Guess who is served by taxing blank tapes and recorders? Not the consumer

In late July, acting on orders from the Federal Judiciary, the consumer electronics and recording industries agreed on a package that would effectively end a four-year battle over consumers’ rights to make digital audio recordings at home. At issue are the millions of dollars that the recording industry feels it is losing in sales as a result of the home recording of music.

Home recording has always been a source of animosity between recording artists and electronics manufacturers. In the past, the only copies were analog and therefore imperfect. But the ability to create “perfect” copies, which digital technology allows, has led the music industry to demand protection or compensation for lost sales as a result of “pirating” (large-scale illegal copying and selling of titles) and home copying.

Next: DAT TAKES FIRST HIT
When Sony announced the Digital Audio Tape (DAT) format and recorders five years ago, the music industry made so much noise that Sony delayed shipment of recorders into the U.S. until this past year. Most record labels refused to release titles on the format.

Even Sony Music stalled at releasing titles on DAT. No other company even entered the domestic market. This made for slow sales, high costs and little, if any, consumer support. Only musicians and audiophiles paid the premium. (DAT technology also developed a secondary market as a computer storage device, primarily for tape backup.) In the meantime, Philips and Tandy developed DCC as a competing technology, and Sony came out with a new medium, Mini Disc (see Vol. 1, No. 2, p. 19).

Then Sony got sued. Last year, the National Music Publishers Association (NMPA) sued Sony, seeking an injunction that would force it to stop marketing the recorders unless it were willing to pay royalties to the artists NMPA represented. The consumer electronics industry was adamant that it would not pay royalties on its technology to artists. Caught somewhere in the middle was the consumer, to whom all options cost money.

Congress has been loathe to get involved in such an issue, lest it upset industry (a potent lobby) and/or the consumer (who does, after all, elect members of Congress). Numerous bills have been proposed with no real action taken. Finally the courts ordered the various parties to work out a deal between them and propose it to Congress. They have now hammered out the deal.

Parties to this agreement include the Recording Industry Association of America and the NMPA, representing the recording industry, and the National Association of Retail Dealers of America (NARDA) and the Electronics Industry Association’s Consumer Electronics Group, representing manufacturers. It is said to have the support of the major artists’ unions and associations. The entire deal was brokered by John Roach, chairman of Tandy, the largest consumer electronics dealer in the country and a contributor to the DCC specification.

The deal calls for manufacturers of digital recording equipment to pay a royalty of 2% of the wholesale price on recorders and 3% on blank disks and cassettes. There is a minimum tax of $1, and a maximum of $8 for a single tape deck and $12 for a dual cassette recorder. These monies would be deposited into a pool, to be distributed to composers and artists based on record sales and airplay.

All hardware manufacturers would be required to include the Serial Copy Management System into all devices. The SCMS would allow only a first-generation copy, adding an inaudible track to the copy that makes it impossible to duplicate again.

Ironically, this digital solution provides far better protection than exists today in the analog world, where tape-to-tape decks are sold freely with no copy protection whatsoever. Yet no royalty tax has been placed on blank analog tapes. One might ask why a tax on digital tapes is necessary when SCMS eliminates the problem of multigeneration copying.

Most manufacturers had voluntarily agreed to include SCMS in their recorders even before this agreement was reached. The suit against Sony will also be dropped (although it can be reinstated if things go awry).

Most significant, perhaps, is that such an agreement, if made law by Congress, would establish the legal right for consumers to make audio tapes, analog or digital, and would prevent any future copyright infringement suits for lost income against the manufacturers and marketers of digital recording equipment and blank media.

Next: WHO DO THEY THINK THEY’RE KIDDING?
The entire deal smacks of greed, long a character trait of the entertainment industry. The recording industry has already responded to the loss of revenue from taping by raising the price substantially on prerecorded analog tapes. This higher pricing, of course, lowers the incentive for consumers to buy tapes from the record companies and, instead, raises the incentive to copy.

Shaft. Can you dig it? As consumers, we must be aware of the ramifications of copying other people’s work: recording artists are compensated for the number of records sold. On the other hand, it’s bad enough that consumers are still paying a premium price — generally around $15 per disc — for audio CD technology that costs $1 per disc to produce.

Those people who do not copy CDs onto blank analog tape should not be penalized for the actions of others — which at the present moment, they certainly are. Now the record companies have it both ways: higher prices on prerecorded tapes and records and a royalty on blank media.

Consumers will also be paying a premium, in the form of a price differential, for purchasing digital equipment. This will create a permanent price disparity between analog and digital equipment and will ultimately slow the acceptance of the new technology. While some experts believe that the royalty will not affect the retail price for equipment that today costs $800-1,200, what happens when volumes increase and retail prices drop? To an industry that is made or broken on $25 price differentials, this could be significant. The cost to the consumer of blank media is expected to rise approximately 25˝ per tape.

There’s just no excuse. It is our opinion that the music industry’s concern over piracy was more than adequately answered with the SCMS specification, which was being voluntarily implemented without any royalty agreements.

The issue of perfect copies is no longer even valid. Sony conceded that DAT was essentially dead as a consumer product. After Philips and Tandy announced DCC, Sony produced the Mini Disc, a recordable disc that holds the same amount of music in half the size of traditional CDs. However, both DCC and Mini Disc utilize a compression algorithm that loses a small amount of information each time a copy is made, thereby making perfect duplication from copy to copy impossible. (For a full comparison of the three formats, see Vol. 1, No. 2, p. 19.)

The computer software industry faced a similar problem a number of years ago. Software manufacturers were spending a lot of money to place complex copy-protection code on their applications to prevent duplication. But they found that it was much more economical to remove all copy protections and lower the cost of the software to promote sales!

Guess what? It worked. Producers were happy. Consumers were happy.

But thanks to industry greed, the royalty agreement seems to be the only way that digital technology will ever get into consumers’ hands. The entire issue has become so emotional over the years that no logical conclusion now seems possible.

Next: THE IMPLICATIONS
Anyone working with digital media needs to be aware of such battles. This particular battle is being fought on a limited field: only digital audio reproduction is at issue. Analog audio seems to have escaped unscathed at least from a royalty tax (though the cost of pre-recorded tapes has gone up about ten percent in the past six months), and implicit in this deal is the agreement not to include video or computer data.

But the groundwork is being laid for just such future battles. How much longer will we be able to differentiate digital video from computer data, or a movie from a software title? The Motion Picture Association of America (MPAA) has been watching this deal take shape with great interest. You can be sure that it will be looking for its own piece of royalty tax when digital video arrives to the home.

- David Baron