Rare Good Sense from the French

by on March 20, 2006

Tyler Cowen links to a story about France’s new DRM law. Cowen is a very smart guy and he’s forgotten more economics than I’ll probably ever know, but I think he misses the boat on this one:

A legally forced unbundling could induce Apple to leave the market, if only to send other governments a message. More generally, song prices are relatively low early on to induce people to lock into the technology. If you forbid lock-in, early period song prices and indeed hardware prices will be higher than otherwise (think of market exit as the limiting case). But will forced unbundling make prices lower in the long run, due to the growing competitiveness of the market? My guess is no. Something better than iPod will come along within five or ten years, so the relevant form of future lower prices is “higher quality.” Allowing monopoly profits, rather than confiscating them, is the way to get there more quickly and more decisively. By enforcing interchangeability at such an early stage in the process, the French will more likely get a lame rather than a cool version of a universal access platform. How’s that for lock-in?

In the first place, if this is anything like the Boucher bill, which it sounds like it is, it’s not a “forced unbundling” of anything. Apple will still be free to bundle however they like, and will be under no obligation to assist their customers in converting songs to other formats. All it does is repeal a ill-conceived law that previously banned unbundling by the consumer. This simply puts it on par with most other industries. Gillette may sell me razors in hope that I’ll buy blades, but it’s not against the law if I decide to use the razor for something else.

I’m not sure I follow the rest of his argument, but it seems to me he has things precisely backwards. Let’s say something better than iPod comes along in 5 years that’s not compatible with iTunes. Under the status quo, iTunes customers will be faced with a Hobbson’s choice: either they throw all their current music out and buy it again from the new vendor, or they stick with the iPod. Many of them will stick with the iPod, because while the new platform may be better, it’s not enough better to justify throwing a music library that might be worth hundreds of dollars. This legislation lowers switching costs, thereby making it less likely that consumers will stick with an inferior device to avoid re-purchasing their music.

Now, obviously, if the French were mandating a particular form of interoperability–say, requiring all devices to support a format designed by the French government–that would obviously be a bad thing. But at least from the news reports I’ve read (I don’t read French so I could be wrong) that’s not what the law does. It simply says that consumers (and software companies) may convert legally purchased music to a different format so it can be enjoyed on new devices. So I don’t see why this would make the lock-in of inferior technology more likely.

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