They'll love this in Dallas.

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