Digital lock's rights and wrongs

When a piece of music is purchased you might assume you can listen to it in on any number of different devices: at home, in the car or on a portable music player. But, in the UK at least, you would be wrong.

"You can't copy any form of music or film without the copyright owner's consent," explained copyright lawyer Hamish Porter.

"So if you buy a CD from a record shop, even copying that CD onto your iPod is unlawful unless you have the copyright owner's consent."

In practice, stopping consumers making CD backups has proved impossible to enforce. But our habits are changing; around 10% of purchased music is now downloaded. This raises different issues.

"When you download an electronic copy of a musical work or a film from a website," said Mr Porter, "the copyright owner, as part of the contract under which you have downloaded it, has allowed you to copy that file onto a laptop or an iPod or onto a hard disc.

The problem, some believe, is that the music labels have made these contracts pretty restrictive by using something called Digital Rights Management (DRM).

Flaws

David Roundtree, the drummer with Blur told us: "The idea is that DRM is supposed to allow you to control the copying of your music.
"That's the point of it all. You're supposed to be able to sell something to somebody and restrict what they do with it after that."

Software is embedded in downloaded music, restricting which devices it can be used with and how many copies can be made.

Many in the recording industry claim DRM is necessary to fight music piracy.

"The problem that we really face at the moment is unfettered filesharing, free copying of MP3s," explained Richard Gooch from the International Federation of Phonographic Industry which represents all the major record labels.

"MP3 is fine, but what is not fine is taking artists' work and then swapping it with a large number of people over the internet for free."

DRM is the solution, the music industry says.

But Simon Wheeler, the Director of Digital Beggars Banquet Records, disagrees.

"DRM can allow copyright holders to protect their intellectual property but considering that over 90% of the music sold in the music market today is on a non-DRM format called the CD, then that's not necessarily an answer."

David Roundtree also has misgivings: "I think the fundamental problem with it is that it doesn't work. If it did work we would be having a rather different conversation.
"It's best summed up by the old computer security maxim: whatever you can do in software, you can undo in software. In the case of music, whatever complicated system you have in place, the music has to come out of two wires that you have plugged into a loud speaker.
"I can just as easily plug those into a recording device as a loud speaker, so the whole concept is fundamentally flawed."

Incompatible

There are two main kinds of DRM. One is based on Microsoft code and is used by most of the major download services.
But the one store which dominates the market, Apple's iTunes, uses a completely different and incompatible DRM system called FairPlay.
FairPlay allows music downloaded from the iTunes store to be played on computers running iTunes that have been authorised by the consumer and only one portable device, iPods.

Users can copy downloaded songs to a CD and then copy the disc back on to the computer so that the songs can then be moved to other portable devices - but the quality of the music is affected.

"I think the problem that we've got with DRM at the moment is the most popular music player on the market, the iPod," said Mr Wheeler.
"If you buy digital music outside of iTunes or an MP3 based service then you're not going to be able to put the music on your iPod. I think that confuses consumers more than anything else."

The fight back against DRM has already begun. In Europe, Apple's system is under fire for being anti-competitive and is facing legal action in various European countries.

Consumers are also making their voices heard through various organisations which oppose DRM, which they term Digital Restrictions Management.

While the major labels are still largely behind DRM, the independent sector prefers a different approach. Sites like E-Music and Audio Lunchbox sell DRM-free tracks, all of which come from Indie labels.

"I believe that if music was sold without DRM there would be less confusion for the consumer," said Mr Wheeler. "They wouldn't have to worry whether the track they brought from service X would play on player Y."

"They could buy with confidence knowing that they could take their music with them on whatever portable device they wanted.

"I think this growth in confidence for the consumers would lead to market growth and I think that's a real benefit for the industry."

DRM-free or otherwise, at least some more imaginative approaches to music services have been appearing. Spiralfrog promises ad-supported downloads - when or if it eventually launches.

Aime Street has launched. Here, the price of each track is decided by its popularity. Less popular or new tracks are free, rising to a maximum of 98 cents if their popularity increases. At the moment it deals almost exclusively in independent music.

Silent orchestration

From The Economist print edition

LAST month Ian Gillan, lead singer with Deep Purple, an elderly heavy-metal band, made an angry attack on the group's record label, Sony BMG. His tirade against the company's “opportunistic fat cats” was provoked by the CD release of a 1993 live performance, which the rock star claimed was the band's “worst gig ever”. On March 1st, two days after Mr Gillan's outburst, the European Commission announced its own re-release, saying it would look again at the merger that created Sony BMG in 2004. Europe's anti-trust authorities have until July 2nd to decide whether the merger should now be picked apart.

Before the merger, there were five record “majors”—Universal, Sony, Bertelsmann, Warner and EMI—which together accounted for 80-85% of recorded music sales in western Europe. Once Sony and Bertelsmann fused their record subsidiaries into Sony BMG, the merged entity had an average 20-25% share in national markets. This is not enough clout on its own to trouble the trustbusters: in fact Sony BMG has a smaller European presence than Universal, the leading record company. At issue is whether the four majors together might now reach an unspoken understanding about prices.

The evidence is not yet in. But what about the theory? Cartels—in which pacts among companies are formally agreed—are notoriously difficult to sustain, not to mention illegal in most instances. Witness the tensions that dog OPEC, the cartel of oil-producing countries. A tacit understanding faces even bigger challenges. Suppliers must co-ordinate without negotiation on a mutually profitable price, then stop anybody undercutting it. In principle, industry consolidation makes it easier for firms to synchronise their actions. A merger that turns five big firms into four, for example, cuts their bilateral links from ten to six.

Co-ordinating a price is one thing; sticking to it is another. Companies face the same dilemma that has undone countless hypothetical prisoners in economics textbooks. There is an incentive to collude with other suppliers to boost prices, just as two prisoners have good reason to keep mum about their crime. But there is also a temptation to renege to gain sales, much as one prisoner might end up ratting on another.

Yet in the right circumstances a tacit understanding can endure. Those among equal partners have the best chance of lasting. A rough parity in market shares should mean that the benefits of high prices are split evenly, minimising the risk that one firm breaks ranks. Firms with similar costs and capacity will also share a common view of what the “right” price is. If, on the other hand, one firm has lots of spare capacity or lower costs than its competitors, it will find undercutting them hard to resist.

Symmetry helps, but the temptation to cheat will be too great if rival firms cannot monitor each other's behaviour and respond quickly if one of them reneges. The obvious riposte to cheating is to abandon price co-ordination altogether. But a cleverer response is to suspend it temporarily—introducing “promotional” prices on selected goods, for example—as a prelude to a bloodier price war should the treachery continue. If the short-term gains from cheating are small relative to the long-term losses from lower industry prices, the threat of prompt retaliation may be enough to sustain tacit collusion.

Markets in fast-moving and relatively cheap goods are easiest to police. Where transactions are “lumpy”, as in the commercial aircraft industry, the short-term profits from undercutting rivals are too big to resist.

Even if an understanding can be co-ordinated and policed, it could still be broken by outside forces, such as smaller competitors or new entrants. That is why the consolidation of Europe's package-holiday industry might not ring too many alarm bells in Brussels. The number of big firms is shrinking from four to two, but unless the commission is convinced that one of them could dominate the market on its own, it is likely to tread carefully.

In 1999 the commission blocked a merger between two of the four big British tour operators, Airtours (now MyTravel) and First Choice, only to see the decision annulled by the courts. It had argued that the big firms might arrive at an implicit understanding to restrict industry supply. The courts disagreed, ruling that it is difficult to collude tacitly on something as complex and opaque as tourism capacity, harder still to discipline cheating, and impossible to prevent smaller competitors or new entrants from expanding supply and spoiling the incumbents' game.

It's hard to sing in harmony

What about the record industry? Wholesale record prices are highly visible—a few prices in company catalogues account for the bulk of sales—which suggests that firms could plausibly co-ordinate on an agreed tariff. Sales turnover is rapid, which means a cheat cannot make much money before its rivals have a chance to retaliate. The main suppliers also interact in a variety of markets and on joint ventures like compilations, so there are ample opportunities to dole out selective punishment.

But tacit collusion may still be beyond them. For one thing, the prices they publish are not always the ones they are paid. Record companies offer retailers targeted discounts in return for shelf space and marketing resources. And although one CD looks much like another, music is a gloriously “differentiated” product, so firms cannot infer what their rivals are doing from their own sales data. If, say, EMI's market share slumps, is it because a competitor is cutting prices or because the new album from its biggest star is no good?

The commission initially cleared the Sony-Bertelsmann merger on the basis that prices were not fully observable. It was forced by the courts to look at it again. Sony BMG has already lost one battle, forced to recall the offending Deep Purple album. It won't want to lose another.