The Patent War

Following InterTrust’s award of a $440 Million settlement in a patent suit against Microsoft in April 2004, we anticipated that the DRM patent licensing scene would erupt into an all-out war and get worse before it gets better. This has indeed happened.

MPEG LA, an organization that achieved initial notoriety in offering one-stop patent licenses (patent pools) for technology related to MPEG compression algorithms, attempted to bring some harmony to the mess that is DRM patent licensing by forming a patent pool for implementers of OMA DRM 1.0, with other pools for other DRM implementations to come in the future. MPEG LA announced its OMA DRM 1.0 license in January 2005.

At the present time, the mobile industry and MPEG LA are at an impasse after a very public spat back in the spring, and the viability of the pool has been hobbled by such events as Vodafone agreeing to take a license directly from InterTrust, one of the pool’s members; the actions of Macrovision (holder of a DRM patent considered essential everywhere except in the United States), which has refused to participate in the pool while it does its own deals in various countries; and organizational instability at ContentGuard, another of the pool’s key members.

The problem, of course, is that implementers simply would prefer not to pay DRM patent holders simply for the use of their patented technology. It is possible that MPEG LA will finally announce licensing deals with some European wireless industry players (carriers or device makers) next year, but it is equally possible that this situation will end up in court – and the two outcomes are not mutually exclusive. Patent cases can take years to reach conclusions, and they generally do not establish particularly broad precedents that affect other patent holders, so – again – we do not expect this situation to resolve itself next year.

Laying Eggs with HENs

The HEN market failed to develop much further, as consumer electronics vendors failed to figure out what would interest consumers in paying, for example, US $300 for the equivalent of a TV signal splitter and a coaxial cable for watching video programs in another room in the house. The most successful HEN-related solutions – and the successes were modest – were in highly specific device-transfer scenarios, the most prominent example being TiVoToGo’s expansion beyond Microsoft Windows Media-compatible devices to Apple Video iPods and Sony PSPs. In particular, standards initiatives failed to make much impact in this market; see our year-end Standards review for more on this.

In the end, the HEN story is really about platform providers trying to achieve or assert dominance in a very nebulous market, where consumer value propositions are poorly understood – or impossible to fulfill at viable price points – and yet consumer demands for flexibility to use content among heterogeneous devices will ultimately carry the day. Makers of set-top boxes in the cable/conditional access industry have done the most to embrace heterogeneity and interoperability, if only because they know that their legacy devices are far less powerful than their new competition – PCs, TiVos, and now advanced gaming devices such as the Sony PSP.

Toward this end, several leading set-top box makers launched DRM strategies this year that are oriented toward the HEN market: NDS launched mVideoGuard, an implementation of the OMA DRM 2.0 standards, and Nagravision announced a joint development initiative with Microsoft to feed content from Nagravision set-top boxes to Windows Media Center PCs. In addition, third-party vendors such as Digital 5 and Mediabolic introduced proprietary interoperability technologies for the HEN market through relationships with vendors of various devices, such as network-attached DVD players and streaming media receivers. Other efforts by set-top box makers to embrace the HEN market took place through standards initiatives.

Next year in the HEN market, we expect interoperability to succeed mainly when it’s attached to well-established devices – that is, PCs and TiVos. Lack of compelling value propositions, the slow growth in the digital cable/IPTV markets, and confusion over standards initiatives will retard progress of all other HEN interoperability technologies.

Perhaps the most significant new DRM-related technology development was the maturing -- relatively speaking -- of acoustic fingerprinting technologies for digital music. Major record companies became convinced that technologies that “listen” to music and figure out its identity could be viable as ways to throttle activities on file-sharing networks; as a result, two acoustic fingerprinting vendors got major-label licensing deals in 2005: Philips Labs, whose technology is used in Snocap and is now licensed by all four majors, and Audible Magic, used in the newly legitimate iMesh file-sharing network and licensed by Sony BMG Music. See our Content Services summary for more on this.

Copy-Protected CDs Court Disaster

Of course, the DRM technology area that suffered the most in 2005 was copy-protected CDs. This type of technology had a bad year in 2004, as easy hacks were discovered. But 2005 was disastrous for CD copy protection as one technology used by Sony BMG, XCP from UK-based First4Internet, was found to install a so-called rootkit on consumers’ PCs that opens them up to viruses. Consumer outcry was legion, and Microsoft adapted its Anti-Spyware software to remove it from users’ PCs. Various lawsuits were launched against SonyBMG and First4Internet, including those by the Texas Attorney General and the Electronic Frontier Foundation.

Those suits ended up as springboards for launching other actions against SunnComm, the other provider of CD copy protection technology that Sony BMG has used, based on security flaws and alleged dishonesty about its behavior in documentation. As for the music giant, it was reduced to issuing apologies, recalling its products, and hammering First4Internet to issue patch after patch; it came off looking more technologically clueless than malicious.

CD copy protection may well be a problem with no realistic solution that balances consumers’ concerns with those of antipiracy; the first step towards that determination is for music companies to put people capable of making sound judgments on this point into positions of power, giving them the time and resources to do proper analyses, and abiding by the outcomes.

Meanwhile, the two warring next-generation optical disc camps – Blu-ray and HD DVD – both decided to embrace the Content Protection Technical Working Group’s forthcoming AACS standard for content protection. Blu-ray – backed mainly by Disney and Fox Studios – defined additional content protection requirements including physical embedding of product identifiers during manufacturing, which adds costs to the process.

We believe that the Blu-ray Disc Association’s insistence on unsubsidized incremental costs for DRM will jeopardize its momentum and threaten to devolve the Blu-ray/HD DVD dilemma into the usual battle between the media and technology industries. There is evidence of this already, as Microsoft and Intel announced support for HD DVD and more recently, Hewlett-Packard backed off from its unilateral support of Blu-ray and is now backing both standards.

What Will Apple Do?

The biggest wildcard in DRM technology nowadays is Apple. Its FairPlay DRM for iTunes has been hacked repeatedly, though that may be due as much to its popularity as to the strength of its security. Apple has not extended FairPlay for use on devices other than PCs, Macs, and iPods, the sole exception being the Motorola/Cingular ROKR wireless phone, whose overhyped debut in September was Apple’s biggest misstep in a long while. Apple’s licensing terms with the major music companies will expire this coming April, and the majors may demand improvements and extensions to FairPlay in exchange for renewing licenses to their content. Apple is also starting to take some legal heat in France for refusing to disaggregate its hardware/software stack and make it available to other vendors.

In other words, Apple’s behavior is typical of a “gorilla” in its market – that is, a market leader with a closed, vertically integrated solution. It is also causing the tide of public opinion about media and technology to start to turn. Content providers are beginning to be comfortable with the idea of licensing their content for use on a wide variety of devices in consumers’ homes, briefcases, and purses; and technologies such as Windows Media DRM for Portable Devices and TiVoToGo are starting to appear that give consumers some flexibility. Meanwhile, Apple’s world remains closed – and like any “gorilla,” public opinion is turning against it.

We believe that pressure from the music industry, competition, and increasingly the public will cause Apple to change its DRM strategy in 2006. We dare not speculate how they will do this, and given Apple’s typical marketing tactics, we’re unlikely to find out what the estimable Steve Jobs has up his sleeve until he is good and ready to tell us all.

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