An interesting tempest in a teapot has emerged this week following some overblown rhetoric by and in response to celebrity causemeister Bono. There’s a deeper lesson to the incident, however, one with important implications for the net neutrality debate. (More on that in a moment.)

In a New York Times op-ed column on Jan. 2, 2010, Bono provided “10 ideas that might make the next 10 years more interesting, healthy or civil.” These include the salvation of the entertainment industry from the clutches of peer-to-peer file sharers, who are just a few turns of Moore’s Law away from being able to “download an entire season of “24” in 24 seconds.”

“Many will expect to get it for free,” Bono laments, apparently unaware that in the U.S., we don’t have a mandatory television license for television content as they do in the U.K. (U.K. residents pay £142.50 a year tax, the principal source of income for the BBC.) So long as you watch 24 when Fox broadcasts it, you will expect to and indeed will get it “for free,” without breaking any laws whatsoever. Hooray for America.

Bono’s proposal to solve this problem, also factually challenged, is to force ISPs to clean up the illegal sharing of copyrighted content:

We’re the post office, they tell us; who knows what’s in the brown-paper packages? But we know from America’s noble effort to stop child pornography, not to mention China’s ignoble effort to suppress online dissent, that it’s perfectly possible to track content. Perhaps movie moguls will succeed where musicians and their moguls have failed so far, and rally America to defend the most creative economy in the world….

As several commentators have already pointed out, America’s “noble effort to stop child pornography” has almost nothing to do with looking inside the broken up pieces of Internet transactions, known as  “deep packet inspection.”  Indeed, as I write in Law One (“Convergence”) of The Laws of Disruption, most federal and state efforts at solving that scourge at least in the online world have been so broad and clumsy that they instantly fail First Amendment scrutiny. (Another feature of American law that Bono may not fully appreciate.) Congress has tried three times to pass laws on the subject, two of which were declared unconstitutional and the third reigned in to be almost meaningless.

State efforts have been even more poorly-crafted. I write in the book about Pennsylvania’s Child Sexual Exploitation Unit, formed in 2008 by act of the Pennsylvania legislature. Staffed by three former state troopers, the CSEU “analysts” surfed the web looking for sites they felt contained child porn, then wrote letters demanding that ISPs block access to those sites for all their Pennsylvania customers. (The easiest way for large ISPs including AOL and Verizon to do that was simply to block the sites, period.)

Aside from the lack of any training or standards by the regulators, the sites that made the list included several host sites with hundreds or thousands of private websites that had nothing to do with pornography of any kind. By the time the courts put the CSEU out of business a year later, Pennsylvania had banned 1.19 million websites, only 376 of which actually contained content the troopers deemed offensive. (An official geographic survey of Spain and the International Philatelic Society made the banned list.) There was also no mechanism for getting a web address off the list, even if the ownership and contents changed hands.

But that’s a mere quibble, as is the fact that Chinese censorship of content, hardly a “best practice,” apparently includes some 30,000 Internet police and perhaps millions of servers—and even then, the surveillance appears to be on the back-end, after the packets have already been reassembled. (Not surprising, China hasn’t exactly published its processes in the Harvard Business Review.)

Regular readers of this blog will be expecting the twist ending, and here it comes. I’m less interested in the misinformed opinions of a musician and humanitarian than in the response it drew from Internet activists. Gigi Sohn of Public Knowledge characterized Bono’s proposal as “mind-bogglingly ignorant” both as to what really caused the fall of the music industry and the technology that would be required for ISPs to become the content police on behalf of copyright owners. Packet filtration, Sohn points out, would lead to “blocking lawful content and encouraging an encryption arms race that would allow filesharing to proceed unabated.” And anyway, the real problem here is overprotective IP laws. (I agree.)

Somewhat less hyperbolic, Leslie Harris of the Center for Democracy and Technology (CDT) wrote today on The Huffington Post that ISPs are taking concrete and responsible steps stop to reduce child pornography that don’t include deep packet inspection, and reiterated Sohn’s point about an encryption arms race.

More interesting, however, Harris notes the danger of mandating ISPs to exert “centralized control over Internet communications.” Harris writes:

In this country, ISPs do not control what their users send to the Internet any more than a phone company controls the topics of someone’s phone call. Does the U.S. really want to move in the direction of the Chinese model of always-on surveillance? Once we begin to break into all Web traffic to search for copyright violations, evaluating content for its “decency” or appropriateness for children, then analyzing each user’s search habits to determine buying habits and government surveillance without lawful process (remember the NSA warrantless wiretapping) will follow close behind.

The U.S. has the most vibrant, free and innovative Internet because we don’t have gatekeepers in the middle of the network.

Well, at least we don’t yet.

As I’ve pointed out before (see, for example, “Zombieland – The Return of Net Neutrality”) my principal concern with net neutrality is not the idea that information should flow freely on the Internet. That’s a fine principle, and central to the success of this largely unregulated, non-proprietary infrastructure.

Rather, I worry about the unfortunate details of implementation. If net neutrality also means that ISPs are forbidden from offering premium or priority routing within the back-end segments of the network they control (that is, the last mile to the consumer), then it will necessarily fall to the government to monitor, audit, and investigate the flow of packets across the network, if only in response to complaints by consumers of real or perceived non-neutral behavior.

Under the rules proposed in the fall, the FCC has said only that it will investigate complaints of non-neutrality on “a case-by-case basis;” under the proposed Internet Freedom Preservation Act, any consumer would have the right to complain directly to the FCC, which would be required to investigate all complaints within 90 days.

How else can the FCC determine whether some packets are being given priority in defiance of neutrality rules without intercepting at least a random subset of those packets and opening them up?

Very quickly, the enforcement of net neutrality would lead us  into the “model of always-on surveillance,” not by ISPs but, worse, by federal regulators. The opportunities for linking the FCC’s enforcement powers with “government surveillance” will be even more irresistible than if would be if the ISPs were the ones exerting the “centralized control.”

This, of course, is a worst case scenario, but that is not to say that the risk of the worst case scenario becoming reality is particularly low. Indeed, the history of FCC interference with broadcast TV content, a long a sad story that persists to this day, suggests that the worst case scenario is also the most likely.

(On enforcement, Public Knowledge says only that it “supports a Network Neutrality system that can be enforced through a simple complaint process managed by the Federal Communications Commission, where the network operator must bear the burden of demonstrating that any interference with traffic is necessary to support a lawful goal.” Simple for whom? The complainant, not the investigator.)

I agree that the U.S. has the most free and innovative Internet because we don’t have “gatekeepers in the middle of the network.” So why do groups including Public Knowledge and the CDT, who clearly understand the risks of private and–even worse–of public interference with the flow of packets, advocate so strongly in favor of neutrality rules?

Perhaps because, like Bono, they haven’t thought through the implications of their rhetoric.

I’m fascinated by the firestorm that has erupted over what sounds on paper like the most boring combination of a legal and technical discussion: the recent appeal by Hollywood for a waiver from the FCC’s Selectable Output Control (SOC) rule.

First a little background, greatly simplified. (Those wanting the gory details can read the excellent coverage of the story over at Ars Technica.) Older television sets receive cable programming through analog component wires. Newer TVs include the old analog interface but also added digital ports, such as HDMI, that can reproduce a higher-quality picture.

The SOC rule, adopted in 2003, prohibits content providers (including cable and phone companies offering television content) from manipulating transmissions in a way that turns off or otherwise disables the analog ports, which would have forced consumers either to use the digital interface or, if they don’t have those ports, buy a new set that does.

In addition to quality, the other relevant difference between analog and digital outputs is that the latter can be programmed to obey increasingly sophisticated forms of digital rights management (DRM), used to limit the reception, quality and use of received content. HDMI interfaces, among other features, support signal encryption that ensures the output is being directed to an authorized device—a television set registered for on-demand viewing, for example.

The MPAA has asked the FCC for a waiver to allow studios to broadcast new movies before they are made available on DVD. To make such broadcasts more secure, the MPAA wants permission to block the signal from being output through the analog interface. While digital outputs can be hacked and DRM bypassed, the MPAA believes that the most likely and most dangerous form of piracy of these early releases would come from users with active analog ports–what is sometimes referred to as “the analog hole.”

If the waiver is granted, content providers would be able to disable analog ports when transmitting early-release movies to the set. The digital ports could then be manipulated to ensure that the programming was not copied in violation of the new service’s terms.

The MPAA’s request is being supported by content providers including cable TV, satellite, and phone companies, as well as some device manufacturers. The principal opposition is coming from the Consumer Electronics Association, the main trade group for device manufacturers, as well as a coalition of public interest groups including Public Knowledge and the EFF. (See CEA President Gary Shapiro’s open letter to the FCC on The Huffington Post and John Bergmayer’s “SOC in Context” at Public Knowledge, as well as Ars Technica’s Matthew Lasar’s response to the cable industry.)

This is not an open-and-shut case, though both sides would like to characterize it as such. The objectors argue that consumers who only have analog outputs (25 million, according to CEA) should not have their TV’s “broken” by SOC, in essence forced to upgrade to newer TVs if they want to watch early releases of new movies.

They also point out the there is no evidence that content piracy has anything to do with home viewers intercepting transmissions and translating them to media or file-sharing copies through analog interfaces or otherwise; that, indeed, the most significant source of piracy for new movies comes from insiders who get hold of production copies before or soon after movie releases.

The public interest groups are particularly concerned that a SOC waiver here is at best a Trojan Horse, giving the entertainment industry a foot in the door to control the use of more kinds of broadcasts, including those for which today there are no or fewer restrictions.

The waiver could be a start, in other words, toward more restrictive content limitations, along the lines of so-called “broadcast flag” technology embedded into TV sets that Hollywood had earlier convinced the FCC to mandate. (A federal appeals panel laughed the FCC out of court on that one, reversing the Commission as wildly out of its jurisdiction.)

Ultimately, the public interest groups believe, the SOC waiver could lead to the end of long-established rights for viewers to record and time-shift programming, a right that the Supreme Court underscored nearly 25 years ago when the same parties asked for a ban on VCRs.

The requested waiver, however, doesn’t apply beyond the “narrow” exception of the early-release movies. (A number of companies, including TiVo, have urged the FCC to allow the waiver, but only after significantly tightening up just how narrow the exception really is.) And supporters point out that without the SOC waiver that new service simply won’t be offered, harming everyone.

As the National Cable & Telecommunications Association (NCTA) put it in a letter to the FCC, “MPAA has sought waiver of the ban on SOC to permit [content providers] to provide consumers with more viewing options, which can only be made available if the ban on SOC is waived.” (emphasis added)

The implication of that statement is that the SOC waiver is a kind of technological requirement for early-release movies, which isn’t the case. What the NCTA means is that without the waiver, Hollywood won’t risk showing movies before DVD releases for fear that piracy will undermine the subsequent market for media.

Well, maybe. But even absent rampant piracy, the likelihood is that DVD and other media purchases will continue to decline (see “Hollywood: We Have Met the Enemy”) and the studios will be forced into new (potentially more-profitable) on-demand and/or subscription models. Indeed, Warner Home video is already experimenting with early release video-on-demand for new movies even without a SOC waiver.

I share the public interests groups’ fears of a slippery slope. As I write in “The Laws of Disruption,” since the advent of the Gutenberg Press, content industries have demonstrated an uncanny consistency in lobbying and litigating against every new consumer technology that threatens their control over distribution and use, including several that have, ironically, saved them from extinction.

Consumers are understandably wary of promises from their content providers and the entertainment industry that a small inconvenience is needed in order to give consumers what they want. There’s something frankly irritating not so much in the argument but in the tone with which the NCTA is making its case (“sounds like a slam dunk to me, but surprisingly, some object” NCTA head Kyle McSlarrow writes. Come on!)

On the other hand, the SOC waiver, more narrowly defined, won’t take away any abilities or rights consumers have now. Though the analogy isn’t perfect, consumers who want to see HD broadcasts must buy HD television sets. The MPAA is arguing that it won’t offer pre-release movies if it can’t stop them from coming out an analog interface. (Technically, of course, they can come out that interface.)

Eventually, the 25 million analog-only TV sets left in the U.S. will be replaced anyway, and the “analog hole” will be plugged with more secure (though hardly bulletproof) digital technology. At that point the analogy is a little better: if you want the new service, you need to plug it into a port you will likely have and not one that you have but which isn’t permitted.

In the end, I’m with TiVo and Sony (both a content producer and a device manufacturer), who “now believes that under certain, very narrow, circumstances, SOC could bring benefits to consumers that on balance would outweigh any potential drawbacks.”

At the same time, I’d sure like to see Hollywood and its partners stop listening to consumers with such a tin ear. If they devoted even a fraction of the energy they put into trying to control the uncontrollable into experimenting with a holistic approach to offering access through all the channels—media, on-demand, virtual libraries, etc.—consumers are interested in, these fights could largely be avoided. Profits would be higher and more secure, and the pressure for piracy would be greatly diminished.

As Internet Research Group’s Peter Christy puts it, “The Internet is playing a fascinating role here by enabling experimentation. In the end the content owners are king, and their objective is maximum revenue capture from a menu of distribution alternatives. I think they are starting to know enough data not to act in way that will cost them money.”

I’m not quite that optimistic.  But I hope he’s right.

Strategy under The Law of Disruption requires attention to detail.

Two recent articles with competing views of the fate of Hollywood content producers caught my attention.  The first, by CNET’s Greg Sandoval, reiterates long-standing predictions that for current industry giants the Internet spells doom.   “[T]he end is coming,” Sandoval concludes, “for DVDs, traditional movie rentals and yes, much of your cable money…..”

The second, from New York Times reporter Bill Carter, reported surprising results from a recent change by ratings agency Nielsen.  In determining whether consumers are watching commercials and, therefore, what “rating” to assign a broadcast program, Nielsen now includes DVR views within three days of airing if commercials aren’t skipped.

The surprising result is that more than half of all DVR viewers don’t skip the commercials, even though they have a button that lets them do so with relative ease.  For some shows, including “Heroes” and “Fringe,” actual ratings jumped after taking the new data into account.  The DVR, seen as the destroyer of commercial television, may save the major networks, which are averaging a 10% increase in ratings under the new system.  “It’s completely counterintuitive,” the article quotes the president of research for NBC.  “But when the facts come in, there they are.”

Ah, facts.  The hobgoblins of pundits everywhere.

So is Hollywood dead or is it doing better than ever?  Let’s split the difference here.   The content industries are clearly in crisis.  But their doom is not inevitable.

Sandoval is right that digital technology, held back for years by litigation and cost, is now in the midst of thoroughly disrupting the entire content supply chain, from creation through consumption.  The lawsuits have failed (the MPAA recently fired its general counsel in a housecleaning) and, thanks to Moore’s Law, digital content is everywhere.

Sandoval  thinks that the availability of cheap copying and rebroadcasting technologies (file-sharing, streaming, and of course the Internet everywhere) poses an insurmountable foe for the content industry.  After the fall, he says, “What will come out the other side is still uncertain but will likely be very much smaller.”

I don’t agree.  In fact, I think the answer is just the opposite, and the DVR data Nielsen is now collecting (in the teeth of initial opposition from the broadcasters, who thought it would lower their commercial-viewing share points) gives the best clue as to why.  More on why in a moment.

First, let’s be clear on the source of the crisis.  Though it’s convenient for media executives to see it this way, consumers aren’t evil–they aren’t breaking the rules because they hate rules.  They’re breaking them because they want something they aren’t getting.  And they don’t understand why broadcasters would object to their efforts to enjoy entertainment content however they like.  Legally speaking, we’re all felons.  But who taught us to think of broadcast content as something that magically appeared on the TV for free in the first place?

Consumers break the industry rules (and, often, the law of copyright) not because they want to destroy the industry but because they have access to technology that lets them do something they want to do but otherwise can’t.  Consumers want to watch what they want, when they want to, on whatever device they want it.

When the only way to do so was on the broadcaster’s timetable, on media (over the air, cable, videocassettes, DVDs, Blu-Rays) controlled by content owners, paid for by advertiser support, media purchase, cable subscription fees, or all of the above, that is the way media was consumed.

Now that there are other options–including legal ones such as Hulu (ad-based), iTunes (fee-based) and Netflix (subscription-based) that remove some of the artificial constraints on time, quality, media, and frequency of viewing.  Consumers are embracing these, even as they continue, in smaller numbers, to buy media versions of movies and TV programs.

Here’s the key point: they are consuming much more media, whether legally or otherwise. They want more choices and more content. If Hollywood won’t give it to them, the Internet will. But it’s not as if we really care who gives us what we want. We’re willing to make all manner of trade-offs on quality, cost, ease-of-use.  If, that is, there is a real choice.

Consumers will always reject artificial constraints where technology allows them to do so.  Inherently, they understand that information is an inexhaustible commodity–that no matter how and how often and in what quality they watch “Star Wars” or last week’s “Flash Forward,” the programming is still intact, undamaged, and available any time in the future for them or any other viewer–simultaneously, if desired.

Now that most everything has been translated to bits (or starts life that way in the first place), the curtain has been lifted.

There are two ways to make consumers pay for this content in a manner that that make it profitable for creators, distributors and others in the supply chain to continue to produce it.  One way, the pre-Internet way, was to give them no choice.  Watch these commercials because you can’t skip them.  Buy these videotapes because there’s no other media.  Pay your cable bill because that’s the only way to get the channels you want.

The second way, which will now determine who wins and who loses in the content industry of the future, is to use whatever information you can get your grubby hands on about what consumers are actually doing with technology and learn from it.

Now that both the content and information about the content have become digital, the media industry needs to learn what it is that consumers actually want–that is, what consumers actually value–and offer it to them.

The DVR data, as a  starting point, tells us two interesting things.  First, that many consumers don’t mind watching commercials, either because they like them, or they’re too dazed to skip them, or because they understand that the commercials subsidize the programming.  Media buyer Brad Adgate, quoted in the Times piece, notes something that hasn’t changed about the viewing experience:  “It’s still a passive activity.”

(To exploit that passivity, sponsors are going back to the original model of embedding product placements and commercials into the programming–a la “Top Chef” and “The Biggest Loser” and probably every other show that does it with more subtlety.)

But the second and more interesting insight from the DVR data is that resisting information because you think it will deliver bad news is a self-destructive behavior, especially during times of industry transformation.

Ten years into the digital revolution, Hollywood is still firmly stuck in the first stage of grief–denial.  Not only are they resisting change, they are resisting any knowledge about how the change is taking place.  Even when, as here, that knowledge tells them something valuable about how to thrive in the emerging new order.

(History repeats itself:  recall the industry reaction to the VCR, which MPAA President Jack Valenti famously equated to the Boston Strangler–the violent, insane destroyer of his industry.  In retrospect, the VCR saved Hollywood from itself.)

I don’t agree with Sandoval’s conclusion that the Hollywood of the future “will likely be much smaller.”  The popularity of YouTube and other user-produced content services, the explosion of cell phone apps for enjoying content, the success of Indy studios and niche channels, and the continued interest of consumers in “collector edition” and other high-end media artifacts all suggest that the public’s appetite for entertainment is unfathomable.

Three networks, we have already learned, aren’t enough.  Hundreds of specialty cable channels aren’t enough.  Content produced and delivered on a take-it-or-leave-it basis in a vacuum of consumer insight beyond gross demographics and what-worked-last-year strategies is no longer a sustainable model.

But what will come out “the other side,” as so often happens when disruptive technologies rewrite the rules, will be a much bigger industry, with more profits to share.  True, the Hollywood of tomorrow won’t look much like the Hollywood of today.  But then, the Hollywood of today has almost nothing in common with the original industry model, dominated by the studio system and a handful of powerful decison-makers.  For one thing, it’s a whole lot bigger by any measure.  Technology makes things better–always, if eventually.

Here’s what else the DVR data tells us.  In the future, information about media consumption will prove as valuable as the entertainment itself.  Strike that:  it’s already happened.  For the first fifty years of its existence, TV Guide, which merely printed local listings summarizing what was on the few channels a household received, made more money than all three of the major broadcast networks combined.

Existing players in the collapsing Hollywood supply chain can either learn new ways to add value and thrive, or they can continue to resist the inevitable, close their eyes to valuable data, insist on business as usual, sue everyone and everything, and go the way of buggy whips and analog broadcast.  Add value, as a client once summarized it for me, or adios.

I know which one I would choose.  But then, I don’t run a multi-billion dollar public company.

Yet.