The third in a series of international DRM Conferences taking place in Berlin brought together a broad spectrum of DRM experts giving presentations and an audience of about 300 people eager to discuss. Financial support for this conference, as in earlier years, came mainly from the Ministry of Science and Research of North-Rhine Westphalia, while the responsibility for the programme rested mainly with the University of Dortmund, Germany and Berkeley Center for Law & Technology, University of California at Berkeley, USA. The following conference report is selective, concentrating on three overlapping topics: consumer concerns, economics of DRM, and alternative compensation systems.

Consumer issues
Industry has learnt that DRM-based solutions have to respect consumer demands. For instance, Johannes Mohn (Bertelsmann AG, Germany) pointed to legitimate questions of consumers which industry has to address, such as: What about reselling or just giving away DRM-based products? What happens when a device gets lost? How to use protected content on different devices? Following Mohn it is inevitable to find out in a trial-and-error process what consumers want. The ideal DRM system would probably be one that won’t be noticed at all by consumers.

Soichiro Saida (Vodafone) also stressed the importance of the customers' experience. In particular he acknowledged the expectation of anywhere, anytime with respect to CD usage, and pointed to seamless interaction of DRMs as a prerequisite. Superdistribution was seen as the most promising approach to realize the revenues predicted by analysts. Here again, interoperability is crucial and it is the client side industry which has to make the "DRM eco-system" work.

Tomas Sander (Hewlett Packard Laboratories Princeton, USA) repeated that consumer acceptance is the key factor for success. He put forward direct benefits of DRMs for consumers: different price points, new payment models, and new functionality. In addition as DRM enables individual compensation of rightsholders it will also be a much fairer system.

This view was not shared by all as the debate showed. The benefit of DRMs was questioned as new digital product types and flexible business models have also been developed without DRM. Another fundamental – not so new – objection against DRM was renewed by Fred von Lohmann (Electronic Frontier Foundation, USA), namely that DRM has failed to prevent piracy as predicted (see Biddle et al., 2002) and is not just a "waste of time", but also actually counterproductive, because copy-protected content drives customers to P2P. Further caveats were that the costs of building up the DRM infrastructure – especially due to new devices required – are shifted to consumers, and transaction costs for consumers increase given the extra complexity of DRM-protected content.

Another interesting point of debate was about the role of copyright exceptions. Fred von Lohmann was sceptical that the market comes to solutions in which copyright exceptions are adequately acknowledged since the groups for which exceptions were established are less powerful. Thomas Dreier (University of Karlsruhe, Germany) underlined that in his opinion DRM will not be accepted by consumers if existing statutory exceptions are overridden by technical means and/or legislation. He was however a bit less sceptical than von Lohmann and recommended switching from object-oriented to user-oriented DRM design. Consumers should be provided with a non-transferable key that is specific to their statutory use privileges. He sketched a possible solution based on public key infrastructure (PKI) with a Trusted Third Party (TTP) infrastructure.

In the opinion of Cornelia Kutterer (Bureau Europeén des Unions de Consommateurs (BEUC), Belgium), the advantages of DRM-based content distribution for consumers have yet to be shown, in particular greater choice and the reduced costs for consumers of protected content. Today legal uncertainty prevails combined with shrinking legitimate uses, shrinking public domain, segmentation of markets, draconian enforcement, and dubious marketing or "education campaigns". Her positive vision was that DRM will be adjusted to business models and business models will be adjusted to consumer expectations. She asked consortia developing interoperable DRM to invite data protection and consumer advocates right from the start.

Deirdre Mulligan (University of California at Berkeley, USA) explained how she understands consumer expectations of personal use which are usually defined by the capabilities of devices. Such capabilities are normally determined by legal rules, which themselves are generated in view of consumers’ expectations. Thus, expectations of personal use of digital content stem from a mixture of "fair use" exceptions, "first sale" rights and factors that are unregulated in copyright laws (i.e. use habits such as annotating a book’s pages, physically removing pages, reading a book in a foreign country, or making personal music selection from CDs for private uses). Referring to results of a study (Mulligan, Han, and Burstein, 2003) she argued that many online music services do not respect consumer expectations such as portability and privacy. She recommended policy measures especially in the field of competition policy and consumer protection law.

Thorsten Wichmann (Berlecon Research, member of INDICARE) argued that consumers expect "fair use". Such fair use can be reached, firstly, by clear rules which have to be found between the extreme positions of consumers and content owners. In his opinion a discussion is needed, for instance, on where "fair use" ends and "piracy" begins. He urged to "fix the numbers", i.e. to clearly determine how many copies are legal, how many "friends" can be supplied, et cetera. Secondly, the rules have to be made bilaterally instead of being dictated by the supply side alone. Thirdly, in his opinion the market should be the referee of the rules defining. Consumers vote with their wallets and this would be the strongest force to come to consumer-friendly solutions. However, he emphasised that until now little is still known about consumer needs in relation to DRM and DRM-protected content.

Martin Springer presented goals and work of the Digital Media Project (DMP). Its main objective is to develop standards for interoperable DRM. DMP is developing – alongside its technical specifications – a recommendation on transferring so called "Traditional Rights and Usages" (TRUs) from the analogue to the digital space. Examples of TRUs are to quote, make personal copy, shift content in space and time, use copyright-expired content, or use content anonymously. In their opinion, DRM has the potential for an imbalance, which may reduce the "TRUs" of media users and may in the end lead to a rejection of DRM.

Turning to privacy Lee Bygrave (University of Oslo, Norway) doubted that market forces will provide more privacy-friendly solutions, first of all because consumers are too superficial in this respect. Therefore he called for awareness raising measures. DRM systems have a considerable potential to collect personal information, and this issue is not well regulated. Uncertainties exist with respect to technical processes, e.g. how DRMs are talking to each other, and with respect to legal provisions, e.g. it is difficult to apply the data protection criteria of "necessity" (only such information can be collected that is necessary for a defined purpose) in the DRM context. A reform of the European Copyright Directive would be required to stimulate the implementation of "privacy-enhancing technologies" (PETs) in DRMs.

DRM and TC
It became clear at the conference that DRM and trusted computing (TC) is a consumer issue too. At first sight the promises of TC are in the interest of consumers using PCs. Graeme Proudler (Hewlett Packard Laboratories Bristol, UK, and Trusted Computing Group) explained that DRM is just one of a broad range of applications based on TC. It is mainly designed for the protection and processing of secret and private data. In the short term, protected storage is envisaged with TC, i.e. that customers will be able to protect data on hard disks more securely than with software solutions. In the mid term, integrity checking should be possible, enabling the automatic prevention of unwanted programmes to access information. Furthermore, in the long term, customers and their partners will be able to connect their IT systems and expose only the intended data ("trusted eco-systems").

However, there are considerable caveats. Stefan Bechtold (Max Planck Institute for Research on Collective Goods, Bonn, Germany) drew attention to some of the problems. He questioned if TC is a good basis for DRM systems due to their limited protection against local attacks and the high complexity of "platform state attestation" on the consumer side. Content providers might be able to misuse the possibility that TC allows to bind objects to particular platforms. Another type of misuse could be based on "remote attestation" which allows third parties to check the integrity of PCs – with the help of the Trusted Platform Module (TPM). This bears the risk of anti-competitive behaviour, when e.g. interoperation can be denied, because software by competitors is detected on a PC. Seth Schoen (Electronic Frontier Foundation, USA) also highlighted the anti-competitive potential of TC (see also Schoen 2004). The verifier would get identity information which would lead to an unprecedented situation. He sees the risk of a "super-spyware" that controls attestation. In the discussion Ross Anderson criticised particularly the intransparent proceeding of the Trusted Computing Group (TCG). The risk that the specifications might be captured one day by a single player was pointed out and there was criticism that TCG is taking no measures to avoid this.

Economic aspects of DRM
Economic issues were addressed in different sections of the conference, many of them about competition at the end of the day.

Keynote speaker Hal Varian (University of California at Berkeley, USA) believes that "in the long run, ensuring competition is more important than determining the default rights". It is likely that a standardised set of usage rights will evolve. Markets and society should have the ability to experiment with sets of rights. He emphasised however the threat of monopolisation in DRM technology due to the need for standardisation. For content and device suppliers it is much easier to produce for a single standard (see the DVD example). To avoid the potential misuse of a proprietary standard he called for open systems like the Internet or GSM standards. At the same time he warned that seemingly open systems could be captured by single parties. Fully open standards with no proprietary extensions would be required and a governance system with a lot of checks and balances.

It was also interesting that Varian put the emphasis on DRM in B2B relations, i.e. rights clearing in the content industry. In his view, maybe the greatest benefit of DRM could be the reduction of transaction costs of rights acquisition. However, the solution of establishing an online registry has not received the attention in public policy it deserves.

Pamela Samuelson (University of California at Berkeley, USA) criticised some developments in the USA, especially the misuse of TPM and DMCA for anti-competitive behaviour, and so did Todd Alberstone (RealNetworks Inc., USA). He pointed to some notorious legal cases demonstrating how companies misuse the anti-circumvention rule of the Digital Millennium Copyright Act (DMCA) to stifle competition (e.g. "Chamberlain Group vs. Skylink Technologies", i.e. the "garage door opener" case, and "Lexmark vs Static Control Components"). In these cases competitors who circumvent a proprietary protection technology embedded in a product – here remote controllers for garage door openers and printer cartridges – were sued under the DMCA by market incumbents.

Bernt Hugenholtz (Institute of Information Law, IViR, University of Amsterdam) scrutinised "regional coding" in the light of the anti-circumvention provisions in the European Copyright Directive (EUCD). He shrewdly argued that – depending on the TPM – removing regional coding might be legal, because the EUCD only protects those TPMs from circumvention which refer to explicitly non-authorised uses. Hugenholtz recalled the internal market goal of the European Commission of avoiding market fragmentation which has been emphasised also with respect to TPM (see report on the "satellite directive" European Commission 2002). During debate a discussant pointed to the already existent market segmentation by TPM referring to the higher prices of iTunes in UK compared to other European countries.

DRM and alternative compensation systems
The debate about alternative compensation systems was one of the most interesting ones as the schemes proposed get more and more sophisticated and down to earth – of course not escaping sound criticism. Volker Grassmuck (Humboldt-University Berlin, Helmholtz Centre for Cultural Technology, Germany) said that there is no evidence that a stronger protection of content leads to higher innovation and creativity. He proposed a so-called "culture flat-rate" (or content flat-rate) to compensate artists – an approach with lower systems costs compared to DRM, and without controlling consumers.

William W. Fisher (Harvard University, USA) listed some disadvantages of DRM ranging from additional transaction costs, inconvenience and additional costs through lack of interoperability, impediment of consumer creativity, to the economic and cultural losses caused by price discrimination. Referring to his book (Fisher 2004) he suggested an alternative compensation system, in which – very briefly sketched out – artists register at a central office under a compulsory license. A tax is imposed on digital consumption (in particular on P2P) and the collected money is distributed to artists according to their popularity measured by a counting system.

Alexander Peukert (Max Planck Institute for Intellectual Property Law, Munich, Germany) criticised the scheme proposed by Fischer pointing to the incompatibility with international treaties. The scheme would not pass the "three step test" of the Berne Convention (i.e. a set of provisions that define permissible limitations and exceptions of national copyright laws under international IPR treaties). In contrast, Peukert suggested a "bipolar" system that would better fit with international treaties since it is close to the already existing dual compensation systems in many European countries. Authors would have the choice between the individual exercise of exclusive rights or to use collective compensation systems.

Bernt Hugenholtz also criticised the approach of Fisher and a similar one by Netanel (2003). He pointed out some defects of levy schemes, reminding of the long-lasting experiences with them in most European countries. Such defects include the intransparent repartition of the collected money to the creators and right holders, the complex and protracted administrative procedures of setting the "right" tariff for the levy, and the unfair treatment of those consumers who use a device or service with a levy on it (e.g. PC of ISP services), but are not engaged in P2P file sharing. Furthermore, levy schemes generally require a complex administration and the scheme proposed by Fisher would require an even larger one.

Susanne Dehmel (BITKOM, German Association for Information Technology, Telecommunications and New Media) added to the criticisms of levy schemes the argument that currently – and more in the future – the number of devices that are capable of copying, and therefore potentially imposed with a levy, will vastly increase including more and more multi-purpose devices for which levies for private copying of copyrighted material seem unfair.

Private and collective licensing will be necessary and existent in parallel for the near future, said Eric Baptiste (International Confederation of Societies of Authors and Composers, France). DRM is no rival for collective licensing because collecting societies have more functions than enforcing licensing, especially for international distribution and to establish bargaining power. At the moment, he regards levies as more effective than DRM. In the future, collecting societies would have to better cope with the multi-purpose ability of devices.

Bottom line
Apparently DRM has not fulfilled its original purpose of piracy prevention. It is becoming obvious that DRM can also be employed for other purposes such as for anti-competitive behaviour, to gain market dominance, lock-in consumers, and maintain price discrimination or to experiment with new compensation models. Thus, in my opinion, the focus of public policy has to be shifted accordingly from copyright issues to consumer protection and to policies of innovation, anti-trust and competition.


About the author: Carsten Orwat is researcher at the Institute for Technology Assessment and Systems Analysis (ITAS) and Research Centre Karlsruhe (FZK) since 2000. He holds a diploma and Ph.D. in economics. He has been involved in several research projects dealing with e-commerce and digital goods. His long term research interest focuses on the economics of information goods. Currently he is co-ordinator of the EU-funded project INDICARE. Contact: + 49 7247 826116,

Status: first posted 21.02.2005; licensed under Creative Commons