Google offered an olive branch to rivals of its digital book efforts at a congressional hearing Thursday, but Amazon was having none of it.
David Drummond, Google's chief legal officer, testifies before Congress.
(Credit: Screenshot by Stephen Shankland/CNET)The move involves a major point of contention in Google's project to bring books to the Internet and in a proposed settlement of class-action suits that author and publisher groups brought against the project. Specifically, Google announced a reseller program that would let competitors get some measure of the rights--and revenue--that Google itself could get through the settlement.
"Any bookseller--Amazon, Barnes & Noble, Microsoft--would be able to sell the books covered by the settlement," said David C. Drummond, Google's chief legal officer. Under the proposed settlement, Google would get 37 percent of revenue from e-books sold through its service, and through the reseller program, the reseller would get "the significant majority" of that 37 percent, Drummond said.
He announced the offer during a House Judiciary Committee hearing on digital books issues raised by Google Books project. If the settlement is approved, Google would get the right to sell not just books for which it had explicit agreements with rights holders, but also for out-of-print books that still are in copyright for which Google doesn't have explicit permission.
That blanket permission has worried some, notably Amazon, which has scanned 3 million books with permission and opposes the settlement. Drummond explicitly said Amazon would be allowed to participate the revenue-sharing program.
Amazon: No thanks
But Amazon indicated it's not interested after Judiciary Committee Chairman John Conyers, a Democrat from Michigan, asked the company's reaction to this "thrilling new piece of information" from Google.
Paul Misener, Amazon's vice president of global policy
(Credit: Screenshot by Stephen Shankland/CNET)"The Internet has never been about intermediation," said Paul Misener, Amazon's vice president of global policy. "We're happy to work with rights holders without anybody else's help."
The hearing revealed some representatives, including the chairman, to be allies of Google. Also generally speaking in favor of Google's work were Zoe Lofgren and Brad Sherman, both Democrats from California.
"It is a good thing to provide millions of Americans access to published works that otherwise wouldn't be available to them," Conyers said. "A library available to every household with an Internet connection--this could be the greatest innovation in book publishing since the Gutenberg press."
But a high-profile opponent emerged in Marybeth Peters, the register of copyrights at the U.S. Copyright Office.
"By permitting Google to engage in an array of new uses, the settlement would alter the landscape of copyright law," in effect subjecting authors to "compulsory licenses" for their works, Peters said.
"Compulsory licenses are the domain of Congress, not the courts," she said, adding that the settlement could cause diplomatic stress for the United States because foreign authors' books are in U.S. library collections that Google is scanning.
Opting in or out
Google wants to be able to sell electronic books online and has scanned 10 million books since 2004 as part of the program. About 2 million are out of copyright, meaning Google and anyone else may do as they like with them; about 2 million are in copyright and in print, with Google establishing permission from rights holders; and about 6 million are in copyright and out of print. It's this last category that's so contentious--particularly in the case of "orphaned" books, whose rights holders can't be located.
Misener specifically objected to the way in which the class-action suit would give Google the right to sell access to the in-copyright, out-of-print books without obtaining permission first.
Google is the only entity in the world that could approach copyright as an opt-out mechanism," Misener said, meaning that authors and publishers are included in the Google project by default. "Everybody else faces the current legal regime, which is opt-in."
Marybeth Peters, the register of copyrights at the U.S. Copyright Office
(Credit: Screenshot by Stephen Shankland/CNET)Sharing Misener's concerns was Rep. Hank Johnson, a Democrat from Georgia. "I'm troubled by the exclusive access Google will have to orphaned works. Why should Google be the only entity permitted to sell orphaned works?" he asked. And he believes the case in the courts could edge in on the job of his own branch of government.
Orphaned works rights-holders aren't completely ignored in the proposed settlement, though. It would create a nonprofit organization called the Books Rights Registry that would collect sales revenue--minus Google's cut--and use that money to locate missing rights holders of and compensate them and other rights holders.
Google argues its program will let millions of out-of-print books generate revenue once again, including orphaned works. Reinforcing Google's point, Sherman criticized Amazon for focusing on digitizing bestsellers but not bothering to bring other books to the electronic realm.
Misener stood by Amazon's position, though. "We are not scanning books for which rights holders cannot be found in advance. That's the way the law requires," he said.
Sherman countered by likening the orphan-works situation to that of unclaimed property. "We want unused property and unclaimed property to be made use of, and we want the ultimate owner to be compensated when found," he said. "To say all that knowledge should be locked up and unavailable to humankind doesn't seem to be in the interest of knowledge."
Congress or the courts?
Conyers indicated he doesn't see the orphaned-works issue as an issue that can't be resolved.
House Judiciary Committee Chairman John Conyers
(Credit: Screenshot by Stephen Shankland/CNET)"My primary concern is because Google reached this settlement, they now have exclusive access to orphaned works," Conyer said. "This can be remedied by legislation."
Such legislation hasn't been easy to come by, though. The House and Senate have worked on it in recent years but have yet to pass any new law. Google's proposed settlement raises the issue that for one company at least, the orphan-works issue could be settled in the judicial branch of government rather than the legislative branch.
"The best protection of the prerogatives of the legislative branch is for us to legislate. Since we have haven't done very effectively the legislation on the orphaned works, it's hard for me to condemn the courts to have a case before it that determines what can be done and can't be done with orphaned works," said Rep. Mel Watt, a Democrat from North Carolina.
Johnson disagreed. "The settlement is coming very close to whittling away the powers of the U.S. Congress. The treatment of orphaned rights holders is a matter that should be determined by Congress," he said.
Things get even more complicated, too: the executive branch, in the form of the Justice Department, is investigating the proposed Google Books settlement.
For its part, Google has no objection to legislation--even if it grants competitors rights to the same books the proposed settlement would give it access to. "We support Congress going in and legislating around that," Drummond said.
Updated at 11:15 a.m. PDT with further detail from the hearing.
This was originally posted at Between the Lines. It was updated at 3:25 p.m. PDT with Amazon adding Hawaii to the list of states where it's pulled its Associates program.
Amazon.com is in a high-profile tax showdown with states over its Associates referral program and is likely to come out a winner either way.
Amazon has pulled its Associates program, which allows Web site operators to drive sales to the e-tailer in exchange for commissions of up to 15 percent, in North Carolina and Rhode Island. And on Tuesday, Amazon also added Hawaii to its hitlist, according to The Wall Street Journal.
States are hurting for revenue and are trying to force Amazon to collect sales taxes on its associates. Simply put, states are trying to treat associate Web sites as if they are physical assets of Amazon.
Amazon's response: Cut out associates in the states where tax bills are proceeding.
Providence Business News reported that Amazon cut its ties with business affiliates in Rhode Island over a bill that would force it to collect sales tax on referrals via authors or businesses in the state. Amazon had the same reaction to a similar tax-happy move by North Carolina. These battles will be fought state by state, depending on the return on Amazon's marketing dollars.
Bernstein Research analyst Jeffrey Lindsay summarizes the situation:
The issue is collection of sales taxes--several states are trying tactics developed by then-Gov. Eliot Spitzer in New York to try to force Amazon to collect sales taxes on online sales made in their states. In 2008, Spitzer argued (and the courts upheld his view) that if Amazon has affiliates in the state where sales were made, that counted as "in-state" presence, and sales taxes must be collected.
Amazon's response to the latest move by cash-strapped states hoping to follow New York's lead has been to terminate relationships with in-state affiliates in a rapidly escalating game of chicken. It is not clear where this game may end, but clearly, Amazon is prepared to tolerate some pain to maintain its sales tax collection exemption for the majority of states.
While loss of affiliates in some smaller states may not be an insurmountable problem, it now looks as if California may be next to impose the "affiliate rule," and this may be more difficult to circumvent. Even if the states prevail, however, we do not believe the impact upon Amazon will be large.
Given Amazon's response and states' desperation for tax revenue, it doesn't take a brain surgeon to figure this showdown will escalate. What would happen if Amazon just shut down its Associates program in all states?
Amazon could win. Think about it: If Amazon was really dependent on the Associates program for a huge portion of sales would it really just pull it that quickly? Amazon in its SEC filings doesn't break out revenue garnered from its referral program or its total expense.
However, Amazon does drop a few hints. In a blog post, Amazon says, "We pay out hundreds of millions of dollars per year to Web sites that advertise our products."
In other words, these commissions can add up:
Amazon.com commissions, or referral fees, can indeed add up.
(Credit: Amazon.com)In Amazon's SEC filings, it explains that the Associates program falls under its marketing spending line. According to Amazon's annual report:
We direct customers to our Web sites primarily through a number of targeted online-marketing channels, such as our Associates program, sponsored search, portal advertising, e-mail campaigns, and other initiatives. Our marketing expenses are largely variable, based on growth in sales and changes in rates.
To the extent there is increased or decreased competition for these traffic sources, or to the extent our mix of these channels shifts, we would expect to see a corresponding change in our marketing expense or its effect.
Marketing costs increased in absolute dollars in 2008, compared to 2007 and 2006, due to increased spending in variable online-marketing channels, such as our Associates program and sponsored-search programs.
While costs associated with free shipping are not included in marketing expense, we view free-shipping offers and Amazon Prime as effective worldwide marketing tools, and intend to continue offering them indefinitely.
The big question is whether Amazon's referral program accounts for the bulk of the company's marketing expense. For the year ended December 31, 2008, Amazon reported marketing expenses of $482 million, up from $344 million in 2007 and $263 million in 2006.
It's hard to quantify the connection between referrals and Amazon's sales, but chances are good that the company has word of mouth, habits, and low prices at its back these days. Simply put, if Amazon cuts its Associates program in every state, its marketing expenses would fall dramatically and ultimately boost earnings. And Amazon would likely land the sale, anyway. Meanwhile, these small businesses that like Amazon's commissions will be screaming at their state legislators.
JPMorgan analyst Imran Khan writes in a research note:
Although the affiliate network changes could result in some lost sales, Amazon will have the ability to shift marketing spend into other arenas. We think the company can continue to focus its marketing on the areas that deliver the best (return on investment), mitigating the impact of losing some affiliates.
The state tax flap is an interesting showdown, but Amazon has done the math internally. The e-tailer appears confident that it can win a game of chicken.
MobileRead.com posted a letter this week that Amazon.com apparently sent regarding alleged copyright violations. This is an excerpt.
When President Clinton signed the Digital Millennium Copyright Act into law 11 years ago, he predicted it will "protect from digital piracy the copyright industries that comprise the leading export of the United States."
The DMCA turned out to be much broader than that. This week, an e-book Web site said Amazon.com invoked the 1998 law to prevent books from some non-Amazon sources from working on its Kindle reader.
Amazon sent a legal notice to MobileRead.com complaining that information relating to a computer utility written in the Python programming language "constitutes a violation" of the DMCA, according to a copy of the warning letter that the site posted. MobileRead.com is an e-book news and community site.
MobileRead.com forum moderator Alexander Turcic said in a post on Thursday that although he did not believe the program violated the law, the site would "voluntarily follow their request and remove links and detailed instructions related to it." Turcic said that, contrary to Amazon's claim, his site never "hosted" the software.
Amazon did not respond to a request for comment on Friday.
The author of the software in question, titled Kindlepid.py, is listed as Igor Skochinsky, a hardware hacker who performed a remarkable analysis of the Kindle and described in December 2007 how he was able to gain access to the device.
It's unclear why Amazon waited so long to respond with a legal threat, and why the company targeted MobileRead.com: Skochinsky's original blog post about Kindlepid.py is dated December 2007, and the copy of the Kindlepid.py software hosted at the Googlepages.com Web-page posting site is still available for download at http://skochinsky.googlepages.com/azw-0.2.zip.
Kindlepid.py and a related piece of accompanying Python code don't allow piracy. Rather, they accomplish something akin to the opposite: they allow legally purchased books from other e-book stores to be used on the Kindle. (Amazon owns MobiPocket, one of those stores. Another would be OverDrive.com, which counts schools and libraries as customers.)
In theory, at least, this could threaten Amazon's business model, which provides wireless connectivity through Sprint's EV-DO cellular data network and covers the cost through items purchased from the Amazon Kindle Store. Kindle customers can also e-mail themselves documents to be converted at 10 cents per conversion.
A copy of a MobileRead.com wiki page--now empty--saved in Google's cache says Kindlepid.py allows you to "obtain books from sites that use DRM (Digital Rights Management - encryption) on their books for specific devices. This includes book sellers and public libraries." It provides instructions on how to install and use the software.
MobileRead.com readers with Kindles were not pleased with Amazon. "What this script does is make the Kindle more useful," wrote one reader. "With Amazon using the DMCA to get rid of this, they are alienating their customers and causing prospective customers to purchase a different device."
And the Kindlefix.py code is already being mirrored, including in a post on Slashdot.org.
Section 1201 of the DMCA says: "No person shall... offer to the public, provide, or otherwise traffic in any technology... is primarily designed or produced for the purpose of circumventing a technological measure that effectively controls access to a work protected under this title."
One exception to the DMCA's general rule, however, comes a few paragraphs later. It says circumvention is permissible for "interoperability" of computer programs, with interoperability defined as the "ability of computer programs to exchange information, and of such programs mutually to use the information which has been exchanged."
If Amazon were to press its case against Kindlefix.py, another legal claim could involve reverse engineering, which is prohibited by the Kindle terms of use. They say users may not "circumvent any of the functions or protections of the Device or Software or any mechanisms operatively linked to the Software, including, but not limited to, augmenting or substituting any digital rights management functionality of the Device or Software."
This isn't the only legal spat that's arisen over the Kindle 2. Last month, the Authors Guild claimed that the mechanical text-to-speech converter was a violation of copyright law.
Amazon.com won an important legal fight to preserve its customers' privacy by persuading a court to reject requests for 24,000 customer records made by federal prosecutors in Madison, Wis.
Documents in that case, in which the FBI and IRS are accusing an independent Amazon seller of skirting tax laws, came to light in the last week. But it's not the first time that police on a fishing expedition have demanded customer records from the Web's largest bookstore.
Read on for our excerpts from our conversation on Wednesday with David Zapolsky, Amazon.com's vice president for litigation. He said a few years ago that Amazon gets subpoenas "roughly once a quarter," and we asked him for some more information about how the process works.
It's important to note that the First Amendment gives online and offline bookstores a greater legal ability to resist law enforcement demands than say, banks or credit card companies enjoy. And Amazon is following the tradition of other booksellers, which have a tradition of--individually and through the American Booksellers Foundation for Free Expression--opposing requests from overzealous prosecutors.
In an important 2002 case, the Colorado Supreme Court ruled that police could not serve a search warrant on Denver's Tattered Cover Book Store. Two years earlier, a judge denied the Drug Enforcement Administration's attempts to get sales records from a Borders bookstore as part of a grand jury investigation. And perhaps the most famous case came when independent counsel Kenneth Starr tried unsuccessfully to obtain Monica Lewinsky's purchase records from Kramerbooks, a popular neighborhood bookstore in Washington, D.C.
Here's the conversation:
Q: How often does Amazon.com receive requests for customer records?
We do get them from time to time. They come in relatively randomly, and they come from various orders, federal or state. We typically approach each one on a case by case basis.
Nine times out of ten, if what's being asked for involves the compelled disclosure of customer expressive choices... we'll explain our concerns to the government and they'll understand it and they'll withdraw their request or they'll modify it in a way that doesn't cause disclosure of that (information).
Q: Is it more common to see law enforcement withdraw the request or modify it?
It's hard to characterize. It depends on how badly they need the information and what the investigation is about. If they're looking for credit card fraud, for instance, all they really may be interested in is transaction amounts, there's no information about buyers or customers or anything. So if it's a different type of investigation, they may decide its just not worth pursuing the subpoena at all.
Q: How does the volume of records in this request compare to past requests you've received?
It's hard to generalize because each one of these things is a little bit different. This (the Madison, Wis. case) was unusual in that the sheer number of transactions was unusually large: 24,000 sales of individual books, music and a few videos, and that's a lot of sales. When they came back and asked us for all of the customer information associated with those sales, I was surprised.
Q: Can you share any details on past requests?
I never really talk about details of ones we're able to resolve informally. It doesn't make sense, and a lot of them are ongoing investigations.
This only became public after the investigation was concluded, it all played out last summer, only unsealed within last couple of days. (Editor's note: The indictment of former city official Robert D'Angelo on tax evasion, wire fraud, and money laundering charges became public last month. Prosecutors sent a grand jury subpoena to Amazon over the summer during the investigation that let to the subsequent indictment.)
There's only been a few times when we had to go to a court to make this point. (There was) one instance in South Carolina a few years ago that never resulted in any public filings because ultimately the prosecutor's case fell apart before we got to a decision on whether or not they could enforce the subpoena.
There was a case four to five years ago where some Cleveland prosecutors asked for some similar information. They were trying to get the Washington prosecutor to enforce a local subpoena and the local prosecutor ultimately agreed with us that that it didn't make sense.
This was certainly the first public decision that resulted from a challenge such as the one we made.
Q: What do you look at when these requests come in from law enforcement?
When the request for information could violate customer privacy or First Amendment rights, we scrutinize it closely. We talk with the government about it, and if we still can't feel comfortable...we'll just ask a court to make that decision.
What this court held and what we believe the law is, is a court needs to apply a higher standard before allowing the government to get...access to that information. We don't want to be the ones making that determination if there's any doubt at all.
We think this is a significant decision because it recognizes and adopts in the federal grand jury context a doctrine that has kind of been development over the past 10 years in the prior cases...The Kramerbooks case, which grew out of the special prosecutor's investigation of President Clinton and then the Tattered Cover bookstore case in Denver, Colorado, which resulted in a very fine Colorado Supreme Court opinion which goes through the history of this legal doctrine.
This is just an extension of a doctrine that has been kind of percolating for a while, and it's significant because it's a federal district court and it's a federal grand jury investigation...(It) continues the development of important protection for customers and for readers of books.
News.com's Anne Broache contributed to this report.
Federal prosecutors tried unsuccessfully to force Amazon.com to identify thousands of innocent customers who bought books online, then abandoned the idea after a judge rebuked them.
In an order that was sealed but has now become public, U.S. District Judge Stephen Crocker rejected the Justice Department's subpoena for details on Amazon's customers and their purchasing habits. Prosecutors had claimed the details would help them prove their case against a former Madison, Wisc., city official charged with tax evasion related to selling used books through Amazon.
"The subpoena is troubling because it permits the government to peek into the reading habits of specific individuals without their prior knowledge or permission," Crocker wrote in June. Amazon filed the lawsuit to quash the grand jury subpoena.
The case is reminiscent of last year's attempts by federal prosecutors to wrest sensitive search-related information from Google through a subpoena. A California judge eventually rejected the request for users' search queries (and allowed only an excerpt from Google's index of Web sites).
In both cases, the judges worried about public perception. California's Judge James Ware was concerned about the "perception by the public" that Google search terms are "subject to government scrutiny." In the Amazon case, Judge Crocker predicted that "rumors of an Orwellian federal criminal investigation into the reading habits of Amazon's customers could frighten countless potential customers into canceling planned online book purchases, now and perhaps forever."
Instead of giving the Bush administration what it wanted, Crocker split the difference, saying that Amazon could send letters to its customers asking them whether they voluntarily wanted to contact the Feds.
After losing the subpoena fight, Daniel Graber, the assistant U.S. Attorney in Madison, gave up and rescinded his request for the customer records.
The onetime Madison city official who's facing tax evasion, wire fraud, and money laundering charges is Robert D'Angelo. He was indicted in October on charges that he ran a sizable mail order business from his city office, using city computers, and city storage facilities. The business allegedly generated $238,000 in revenue through the sale of music CDs, costume jewelry, and--through Amazon--used books.
Initially, prosecutors demanded "virtually all" records from Amazon dealing with D'Angelo, including "the identities of thousands of customers who had bought used books" from him, according to court documents. Prosecutors subsequently narrowed the request to 120 book buyers, 30 per year for the four years under investigation--on the theory that FBI and IRS agents could then contact those 120 customers.
David Zapolsky, vice president of litigation for Amazon, told the Wisconsin State Journal that his employer tries to protect its customers' privacy rights from governmental fishing expeditions: "When we don 't know what the government wants the information for and we have a doubt whether it violates privacy or First Amendment rights, typically we will dialog with the government and try to understand what their perspective is or we'll make a motion and have a judge decide whether the government has any need for the information."
This subpoena, even more than the one directed at Google, highlights the tension between law enforcement's desire to assemble information--and the privacy rights of Americans who have that information stored by search engines or e-commerce sites.
If the Wisconsin subpoena had been directed at a credit card company or bank, the customer records would probably have been handed over without a fuss (and without any publicity). But booksellers and libraries have unique First Amendment protections under U.S. law that can shield them from some overzealous demands by police for personal information.
In an important 2002 case, the Colorado Supreme Court ruled that police could not serve a search warrant on Denver's Tattered Cover Book Store. Two years earlier, a judge denied the Drug Enforcement Administration's attempts to get sales records from a Borders bookstore as part of a grand jury investigation. And perhaps the most famous case came when independent counsel Kenneth Starr tried unsuccessfully to obtain Monica Lewinsky's purchase records from Kramerbooks, a popular neighborhood bookstore in Washington, D.C.
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