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Ted Waitt takes on Hollywood

Gateway's CEO explains to why the entertainment industry's position on CD burning and copyright protection should have gone out with the Ziegfeld Follies.

If he finds himself dining at Spago anytime soon, Gateway CEO Ted Waitt isn't likely to receive any bear hugs from the Hollywood moguls who favor this perennial Los Angeles hot spot.

That's because Gateway's chief executive officer finds himself on the other side of a bitter digital divide from the entertainment industry over the issue of digital music downloads. Throw in an opportunity for a grandstanding politician or two, and you have the makings of a grand donnybrook.

Last month, Gateway began to campaign against a proposal by Sen. Ernest "Fritz" Hollings, D-S.C., that would shift the burden for copyright protection onto the shoulders of hardware manufacturers such as Gateway. The company, which has ambitions to become a larger player in music publishing and distribution, responded with a series of tongue-in-cheek television advertisements and public statements promoting legal digital downloading.

The entertainment industry was not amused. Music and movie studios are worried about the potential loss of billions of dollars due to illegal digital downloads.

But Gateway, which operates a site where people can legally download certain individual songs, says the wording of the Hollings bill threatens the future of CD burners. If there's a ban on this popular accessory device that allows people to burn downloaded music files to CDs, Gateway and other computer makers say it may reduce computer demand.

CNET recently chatted with Waitt on why the two industries are butting heads and whether it's at all possible to find a compromise that would satisfy both camps.

Q: What made you decide to step out in front of other tech companies to take on the music industry?
A: It wasn't our intention to take on the industry; it was our intention to speak out on behalf of consumers.

A risky move?
It was a bit of a risk. We were looking for ways to revitalize the Gateway brand and get back to being a voice for the consumer. It was funny: When we ran the radio ads, we had a line about copyright laws in there. Then we got a letter from an attorney who was involved in the music industry--and he was ecstatic about what we did. Only later was it that the industry got uptight. But we don't support stealing music. We wanted to educate them.

Did you expect the ferocity of the reaction?
No, not really. We thought it was the right thing to do.

What's to account for the response then?
You saw the same thing with digital music. I think (the music studios) could double their music sales with very targeted solutions, and we're willing to sit down and help them. But it's not our job to help them solve their business problems. I'm not in favor of stealing music. Technology people have as much interest in protecting patents as the entertainment industry.

They've criticized your commercials and the appeal to oppose Hollings' bill as a declaration of war. Have you felt any backlash?
Nothing you could point to specifically. But we didn't view this as a declaration of war. They do everything in an adversarial way because it's in their nature. They're trying to play defense to protect the old way of doing business, which has to evolve.

How do you expect to create a music service of your own if you have alienated the music companies?
We're working with EMusic and others. It might help get us to the table--if (the studios) can stop viewing us as the enemy. We want a solution as much as they do.

Do you see the Hollings bill as a serious threat, or a Trojan Horse for more piecemeal approaches.
It's not the end of the world, but it's also not the way to solve the problem. Our solution is that the music industry has got to get together among themselves and find a common way to do this. They'll have to get hardware people in, the Internet people in--and start building a new business model instead of saying, "Stop this." You can't stop it. CD burners shouldn't be considered contraband.

Hollywood is asking Congress to block DVDs with copy protection and is suing to stop sales of digital VCR and MP3 players. The technology people respond that's an antiquated--and useless--response. Why don't Hollywood and Silicon Valley better understand each other?
They speak different languages. The entertainment industry always chooses to fight things out through the courts and legislation. Technology people always think there's a business solution. Everybody has tried a variety of things, but it won't work until they get together and people can go to one place for all the music that's out there. Consumers don't know what label their favorite artist is on. It's irrelevant. Go back to the VCR analogy. They fought the VCR, but at the end of the day, the VCR created a whole new revenue stream for every movie release.

Is that all there is to it--just a difference in point of view? That is, Silicon Valley saying, 'Dudes, you just don't get it; there is no way to stop digital piracy?'
The technology industry thinks there's a way to solve it, but it's not to say all digital music is bad, so let's keep using CDs.

Do you think music downloading from a Kazaa or Morpheus site is stealing?
I never said that. I don't think that's necessarily right, but all digital music isn't bad. If you buy a CD and want to put your favorite songs on one CD, you should be able to do that. The Hollings bill wants to redefine fair use. But I have never advocated stealing music.

But if I download music from Kazaa, am I in violation of the law?
Not all (downloading) is illegal. Wouldn't it be great if you could go to a service and say, "Here's my 100 CDs, and I want to listen to them in mixed format anywhere. Now, teach me about new music in streaming format, and if I like it, I can click and buy in a radio format." There are other ways of doing it, but nobody wants to go and listen. Last weekend, I was going on a trip and went to two stores looking for CDs. I couldn't find them, so I went to the Web, looking a legal way to download, but it wasn't there. I didn't do it personally, but a friend loaned me a copy--and then I lost the CD anyway. That was the only way I could get the song. But I was willing to pay for it.

Do you download and then burn music CDs?
I don't spend a lot of time doing it, but I have done--just from a research standpoint.

Do you plan to continue your campaign?
We're going to do a variety of things. It's more about the public education of the issue. We'll have more things in July, utilizing our training facilities to educate people about what's legal and what's not.

OK, a couple of business questions. For a lot of this year, you've been cutting prices and sacrificing profits to build market share. IDC had you flat in the first quarter compared with the fourth quarter. I'm not bringing any news when I say it's a still a tough market. Will the success of your strategy depend upon a real turnaround in the economy?
Our strategy's not based on share. It's growth based on fixed cost structure. We're pricing products as if we were twice our size. Our consumer business was sequentially up in the quarter for the first time in the history of the company, and we're continuing that momentum. What's going on with HP and Compaq means there's share up for grabs. I could debate the IDC numbers, but we feel real good about momentum in the business.

If the turnaround stalls, will you consider closing the rest of the Gateway stores to contain your costs?
We're committed to the stores. We're looking at each one on a store-by-store basis...If the economy stalls, it will just take longer, but we'll keep plugging away.