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SAN FRANCISCO -- PayPal, the online payment service owned by San Jose-based eBay (EBAY), is backtracking on its policy against processing sales of e-books containing themes of rape, bestiality or incest after protests from authors and anti-censorship activist groups.

PayPal's new policy will focus only on e-books that contain potentially illegal images, not e-books that are limited to just text, spokesman Anuj Nayar said on Tuesday. The service will still refuse, however, to process payments for text-only e-books containing child pornography themes.

The revised policy will also focus on individual books, rather than entire classes of books, he added. E-book sellers will be notified if specific books violate PayPal's policy, and the company is working on a process through which authors and distributors can challenge such notifications, the spokesman said.

"This is going to be a major victory for writers, readers and free speech," said Mark Coker, founder of e-book distributor Smashwords. "They are going to build a protective moat around legal fiction."

PayPal warned Smashwords and some other e-book publishers and distributors earlier this year that it would "limit" their PayPal accounts unless they removed e-books "containing themes of rape, incest, bestiality and underage subjects."

PayPal's

PayPal is relaxing the policy after the main credit card companies made a distinction between extreme pornographic images and e-books that explore such topics with only the written word.

PayPal told e-book distributors earlier this year that the original policy was in place partly because the banks and credit card companies it works with restrict such content.

However, Doug Michelman, global head of corporate relations for Visa, suggested that the company would not crack down on e-books that explore such topics, according to a letter he wrote that was posted on the blog Banned Writers. A Visa spokesperson confirmed that the letter was real.

"The sale of a limited category of extreme imagery depicting rape, bestiality and child pornography is or is very likely to be unlawful in many places and would be prohibited on the Visa system whether or not the images have formally been held to be illegal in any particular country," Michelman wrote. "Visa would take no action regarding lawful material that seeks to explore erotica in a fictional or educational manner."

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Protests force PayPal to drop attempts at e-book censorship

PayPal has found itself at the center of a heated debate over online censorship after demanding that e-book publishers remove from their marketplaces titles with objectionable themes of rape, bestiality, incest and underage sexual activity.

PayPal, the primary payment services provider for independent online publishers such as Smashwords, has attempted to clarify its position, explaining that the decision to lean on e-book merchants is consistent with a longstanding usage policy and was motivated by the risks associated with trafficking in erotica that runs afoul of the terms of service of its financial services partners, seeking to tamp down allegations of censorship.

"PayPal is a payments company. The right to use PayPal's service is not the same as the right to speak," Anuj Nayar, PayPal's director of communications, wrote in a post on PayPal's corporate blog.

"Unlike many other online payment providers, PayPal does allow its service to be used for the sale of erotic books," Nayar said. "We believe that the Internet empowers authors in a way that is positive and points to an even brighter future for writers, artists and creators the world over, but we draw the line at certain adult content that is extreme or potentially illegal."

PayPal began approaching e-book publishers in February with what Smashwords has described as an ultimatum, insisting that the companies remove erotica titles containing objectionable content or see their accounts deactivated. Other affected companies include BookStrand.com, All Romance eBooks and eXcessica.

In the time since, PayPal has been in talks with the e-book publishers, and Nayar noted that the company has not severed its ties with any of them as it attempts to reach a solution. Smashwords, which has been among the most vocal about the imbroglio, has said that PayPal's enforcement team has been helpful and that talks have been productive, though it acknowledges that there is no clear and simple path forward.

Smashwords founder Mark Coker has also pointed out that PayPal is within its legal rights to bar payment services to marketplaces trading in content that violates its policies, and that, moreover, the crackdown on objectionable erotica comes at the behest of credit card companies, credit unions and other financial partners. Nevertheless, he is urging PayPal to relax its position, arguing that the company is unfairly targeting writers of erotica while the policy, carried to its logical extent, would also ban the sale of controversial mainstream literature such as Vladimir Nabokov's Lolita.

"There's no easy solution. Legally, PayPal and the credit card companies probably have the right to decide how their services are used. Unfortunately, since they're the moneyrunners, they control the oxygen that feeds digital commerce," Coker wrote in an email to Smashwords authors and publishers.

"Regardless (of) one's opinions about these objectionable topics, we view this attempted censorship as a bad precedent. Fiction is fantasy. It's not real," he said.

But PayPal disputes that point. Not only do e-books about subjects like rape and bestiality often contain objectionable images, they can fall into a dubious genre that is not entirely fictive, according to Nayar.

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PayPal Erotica Ban Touches Off Internet Censorship Debate

The companies, now on trial in India, potentially could be fined and see executives jailed over not censoring certain content.

In India, Web censorship is a huge concern. Google and Facebook are learning that the hard way.

The companies, as of today, are on trial in India over claims that they didn't censor content posted on their respective Web sites. According to The Wall Street Journal, which first reported on the case, Indian journalist Vinay Rai brought a criminal complaint against the Web giants, along with 10 other firms, alleging that their lack of censorship "will corrupt minds."

Censorship demands have long presented legal issues for Google and Facebook. Many countries have requested that the companies censor content to comply with local law. China has arguably been the most forceful in its call for censorship, going as far as blocking certain sites within its borders. A couple years ago, China forced Google to censor Web results. Soon after doing so, Google changed its mind and moved its Chinese search operations to Hong Kong.

So far, India hasn't gone as far as blocking Web sites, but the country has made it clear that it wants all "objectionable" content to kept away from its citizens. According to the Journal, Google and Facebook have said in India that they would block certain content, but only if they're notified of an infringement. The companies' core defense centers on India's information technology law, which they claim protects them against content added to sites by users.

A battle between the online giants and India seemed to be brewing in December when the government demanded that all Web companies prescreen user content before it hits the Internet. India's acting telecommunications minister, Kapil Sibal, said at the time that the move would limit the disparaging or inflammatory content that has found its way onto the Internet.

In a previous meeting with lawyers from several online firms and Internet service providers last year, Sibal showed them a Facebook page that included critical remarks about India's Congress Party president, Sonia Gandhi, according to a New York Times report. Sibal said he would want that kind of content erased before it had a chance to make it online.

The stakes are high for both Facebook and Google. According to lawyers with whom the Journal spoke, Facebook and Google could face fines, if found guilty of violating India's online censorship laws, and its executives could face jail time.

Neither Facebook nor Google immediately responded to CNET's request for comment.

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Facebook, Google in India's crosshairs over Web censorship

Heard of Saman Arbabi? The creator of the satirical Iranian TV and radio show "Parazit" was the sole panelist at the SXSW talk, "Iranian Outlaws: Satire Vs. Censorship." From the start, Arbabi inspired great expectations. His intro included a clip of Jon Stewart loving on him: I am proud to be considered in the fraternity of humorists that you guys are in," Stewart said, when Arbabi and his co-host, Kambiz Hosseini, visited "The Daily Show." (We posted the extended interview with Stewart below, full of much more loving-on).

Before launching what's arguably Iran's best and least-loved show, Arbabi, who grew up in the US, worked as a war correspondent for Voice of America. While working, he began to draw cartoons for the hell of it. Their subject was nearly always the hijab -- with a recurring joke centered simply on the image of a woman as a black mound with eyes. In one of his cartoons, an unidentifiable woman in full hijab appears on a milk carton, with the caption, "Have You Seen Me?"

"I found humor was more real than journalism," Arbabi said. He explained the particular targets he trained his sights on: the hijab, and the "hypocrisy" of Islamic tenets against drinking and gambling. "If you ever want to go to Vegas, pick a Muslim. They're beasts," Arbabi said.

To the left of Arbabi was a striking poster in service of the group hosting him, the Weapons of Mouse Destruction campaign. The poster is the work of counter-cultural iconographer Shepard Fairey, who enlisted Twitter co-founder Evan Williams to open his eyes for the camera:

Like Williams, Arbabi is the ideal poster boy for Weapons of Mouse Destruction, a social media-driven awareness campaign about government censorship in places like Iran and China. Arbabi's show is more than a nuisance for the Iranian government -- the way he describes it, "Parazit" is enemy no. 1.

The show began as a one-off experiment for Voice Of America. Emboldened by an online interest in his cartoons, Arbabi convinced his employers he could make them something like a hit. Today it's exactly that, despite the fact that Iran has declared "Parazit" illegal to watch.

"They started breaking down [satellite] dishes. You'd think they're after Bin Laden here," Arbabi said, noting that the government has invested $1 billion in developing a "halal" or Western-free internet.

But "Parazit" isn't any weaker for the counter-attacks. On the contrary, Arbabi claims the streets of Tehran are quieter on the mornings he airs, emptied of people watching the show. As of today, "Parazit" is five Facebook Likes shy of 837,000 (to put that in perspective, The Huffington Post has 554,000 Likes). What Jonathan Franzen criticized as a too-easy show of approval is in this case the opposite. Someone who chooses to Like "Parazit" is also implicitly choosing to let the Iranian government know about it.

For more information on Weapons of Mouse Destruction, visit weaponsofmousedestruction.org. "Parazit" episodes are available on YouTube.

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SXSW 2012: Saman Arbabi Talks 'Parazit' And Government Censorship In Iran (VIDEO)

Reporters Without Borders has updated its 2012 "Enemies of the Internet" listto include Bahrain and Belarus.

The updated list, which was released on Monday to mark what the organisation called "World Day Against Cyber-Censorship", still includes countries such as China, North Korea and Saudi Arabia from the previous year.

The Paris-based non-governmental organisation that advocates freedom of the press said that internet users in 2011 were "at the heart of the political changes in the Arab world and elsewhere".

In Bahrain, RWB said, the government "has bolstered its censorship efforts" in reaction to the pro-democracy uprising that began on February 14, 2011.

"Bahrain offers a perfect example of successful crackdowns, with an information blackout achieved through an impressive arsenal of repressive measures: exclusion of the foreign media, harassment of human rights defenders, arrests of bloggers and netizens (one of whom died behind bars), prosecutions and defamation campaigns against free expression activists, disruption of communications," the report said.

In Belarus, RWB said, "The Internet a mobilisation and information platform has received the full brunt of the authorities brutal crackdown on the opposition."

The report continued that "some 100 Belarusian journalists were interrogated in 2011 alone, and over 30 given prison terms".

Libya, where the government of Muammar Gaddafi was overthrown in a violent revolt, was removed from the list of "countries under surveillance".

"In Libya, many challenges remain but the overthrow of theGaddafi regime has ended an era of censorship," the report said.

Venezuela was also removed from that list, whereas India and Kazakhstan were added to it.

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Bahrain added to web censorship blacklist