The DMCA, IBM Clones, and Intra-platform competition

I’m pleased to announce that my new Cato Policy Analysis, “Circumventing Competition: The Perverse Consequences of the Digital Millennium Copyright Act,” is now available for download.

A lot of DMCA critics have focused on how DRM undermines fair use by narrowing the ways in which users can consume the content they have legally acquired. That’s certainly a valid argument, but I tried to focus on the implications of another type of fair use: the fair use right to use reverse engineering to build a competing product. Prior to the enactment of the DMCA, the courts had consistently turned back efforts by incumbents to use copyright law as a way to exclude competitors from their technology platforms. Most famously, IBM was not able to prevent the creation of IBM clones, because a company called Phoenix used “clean room” reverse engineering techniques to develop a compatible BIOS without directly copying any of IBM’s copyrighted software.

The DMCA throws that principle out the window, because it makes it a crime to “circumvent” a DRM scheme–that is, access the content without first getting the permission of the DRM creator. As a result, it’s effectively illegal to build third-party software that interoperates with software like iTunes or Real’s video streaming software.

What’s most troubling about this is that it locks out small startups and individual hobbyists from building software or hardware that works with a dominant media platform. Inter-platform competition is good and important, but intra-platform competition tends to be a much more important driver of technological progress. Again, the PC platform is the poster child: it has worked so well because new entrants (Phoenix, AMD) have been able to offer products that serve as drop-in replacements for existing PC components. They didn’t have to develop a whole new PC platform in order to sell their BIOS or CPU–and they didn’t need IBM or Intel’s permission to do so.

In contrast, if someone wants to enter the digital music market, they can’t make their products compatible with the dominant technologies without the permission of the incumbents. And, not surprisingly, Apple has chosen not to give anyone permission. As a result, there’s not possibility for some scrappy startup to do to Apple what Phoenix did to IBM.

As I document in the paper, the same problem exists with virtually all post-DMCA video technologies. The next generation of digital video platforms–including Blu-Ray and HD-DVD, Internet streaming formats, and the CableCard–are all wrapped in DRM controlled either by an individual company or an industry cartel. They have strict rules about how approved devices are designed that typically dictate in great detail what features compatible devices may or may not have. If you’ve got an idea for a digital media product that doesn’t meet their checklist, they’re likely to tell you to take a hike.

I expound on this and other points at much greater length in the full paper, which is available from Cato’s web site.

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