It’s an e-business enigma. PC owners are looking for more and more of their entertainment online, as Napster and its subscription-based successors have shown. And many of the companies that own today’s most popular songs, books and movies are eager to sell their content over the Internet-if only they can find a way that’s both convenient for customers and profitable for copyright owners. Yet many of the “digital rights management” companies that were founded to provide just such an online marketplace are shrinking or even disappearing from sight.

In the last eight months, a flock of content protection companies, including Buffalo, NY-based Reciprocal, San Jose, CA-based Vyou.com, Maynard, MA-based Digital Goods and Mountain View, CA-based Preview Systems, have been shut down or sold. ContentGuard, a Bethesda, MD-based Xerox spinoff (see “Digital Rights Management,” TR January/February 2001), has abandoned its content-publishing business, shrinking to a quarter of its former size in the process. InterTrust Technologies of Santa Clara, CA, the company that founded the digital rights management industry, has slashed its head count by 40 percent.

What’s going on? More than just a side effect of last year’s dot-com implosion, the digital-rights slump is in part a result of technological shortcomings. Content protection software is simply too obtrusive and confining to meet users’ needs, say observers. “The most important predictor of success [in digital rights management] is how transparent you can be to the end user, and the industry has fared poorly on that,” says Daniel Schreiber, CEO of Alchemedia, a four-year-old content protection firm based in Dallas, TX.

At the same time, many digital-rights efforts made the mistake of focusing first on fledgling consumer markets-for products like e-books-that suffer from a woeful shortage of paying customers. E-book sales have been so disappointing that the electronic-publishing divisions of several major publishers, such as Random House and Time Warner, have been closed, a fate also suffered by online e-book retailers such as Contentville and MightyWords. At ipicturebooks.com, a New York company that sells multimedia children’s e-books, a title that sells 1,000 units is “a hit,” according to CEO Byron Preiss. “It’s very difficult to sell [digital-rights] technology to companies that are no longer trying to sell content,” observes Schreiber.

In a way, it’s a classic chicken-and-egg question: is the digital rights management industry hampered by a failing market, or are e-books floundering for want of better digital-rights technology? Either way, publishers, record and movie studios, and other businesses haven’t given up on the idea of exploiting their valuable content via the Internet-nor are they contemplating distributing it in free or unprotected form, the way Napster once did for them.

The shakeout in digital rights management firms is prompting calls for new technology that protects more kinds of content and that works more invisibly. Preiss says technological limitations “have placed this business two years behind where it should be, but that’s about to change.”

In theory, digital rights management software should work entirely behind the scenes, preventing unauthorized or nonpaying users from viewing electronic content while giving legitimate customers the ability to read, print or share documents, depending on the rules specified by the content owner.

But if you’ve ever purchased a password-protected business report from a site like WetFeet.com, Hoover’s Online or MightyWords-or if you were one of the nearly half-million people who downloaded Stephen King’s encrypted e-book Riding the Bullet in March 2000-then you know that the process of obtaining a protected file can involve several disheartening steps. You may be forced to wait for a password to arrive by e-mail, for example, or you might have to download a special viewer rather than open the document in a simple Web browser (with its potentially piracy-inducing print, save and copy functions).

“The problem that digital rights management addresses is simple; the solution ought to be just as simple,” says Martin Lambert, founder and director of London-based content protection firm SealedMedia. “But to actually build technology that enforces a degree of control over content without creating some horrid security framework turns out to be despicably difficult.”

Another shortfall of most protection schemes is that they don’t yet allow portability. In most current digital-rights systems, the coded key for decrypting a piece of content is tied to the machine on which that content was originally downloaded. This system prevents indiscriminate copying and redistribution, but it also means, for example, that you can’t start reading an electronic novel on your PC then switch to your personal digital assistant when you leave the house. “It’s just not a seamless experience for the user, and many of them say, The heck with it, I’ll just go and buy the paperback,’” says Michael Letts, an editor at Seybold Seminars and Publications, a publishing-technology analysis firm in Media, PA.

Analysts say the content protection companies left standing, including Alchemedia and SealedMedia, have technologies that may break the usability barrier, finally enabling the serious online sales providers envision. “There are some extremely bright people working in this space who will be able to figure out what the consumer is willing to put up with,” says Letts. Alchemedia’s “Mirage” system, for example, does away with the requirement for special viewer software by making sure the decrypted form of a protected file appears only on-screen, never in random-access memory, where a computer looks for any data it’s trying to print or copy. That way, publishers can put content out in a format compatible with a regular Web browser, and “the fear about the save and copy buttons is neutralized. We don’t have to block those doors because the data in [memory] is still encrypted,” says Schreiber.

SealedMedia’s system, on the other hand, does require a special two-megabyte browser plug-in, but it stores decryption keys on a central Internet-accessible server, meaning that if you have the right password, you can access content from whatever machine you happen to be using. SealedMedia’s viewer can also handle audio and video content. “SealedMedia is providing us for the first time with a robust, convenient way to deliver multimedia e-books,” says ipicturebooks’ Preiss.

And publishers won’t be the only customers for the new breed of digital rights management. Alchemedia, for example, is targeting Mirage at companies that want to allow more collaboration across the Internet without giving away trade secrets. As Schreiber notes, “Boeing is not interested in selling their content for any price; they just want it to be confidential.”

And that means computer users, whether they’re ready or not, can expect to see protected content turning up in more and more corners of the Internet. “You’ve had one business model that has had 500 years to develop since Gutenberg’s printing press, and another one that is only three or four years old,” says Michael Miron, CEO of ContentGuard. “My own belief is that in five, six or seven years we will look back and see that our forecasts for the online content business were low.”