The head bowling pin -- the niche market that developed the strongest in 2003 -- was online music (see our year-end review of online content services), dominated by Microsoft.  Other bowling pins that emerged were e-periodicals, led by the vendors NewsStand and Zinio, and downloadable movies, divided for the moment between Microsoft and RealNetworks, the latter being otherwise practically invisible in the DRM market this past year. The e-book market suffered from flat overall growth, but Adobe began to emerge as the prevailing platform in that niche, with MobiPocket appearing poised for momentum in the coming year as more reading-friendly mobile devices appear.

Corporate Enterprise Push

Apart from those media segments, the strongest push into a "niche" market was in the corporate enterprise market.  As the concerns of corporate IT executives rapidly shifted from boundless ERP and CRM-fueled expansion plans to information security and accountability, entrepreneurs and existing vendors of DRM-related technologies saw their chance and started to move in. 

Some established DRM vendors, such as SealedMedia and RightsMarket, attempted to retool their publishing-oriented offerings for the corporate market and found some success, while others that bypassed the media and publishing market from the start, like Authentica, found their lives extended. 

Meanwhile, regulatory compliance concerns in markets such as healthcare and financial services began to take on more importance.  The relevant laws (including HIPAA in healthcare and Graham-Leach-Bliley (GLB) in financial services), combined with a post-Enron heightened awareness in keeping corporate information noses clean, created a new type of DRM-friendly environment.  Toward the end of 2003, a handful of vendors created remarkably similar elevator pitches for VCs: sell allegedly out-of-the-box information security policy solutions to the new breed of empowered, budget-laden corporate info security czars.  Vendors like PSS Systems, Trusted Edge, and Liquid Machines emerged with so-called "document policy compliance" solutions, about which it wouldn't surprise us to learn that they are mostly custom development at this stage. 

We expect that there will be at least a half-dozen more vendors attempting to enter this space before the inevitable contraction to 2 to 4 by the end of 2004. We have yet to be convinced, for example, that DRM technology applies to regulatory compliance scenarios like HIPAA and GLB at more than a superficial level, or that there is really any such thing as an out-of-the-box "HIPAA solution." We suspect that such solutions require lots of custom integration and process reengineering, although we invite any of this cavalcade of VC-funded startups to prove us wrong.

The development in the corporate DRM space that threatens to overshadow all of the above is Microsoft's release of Windows Rights Management Services (RMS) for Windows Server 2003. This product is the culmination of the "Unified DRM" strategy that Microsoft has pursued since at least 2001, and it's telling that the product release is targeted at the corporate market rather than integrating Microsoft's DRM offerings for the media/publishing market. As is typical for other types of Microsoft platform technologies, the launch of RMS included an already-populated partner program designed to give third parties opportunities to develop more complex and more niche-specific solutions -- such as for HIPAA and GLB? -- on top of RMS.

New Media Applications

A handful of new DRM application areas emerged in the media market.  The most fruitful of these was in pre-release processes -- production and distribution of content.  After the major media industry segments began to publicly admit that much of the piracy of major releases takes place before any consumers lay eyes or ears on the products, vendors began to offer solutions for automation of production and distribution workflows that included a DRM component.  These solutions, from vendors like DMOD, WiredEntertainment, and Activated Content, pay for themselves immediately through efficiency gained by distributing content over the Internet instead of through physical media; DRM features are almost icing on the cake.  Expect the film industry to follow suit next year, especially in light of the MPAA's debacle over the distribution of "screener" copies of movies prior to Oscar time. 

A few new media applications for DRM that appeared in 2003 didn't move beyond the "promising" stage. One was watermarking. Watermarking re-emerged from a slump that was brought about by two failures: the failure of the watermarking-based SDMI as a standard for the music industry, and the failure of Digimarc, the heavyweight IP owner in the watermarking space, to develop markets beyond its cash-cow business of licensing the basic tools with which it saturated the graphic arts and imaging markets.  A few intriguing glimpses of advanced watermarking applications appeared -- including Sony's Signet Screener technology for video and the Fraunhofer institute of Germany's Light Weight DRM -- but none of these have gotten past the research stage yet. 

Meanwhile, fingerprinting, a technology related to watermarking, came into its own this past year.  Fingerprinting technology derives identities of content items from the content itself, not from a special mark inserted into it, as watermarking does.  Fingerprinting vendors have used the technology to build "name that tune" services for consumers, but the more interesting (and more DRM-related) application of fingerprinting is in broadcast monitoring, i.e., identifying broadcast content for purposes of tracking and rightsholder compensation.  Licensing collectives such as ASCAP have begun experimentation with fingerprinting-based broadcast monitoring solutions from vendors such as MediaGuide. Expect this technology to explode into mainstream use, but not for another couple of years as the underlying data issues are slowly and painfully worked out.

Another interesting technology area that emerged in 2003 but did not exit the year with any practical impact was DRM for the home network.  Consumer electronics giants like Sony and Matsushita asserted that the home network was the next frontier, and many large content owners seemed to go along with the idea that users could do what they wished with content within their home networks.  IBM demoed xCP, lab technology for authentication of device identities on home networks, and Sony began to make some noises about the application of its proprietary Open MagicGate (OMG) DRM technology to home networks, but nothing much has happened. 

However, don't look for this area to take off in 2004.  Larger problems have to be solved first: consumers can't install the basic plumbing of home networks without arcane technical knowledge, and even if they could, few people understand what a "home media network" is or why they might want one. 

A similar lack of progress occurred during the past year in the broadband/set-top box market.  That segment of the industry is in a holding pattern waiting for infrastructure as well as for the FCC's broadcast flag regulation (see our year-end review of DRM-related legal actions) to play out in the market.

Do, however, look for DRM to take off in peer-to-peer networks in 2004.  The current dichotomy between peer-to-peer networks and established media interests is more a matter of polemics than of technology.  Media companies can and eventually will find ways to embrace P-to-P and turn it to their advantage, and DRM technology will need to be incorporated in whatever schemes emerge.

The first experimental glimmers of integrating DRM into P-to-P networks occurred this past year through firms like File-Cash Networks and DigitalContainers, and Grokster made an arrangement with the UK-based DRM vendor SoftWrap.  The Content Reference Forum (CRF; see the year-end review of standards initiatives), which originated in the music industry, suggested ways of incorporating DRM into P-to-P networks through formalized, "e-contract" based Superdistribution arrangements.  Expect more of this experimentation to occur next year, along with the first glimmers of involvement by media industry product executives, to legitimize the market.

Negative Developments

2003 was a terrible year for copy protection for physical media.  DVD piracy abounded, thanks to the selection of the weak CSS copy protection scheme, whose primary advantage seems to be low unit cost for the DVD player makers who designed it.  Attempts to foment copy protection schemes for audio CDs were mostly laughable.  Schemes that patently (pun intended) did not work, such as SunnComm's for BMG Music, were fobbed off on the public in an apparent attempt either to placate record company executives eager to "just do something," place audio CDs under the protectionist shield of DMCA 1201, or both. 

Vendors of proprietary DRM solutions continued to cease operations or sell off their assets, but at a slower pace than in 2001-2, thereby confirming the idea that DRM is moving beyond the chasm phase of its market development.  We counted four such developments in 2003: InfraWorks declared bankruptcy, Liquid Audio sold its assets to Wal-Mart's physical media fulfiller, Elisar ceased operations, and at the beginning of the year, Alchemedia sold its assets to a corporate info security vendor. 

Finally, the entire DRM industry is holding its collective breath waiting for results from Sony and Philips's $450 Million acquisition of InterTrust in late 2002.  The entire year has gone by with hardly a peep.  InterTrust continues as a going concern, and there are stirrings of news that Philips will soon be deploying technology that InterTrust is currently developing, but all we are hearing from Sony (and not much, at that) is about its proprietary Open MagicGate technology, which predates the InterTrust acquisition. 

Sony and Philips could do something truly radical with InterTrust's massive DRM-related IP and implemented technology -- dare we suggest a broadly applicable DRM toolkit, a la IBM's EMMS, released under open-source licensing? -- or the assets could disappear deeply into the maws of those two gigantic corporations, as those of similar-sized acquisitions have done so many times in the past.  The re-emergence of InterTrust could well be the DRM story of the year in 2004.