Tuesday, April 3, 2007

Good meddling and bad meddling

Apple hoped that by providing downloads without DRM it would solve its problems with EU regulators over its FairPlay DRM system. This remains to be seen. Meanwhile, it has other problems.

Today the European Commission announced that its competition authorities were investigating the iTunes store over pricing. The well-written AP version makes it clear, however that the issue is less the price that Apple charges in different stores (mainly Euro vs. non-Euro, i.e. UK), and more that it won’t let customers buy music from countries other than their country of residence. Such intra-European price shopping was supposed to be one of the benefits when the Euro currency was introduced in 2002.

The root of the problem is that the record companies grant rights on a country-by-country basis. Is this Apple’s fault? Of course not, it existed decades before the first iPod. Is it the record company’s fault? Not necessarily — the record companies may have their distribution rights (whether for the composition or the performance) on a country-by-country basis.

Normally I’d say that government fishing expeditions are a great example of government subtracting value and attempting to micromanage the economy. This could be true here, too. However, it may also be that by getting all the agreements out in the open, everyone — politicians, bureaucrats, the industry, consumers — can see what the impediment here is to a pan-European licensing system. One possibility is differences still exist in contractual (or copyright) law between member states. Another could be that those differences disappeared in the last few years, but the country-by-country music industry practices have not been updated to reflect that change.

In the long run, this is probably a good thing for consumers and Apple. It might even be a good thing for the record industry — by providing the sort of efficiencies that are necessary for globalization — even it has to get dragged kicking and screaming into the 21st century.

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Doug Klein said...

This goes far beyond just the music business. At NuvoMedia we got into this for books. It's actually more complicated since the distribution rights involve contracts all the way back to the originator of the intellectual property. In the book business, for instance, an author may have deals with different publishers in different countries. In a digital world natural economic boundaries caused by physical presence (e.g., a "book" or a "CD") go away, breaking all sorts of legal precedence.

Another interesting debate is the pricing question. The music world doesn't seem to have the same legacy as the book world, but you would be surprised how may people think a hard bound book is more expensive because the physical good is more expensive to make. It is (a little) but no where near the proportion increase in price. The price increase is strictly due to time value - you get the content sooner. This got really confusing in the ebook business since the publishers wanted to charge more (you get it even sooner since distribution can be virtually immediate) but consumers wanted to pay less since it (obviously) cost nothing to make :) Same arguments you get into as you look at movie releases and the idea of simultaneous release in theater, on cable, and on DVD.

Some interesting reading over at TechDirt on the economic implications of COGS = $0 if you care to dig around their blog.

Joel West said...


Thanks for pointing out this additional example of how such IP issues are affected by national boundaries. You've lived through this and thus are painfully aware of the issues that most people are only dimly aware of.

What I find interesting is that the EC didn't understand this a priori. Don't the Eurocrats know that these laws exist? Or do they know this, but they're just trying to force a crisis but putting this stuff out in the open?

Doug Klein said...

I have no idea how much consideration of various legacy business models were taken into consideration in the whole EU process. I'm not a good follower of politics in general, and definitely not international politics. I suspect it's just one more detail overlooked in the overall consideration of dealing with intellectual property in the digital world. It highlights how much IP protection has actually been built on related but not critical (as we now see) COGS and distribution costs.

Ugh. Way confusing :(