DMCA, DRM & Piracy

Yesterday, the Cato Institute issued Tim Lee’s paper, Circumventing Competition: The Perverse Consequences of the Digital Millennium Copyright Act. Reaction has been swift and favorable.

• Blog top-dog BoingBoing says “it takes sharp free-market types like the Cato characters to bust out elegant critiques like this one.”
• Heavyweight SlashDot congratulates Lee and Cato for “putting into words what most of us know already.” (And the discussion threads prove that many slashdotters have trouble putting ideas into words.)
• Our friend Instapundit quotes the money quote but does not say “read the whole thing,” as he does so often. No one ever reads the whole thing – that’s why we read blogs – so Glenn is obviously using reverse psychology.
• Confessing to a personal relationship with the author, Julian Sanchez of Reason’s Hit and Run calls Tim’s a “sharp new paper.” Oh my, do the comments get testy quickly.
• Mike of TechDirt gives the paper a shout. (We’re glad it wasn’t Carlo.)
• Longtime champions EFF welcome the contribution of “free marketeers” to their effort.
• PublicKnowledge welcomes this “voice on the right.” Only Kartoon Kato is “on the right” – Cato is neither left nor right, rather the best of both – but the welcome is welcome all the same.

These, and other examples, show that Tim’s paper, especially coming as it does from the Cato Institute, is enjoying enthusiastic appreciation. It’s a needed addition to the discussion of copyright law, protection, and business in the digital age.

I’m taking bets on when the paper is blogged on IPCentral . . . !

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In my DMCA paper, I point out that consumers with non-typical hardware and software devices, such as Linux users and audiophiles with high-end audio systems, are harmed by the DMCA. Reader Ben Galliart writes to point out another marginalized group that is particularly harmed by the DMCA: the disabled.

The anti-competive nature of the DMCA also extends to hurting the disabled. The American Disablities Act was passed to force employers to provide the additional resources to disabled employees to give them an equal opportunity to accomplish a job. Or put another way, it uses legal requirements to encourage addressing the technical obstacles to assisting the disabled. But the DMCA does the exact opposite by legally enforcing artifically created obstacles.

For example, eBook access for the blind. The technical obstacle for using a text to speech software package is getting the book in a format that the software can read. While the ADA can require an employer to provide a sound card so that use of text to speech software is possible, eBook’s right management allows the author to disable access to the feature. Any further attempt by the employer to further assist the employee for use of the eBook via text to speech is criminalized.

A publisher of an eBook usually has little to loose by disabling the text to speech software. Most points of sale for eBooks do not provide information on what eBooks disable the feature. Instead, the advantage is provided that any future audio version of the book will not have to compete with the text to speech option. Even if the author then does choose to provide a CD version of the book, it does not provide the same degree of control over the reader voice (speed, pitch, inflection, etc).

Lastly, DMCA also allows the creator of the eBook reader software to restrict access to text to speech functionality to the built-in feature. While a third party might provide improved features (such as an improved text to speech voice), the author of the eBook software can lock out the third party from accessing the material. The DMCA creates an enviroment where it is to the software author’s advantage to lock out third party plug-ins as to avoid having to compete with it’s features. The software author then can require the customer to purchase an upgrade to get features that otherwise could have been provided by a third party for a version of the software the customer already owns.

An excellent point!

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Championing “openness” is in vogue now, be it net neutrality (in the telecom sense) or what is occurring in France with its online copyright bill that would mandate the sharing of proprietary digital rights management systems (call it DRM Neutrality?). But do we really want openness mandated by government? What happens to the freedom to innovate via closed systems?

Being “open” sounds great in theory. But it seems to me that the notion of openness has been hijacked by competitors (and those politicians that receive Dollars or Euros from these competitors) of those successful companies that employ closed systems.

Why be pro-closed? Well, it is often closed systems that can deliver greater value to consumers and society. One of the benefits of closed systems is to take what appears to be separate parts and bundle them together into one easy to consume package.

Let me state the obvious. iTunes was designed primarily to play Apple’s proprietary, rights restricted media and to interoperate with Apple’s own iPod hardware device:and consumers love it! Unfortunately, many regulators overlook the benefits of bundling and tying products together. This was a subject of a recent article of mine.

Innovation prospers when we allow firms to engage in different cost recovery strategies. Check out this history of iPod–Apple has clearly been innovative to the benefit of consumers.

But we know that this really isn’t about consumers – in Europe, competition law is about harm to competitors whereas in the U.S. the legal standard refers to consumer harm. Sometimes, though, helping competitors in the name of competition may hurt consumers. How is iTunes going to convince the music and movie industries to license it content if there’s no assurance that Apple can make of down-the-line protection?

Interestingly, the French law addresses copyright, not competition law. According to a Reuters news article, a French politician said that this modification to copyright law “should prevent the emergence of a monopoly in the supply of online culture.” Why effectuate competition law through copyright law? If there is anticompetitive behavior, it seems to me that the more principled route is through direct enforcement of antitrust law, not broad-strokes legislation in a different (albeit related) area of the law.

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Opining about French politics is difficult because I don’t speak French, and so I’m limited to third-hand reports by reporters that may or may not know anything about technology law. As a result, I’ve had trouble figuring out what the French copyright bill now under consideration actually does. In my prvious post, I assumed that it was a deregulatory measure similar to the DMCRA. But after reading this AP story, it appears that I was wrong:

According to the latest amendments, copy-protection technologies like Apple’s FairPlay format and Sony’s ATRAC3 must work with competing services and players. Companies that refuse to share all essential information with any rival that requests it would be ordered to do so by a judge, under threat of fines. The draft law could force Apple to let French iPod users buy their music from download sites other than iTunes. Owners of other music players would also be allowed to buy songs from iTunes France.

This is very different from reform proposals here in the United States, which have the much more modest goal of undoing the anticompetitive features of the DMCA.

Obviously, this is partly a reflection of France’s tendency to over-regulate everything in sight. But I think it may also be a cautionary tale for libertarian DMCA supporters. There is likely to be a backlash against DRM technologies when consumers discover that they lock them into using products exclusively from a single vendor like Apple. When that happens, there are two ways the law might be changed. One is the Boucher approach: reform the DMCA to allow (but not require) private companies to create software to enable interoperability. The other is the French approach: leave the DMCA’s regulations in place, and layer another level of regulations on top dictating that companies must ensure their DRM is interoperable with competing DRM.

I think that given the three choices (the DMCA, Boucher, or France) the French solution is clearly the worst. So not only is Boucher’s DMCA reform good policy, but it will also help to prevent a consumer backlash that could lead to bad legislation on the French model.

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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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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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Ars reports that Sony has opted not to cripple its next-generation video products for customers with analog TV sets:

The Image Constraint Token is part of the AACS (Advanced Access Content System) used in both next-generation optical formats. A couple of months ago, we reported that ICT would be used in both Blu-ray and HD DVD to downsample video from its 1920×1080 glory to a relatively crufty 960×540 if the player detected that it was hooked up to an analog HD display or any other display lacking an HDMI input. We also noted that use of ICT would be left up to the individual studios, rather than being made a mandatory part of the AACS spec.

Sony is the first studio to lay out its plans for how owners of older, analog-only HD sets would be able to watch Blu-ray content. According to Sony Pictures Home Entertainment Senior VP Don Eklund, none of Sony’s Blu-ray releases for the “foreseeable future” will use ICT to force downsampling. “We have no plan to implement the Image Constraint Token. All of Sony’s titles will come out of the analog output at full definition”

Eklund noted that while Sony is obviously concerned about piracy, it sees analog signals as a relatively small concern. Instead, Sony is banking on the AACS to keep the digital signal from being “intercepted” and preventing HD copies of its movies from turning up on Torrent sites and Usenet.

This was a sensible move on Sony’s part. Let’s hope the other studios come to their senses as well.

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Regular readers of TLF won’t be the least bit suprised to learn that I loved this criticism of DRM by Scott Granneman at Security Focus:

One of my favorite magazines is The New Yorker. I’ve been reading it for years, and it never fails to impress me with its vast subject matter, brilliant writing, and the depth, wit, and attention it brings to important matters. When it was announced over a year ago that The Complete New Yorker: Eighty Years of the Nation’s Greatest Magazine would be released on eight DVDs, I immediately put in my pre-order. After it arrived, I took out the first DVD and stuck it in my Linux box, expecting that I could start looking at the collected issues.

No dice. The issues were available as DjVu files. No problem; there are DjVu readers for Linux, and it’s an open format. Yet none of them worked. It turned out that The New Yorker added DRM to their DjVu files, turning an open format into a closed, proprietary, encrypted format, and forcing consumers to install the special viewer software included on the first DVD. Of course, that software only works on Windows or Mac OS X, so Linux users are out of luck (and no, it doesn’t work under WINE … believe me, I tried).

One of the great things about open standards is that they enable a breathtaking amount of division of labor. If I write this post in HTML format, and you have an HTML-compliant broswer, then I can be assured that you will be able to read my post. Maybe you’re using Internet Explorer on Windows. Maybe you’re using Firefox on Linux. Maybe you’re reading this on a BlackBerry. Doesn’t matter. As long as I follow the HTML spec, you’ll be able to read my post.

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