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Here we'll explore the nexus of legal rulings, Capitol Hill policy-making, technical standards development, and technological innovation that creates -- and will recreate -- the networked world as we know it. Among the topics we'll touch on: intellectual property conflicts, technical architecture and innovation, the evolution of copyright, private vs. public interests in Net policy-making, lobbying and the law, and more.

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May 25, 2004

UnFairPlay: Von Lohmann on DRM v. Competition

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Posted by

Fred von Lohmann over @ Deep Links, speculating on the real reason that Apple uses FairPlay DRM:


On a panel (PDF) a few weeks ago, I asked the head lawyer for Apple's iTunes Music Store whether Apple would, if it could, drop the FairPlay DRM from tracks purchased at the Music Store. He said "no." I was puzzled, because I assumed that the DRM obligation was imposed by the major labels on a grudging Apple.


Thanks to the recent Berkman Center report on the iTunes Music Store, I think I understand.

So you're Apple, and you make all your money selling iPods. You invest in the Music Store to make the iPod even more attractive, never intending to make much margin on the 99 cent downloads. But here's the problem -- you really don't want every other maker of portable digital music players to free-ride on your Music Store investment. After all, the Music Store is supposed to make the iPod more attractive than the competition.

Here's where FairPlay comes in. It's a great barrier to entry that keeps the iPod as the exclusive device for the Music Store. Competitors who dare to reverse engineer the protocols or otherwise support interoperability find themselves staring down the barrel of the DMCA.

Comments (18) + TrackBacks (0) | Category: IP Abuse


COMMENTS

1. Ernest Miller on May 25, 2004 1:52 PM writes...

The only thing surprising about this is the honesty of Apple's lawyer. As I've said before, DRM is not about stopping piracy, it is about controlling competition in other markets.

Permalink to Comment

2. m on May 25, 2004 3:11 PM writes...


Not fair, this is more a product development issue. Manufacturers in other industries have long tied in products with consumables. The courts have taken a perspective that so long as the overall market isn't competitively dampened, then it's not going to interfere.

For example, in the UK, the courts (British Leyland) held a "right to repair" that overrides any registered rights.

Later, they decided differently in Canon KK wrt. replacement printer cartridges.

The argument in the latter case is consumers are aware of all the facts, and there are multiple printer manufacturers out there. It's not as if the manufacturer has an essential facility and is trying to tie in the consumer. The consumer is free to move to other producers who may provide better offering.

The same issue is repeating itself here: the DRM is used by the manufacturer to tie product to consumable. Generally though, there are going to be many online music providers, and this will be a way to differentiate and create some lock in.

Whether or not there is an overall advantage or disadvantage as a result of this (taking into account the larger scale competitive dynamics that result from the economies of the scale that a producer can obtain by some limited form of lock in) is arguable.

Of course, I don't expect copyfight to take an objective perspective and consider all the facts.

Permalink to Comment

3. m on May 25, 2004 3:21 PM writes...


Note, UK/EU patent, copyright and design laws either have case law or statutory provisions for excluding "must fit" and "must match" aspects from protection, effectively the case of "interoperability", however this exclusion does not apply to "modular systems". The principles here easily translate into DRM.

In 5-10 years time, the courts will have applied these existing principles and balanced them with unfair competition and antitrust considerations.

Permalink to Comment

4. Ernest Miller on May 25, 2004 3:30 PM writes...

Well, generally we are discussing US law in this forum. The question is not whether Apple should be permitted to create DRM, but whether the law should make it illegal for others to reverse engineer that DRM and implement alternative platforms. Why should the law protect manufacturers against innovative competitors? We already have patent, copyright and contract. Apple could create a patentable DRM scheme if they chose. Apple could force purchasers of iTunes to sign a contract forbidding use of other devices and enforce it. Why the DMCA?

Permalink to Comment

5. Brad Hutchings on May 25, 2004 4:01 PM writes...

Whether or not $70/million a year and growing is chump change or whether it's about locking in the iPod. Apple will make more money by having some kind of DRM than by having none. Ask anyone who sells software (shareware, commercial, or otherwise) on the Internet. Just having registration codes dramatically increases sales.

Until the copyfight addresses that issue with regards to DRMish things, you're not going to be taken seriously.

Permalink to Comment

6. Ernest Miller on May 25, 2004 4:41 PM writes...

Brad,

That is not all clear to me. If Apple wasn't using DRM (say, for example, they provided MP3 files for sale), isn't it possible that Apple would sell more MP3 files to the owners of other digital portable music players and not just to owners of iPods? Even if your thesis is correct (and I'm not granting that it is in this case) and iTunes sales to iPod owners decrease, might not sales to Nomad Zen players increase (and more than make up for the difference)?

In any case, the issue with DRM isn't piracy, it is about other impacts on the market having nothing to do with piracy.

Permalink to Comment

7. Brad Hutchings on May 25, 2004 5:50 PM writes...

Ernest,

Let me offer a couple links from the shareware community that support the perspective that people tend to buy when they have to:

Abrosia President's letter

Why do people register?.

As a software developer myself who plays in the shareware/Internet market, this is dead on with my experience over 10 years. Reg codes on software increase sales substantially.

Outside the copyfight echo chamber, it is common business sense that if you don't give people a reason to pay, they will take for free. Now, perhaps you guys are really for free culture where nobody can charge for content. That's fine-- you're entitled to promote whatever you like in the marketplace of ideas -- but don't wrap it up in preaching that DRM means less money for sellers. That is just total BS.

Rereading the posting, it is just so "turd in the punchbowl" (pardon the expression). No kidding that Apple would like to sell you tunes that play best with its iPod. No kidding that is the business model here. If you don't like it, how hurt are you if you don't buy in? If iTMS is a loss leader, why should Apple be required or expected to make iTMS tunes easily available for all other players? As an Apple shareholder, I'm glad they are providing a cool service and making money. As an iPod and iTMS user, I could not be happier with the whole system, including the unbelievably low price they deliver the hardware and music for. So that's what you're up against. Real, informed, thinking customers like the iPod and iTMS. FairPlay DRM is so not an issue except to the self-identified anti-DRM crowd.

Permalink to Comment

8. Ernest Miller on May 25, 2004 6:27 PM writes...

Brad,

The shareware argument is not relevant. I'm not arguing that iTunes should let people download for free and then pay a fee to "register" their music, as is done in the shareware world. If you want to download a song from iTunes you would have to pay before download, it is just that the downloaded song would not be unencumbered with DRM.

In any case, I've never made the argument that DRM doesn't mean more money for sellers, except in specific circumstances. My argument has always been that DRM is not an effective anti-piracy method, but is used for other reasons (most of which are worth money to the users of DRM). See this post of mine:
Why Use DRM If It Doesn't Work?
http://www.corante.com/copyfight/archives/003559.html

Fred isn't saying that DRM isn't valuable to Apple, it is, but not because it prevents piracy (it doesn't). It is valuable to Apple as an anti-competitive method. The question I raise is why, then, should the government support such anti-competitive actions with the DMCA?

Let Apple use DRM, let them use patent, or contract to the extent antitrust law permits. However, why must we give them the DMCA to defend anti-competitive behavior? If the DMCA is justified as a protectin for anti-competitive behavior, then a law that makes interoperability generally illegal is also justified.

Permalink to Comment

9. Brad Hutchings on May 25, 2004 9:15 PM writes...

Ernest,

The shareware point is quite relevant, and probably has much more to do with individual customer psychology than it does with transaction costs and the like. When you have a relatively exclusive right to sell something and you make a little effort to make people aware that you have that right, you get a higher level of compliance (if price is fair, etc.) than if you don't make people aware. Often, making people aware is a process of making them do some small thing to comply that demonstrates they have purchased or consciously do something to circumvent. Now, whether there is DMCA or not, this dynamic will hold. It predates the DMCA. Enough people are not thieves all the time with or without DMCA that there are scalable business models based on the premise.

The problem with Fred's argument is that it is BS. I play loads of iTMS music on non-Apple, non-iPod players. I simply burn a playlist to CD and throw it in the car CD changer or home stereo. Most MP3 palyers have software that can rip a CD. So Fred really has a non-starter argument here. My Mom even manages to burn CDs for her car, so I know for a fact that reasonably dexterous non-techie people can do it!

Yeah, there is a high level of integration between iTMS and the iPod, and Apple is holding that close to the vest. But Apple is not excluding other players from using iTMS music. You jut have to burn a CD, which is usually a very convenient intermediate format.


Permalink to Comment

10. Ernest Miller on May 26, 2004 12:52 AM writes...

Brad,

And what part of "you have to pay to download from iTunes" doesn't make the customer aware that you have an exclusive right?

First, iTunes DRM does prevent full compatibility from other manufacturers. Yes, consumers can get around it, but other device manufacturers can't make it even easier for them.

Second, Fred's argument is that this marginal increase in difficulty in shifting formats from DRM to an open format is enough to dissuade some customers. This creates at least some positive, but anti-competitive benefit for Apple. If there were no benefit, why would they do it?

What, exactly, is your argument now?

Permalink to Comment

11. Brad Hutchings on May 26, 2004 4:05 AM writes...

Ernest,

If there is no DRM and the customer gives a copy to a friend, that friend isn't necessarily informed that he is expected to purchase the music. With software (shareware and reg coded commercialware), if you give a friend a copy, you also have to give the reg codes. Developers typically track who is issued these things, and one of the articles I linked to above actually gives some numbers based on the scheme, showing that the closer (within reason and end-user convenience) you track these, SURFREAKINPRIZE, the more people who actually register! Don't protect it and nobody will pay for it. Protect it, and of course you get the script kiddies and malcontents and axe-grinders who wanna play Promethius with your business, but for the most part, it gives reasonably honest people a mechanism and an incentive to be honest. I have no doubt that this dynamic plays out with digital content.

The official Copyfight position seems to be that Apple uses the DMCA to protect its DRM which it uses to keep market share in player sales and that such use of the DMCA is wrong. While nobody would deny that Apple uses iTMS as a vehicle to sell iPods, frankly, you should check the air ducts for crack. With or without the DMCA, there would be DRM on legal Internet music from the major labels. Yes, we know, Apple knows, and the labels know that no DRM scheme is unbreakable, just as software developers know that know reg code scheme is unbreakable. Unauthorized large-scale distribution on the net is best dealt with by lawsuit rather than by DRM anyway, and that's exactly what the record industry is doing. If FairPlay bugs you so much, you can go find PlayFair on some Indian web site and have fun. Your not gonna get sued or arrested for downloading it. If you're not a total geek though, you might not figure out what to do with PlayFair. So realistically, the DMCA argument made by the Copyfight doesn't hold much water.

What FairPlay does is make iTMS possible. I have probably dropped about $500 over the past two years on an iPod Mini and iTMS. I don't buy albums on iTMS. I am extremely happy with what that money has bought me. I have never run into any personal use limits on iTMS music. Many of my non-technical friends feel the same way, and when you're talking about $5 a week for good tunes, we're happy to pay it rather than go to the minimal effort to get around it.

So who is funding your latest crusade anyway? Microsoft? Not that there's anything wrong with that, but the irony would be wild. Somewhere in the Berkman report IIRC I saw a claim that ther majority of other players use WMA. That ignores the iPod's and iTMS' respective market shares. They dominate because Apple had the foresight to do both the music and the player, and do them in a way that were palatable to both consumers and the recording industry. The DMCA really doesn't have much to do with the dynamic.

Permalink to Comment

12. Ernest Miller on May 26, 2004 7:34 AM writes...

Brad,

I really am not getting your argument here. You argue simultaneously that it is trivial to get around the DRM and that Apple uses the DRM to keep market share, yet the DMCA is not important?

With or without the DMCA there would be DRM, yes. However, without the DMCA PlayFair would be freely distributable and other companies could add PlayFair to their devices and sell them. Why the heck should the government defend Apple's DRM scheme? We already have contract, patent and copyright law.

As for who is funding my crusade? Uh, no one. I wish they did fund me. Heck, even the EFF doesn't throw a few bones my way and I rarely even get invited to conferences (guess I don't have anything interesting to say on these issues). As for Microsoft, I seriously doubt they would want people to be able to freely get around WMA's DRM. Microsoft still believes, and they might be right, that their installed based of Windows users will win out for them in the end.

Permalink to Comment

13. Brad Hutchings on May 26, 2004 2:41 PM writes...

Ernest,

You misstate my argument. I don't say it's trivial to break any particular DRM scheme, but you say that I did. I say that we all know they are breakable. And no, I am not saying the DMCA is meaningless in this context, but I think it means a lot less than you contend. Perhaps without the DMCA or some other hammer to use against people who would steal music (or enable its easy theft) by stripping out the DRM, the iTMS and other legal download servcies never launch, and those of us who enjoy some of the innovative features of the service like single track downloads are stuck buying CDs.

You still have failed to acknowledge that you can play iTMS music on any device using a CD-R as an intermediate step. This isn't a back-door and it isn't a hack. It falls within the use allowed by FairPlay and the iTMS user agreement. If other manufacturers want to play directly, then perhaps they should offer to pay their share of the costs of supporting the iTMS (which is marginally profitable) and those costs ought to be reflected in the price of compatible players. Apple has a deal with HP, so it is certainly willing to do some licensing at the right price.

BTW, do you want to "download PlayFair"? Google for it and find its page at mainstream Mac download site, MacUpdate.com. Despite the DMCA, it is still available. Aside from letting a company that makes players freeload off the iTMS, what is your point?

Permalink to Comment

14. Ernest Miller on May 26, 2004 4:09 PM writes...

Brad,

I never denied that you can burn and then rip to get around iTunes. But, if you can get around DRM so easily (using a CD-R as an intermediate step), then the only point of the DRM is to prevent interoperability between commercial devices.

iTunes has launched despite the fact that everyone knows that every bit of music on iTunes is freely available on the filesharing networks. So you argument that these services would never launch because of music theft doesn't really make sense.

Despite the DMCA? They just haven't been sued yet. If the DMCA were unimportant, why did Apple request that Sourceforge and then the Indian site remove the software?

How would a company freeload off of iTunes. Say, for example, I make a portable digital music player that plays iTunes files. People who buy my player then go to iTunes and pay money for iTune downloads. How is that freeloading? If my player violates copyright, Apple can sue me for that. If my player violates patent, Apple can sue me for that. Why do we need the DMCA?

Permalink to Comment

15. Brad Hutchings on May 26, 2004 5:11 PM writes...

Ernest,

Your logic is so circular, we could use it to calculate pi to a few zillion digits. You ignore subtlety and context. There is a certain subtlety about the whole copyright enforcement game. There will always be infringement, regardless of technology or laws. How one uses the tools at hand to legitimize the product, placate suppliers, and crack down on infringers (ranging from gross to negligible) are the tactical choices of the game.

Again, I did not say the the services "would never launch because of music theft". I said that without a tactic to combat theft and the tools of theft like DMCA letters, they may never have launched. The rights holders may not have felt comfortable enough to delegate legitimate publishing rights to an entity that didn't care enough or have the tools to protect the rights. Those tools may be a combination of technical, legal, marketing, etc. and they may very well be imperfect in practice, but good enough to sustain a market and offer a bonafide legitimate alternative to piracy.

I have never suggested that anyone go get an MBA, but Ernest, I'm going to suggest it for you so that you can wrap your head around dynamic business systems. With Apple's informally stated model of iTMS driving iPod sales, there is a cost component imputed on the iPod to support the iTMS system. This probably keeps iTMS prices lower than if iTMS existed on its own island. If you make a player that plays iTMS songs seamlessly without permission from Apple, you are freeloading, plain and simple. If enough companies do that and offer players at a significant price/feature advantage over the iPod and expect users to get their legal content from iTMS, prices at iTMS would go and/or Apple ends up losing money on the iTMS venture. Revenues of $100 million-ish a year don't make the iTMS a raison d'etre for Apple. If it is not driving iPod sales (or third party licensing), it might not be worth the effort.

Again, you're not wrong about the essence of the business model being that iTMS drives iPod sales. You're wrong that the DMCA is the lynchpin that makes this possible -- it's just an arrow in the quiver, and like DRM, there are practical ways to circumvent it -- and you're wrong that any other device manufacturer that wants to build players has a right to expect unfettered access to iTMS music.

Permalink to Comment

16. Ernest Miller on May 26, 2004 5:20 PM writes...

Brad,

If my arguments are circular, it is because they are responding to your arguments. I must also admit that the subtlety of your logic evades me.

"The rights holders may not have felt comfortable enough to delegate legitmate publishing rights to an entity that didn't care enough or have the tools to protect the rights." By you own admission, however, iTunes doesn't protect those rights by design. I don't see how these minor protections do anything to stop piracy. Every song ... every single one ... on iTunes is also on P2P networks. I fail to see how iTunes DRM has done anything to thwart piracy. Those who are honest pay for the convenience of iTunes, those who don't use the filesharing networks. DRM does nothing to inhibit piracy, it only serves as an anticompetitive lock in device (among the other reasons I cited in my post on the issue).

Fine ... Apple is subsidizing iTunes through iPod sales (which is not exactly their claim, since Apple claims a small profit off iTunes). It doesn't mean the government has to protect Apple's business. Lexmark sells printers at or near cost in order to make money off of ink cartridges. Other people sell cheaper ink cartridges that work with Lexmark printers ... should that be illegal because Lexmark doesn't like it? After all, aren't the ink cartridge manufacturers freeloading off of Lexmark?

So, let me get this straight ... if more people pay for music through iTunes ... then Apple will lose more money?

Without the DMCA there would be no barrier to people building iTunes compatible players.

Permalink to Comment

17. Ernest Miller on May 26, 2004 5:33 PM writes...

PS You can have the last word. I'm done with this thread.

Permalink to Comment

18. Brad Hutchings on May 26, 2004 7:57 PM writes...

Ernest,

For the sake of argument, let's adopt your position: that Apple uses the DMCA to restrict iTMS music to the iPod. Now, let's compare to what Lexmark does. Lexmark has used the DMCA to keep its ink prices artificially high, perhaps using the printers as loss-leaders to sell ink. I don't have a problem with that, but let's assume it's pure evil because it bilks innocent people out of their hard earned ink money. iTMS is just the opposite. If they are indeed using the DMCA as you say, they are using it to keep prices more affordable.

Again Ernest, an MBA might help you understand that if Apple has US$264 Million in iPod sales in Q2 2004 with a 20% gross margin (mini) and 23% gross margin (full iPod), and you could figure how that compares to a "small profit" (quote from Q2 2004 Apple conference call) for iTMS and appreciate the symbiotic relationship between iPod and iTMS. You might then appreciate how little iTMS does for Apple's bottom line on its own and how scaling it even 100 fold might not make it worth doing on its own.

I really don't get the opposition to this, unless it's just part of "oppose everything that isn't socialization of content". We finally have a private sector model for music sales that gives consumers unprecedented choice, low price, and easy to use products and services. All sorts of independent labels are playing, all the labels are happy to delegate their copyrights to an online channel, etc. The DRM is not Draconian, and judging by how much people are spending, they love the service. It is hilarious to see the copyfight crowd get their collective panties in a bunch over something that is sooooo cool!

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