In July, Microsoft and Time Warner asked for clearance under the European Union's (EU) Merger Regulation to complete the deal.  That's when the red flags went up with this key initiative. Then, in August, the European Commission (EC) in Brussels -- the European Union's antitrust regulator -- began an in-depth second phase investigation of the arrangement.  The Statement of Objections details why the EC thinks the joint venture might create or strengthen an unfair competitive advantage in the rights management market. The Financial Times quotes the EC as having said at that time: "Under Microsoft's and Time Warner's joint ownership, ContentGuard may have both the incentives and the ability to use its [intellectual property rights] portfolio to put Microsoft's rivals in the DRM solutions market at a competitive disadvantage."

The strategic alliance is significant because it is really the first time a major software vendor has teamed up in parity with a major content provider to jointly further the advancement of DRM technology. Both companies are now in a key position to provide leading technological solutions to legal digital media distribution over the internet.  

Many observers feel that the overall net effect of the deal will be a positive one for the DRM industry in general, because for the first time, it transfers equal control of leading rights management core technology to a major content provider. As Michael Miron, CEO of ContentGuard, stated in a press release when the deal was announced: "Together with Microsoft's, Time Warner's input into our company's direction will accelerate the pace of development for the new standards and technologies that we champion. This is vital to the market's ability to act on the potential of digital content and give more choice and value to customers."

The facts suggest that the basic grounds for opposition focus primarily on Microsoft's increased stock ownership and the potentially discriminatory market influence. When consumers buy a PC, DRM is automatically bundled in with the Windows Media Player, which in turn is normally bundled in with the operating system. The EC is concerned that when one company owns the DRM and the Media Player, it has the propensity to become a monopoly. Another point of contention is the delivery of an assurance from ContentGuard that will allow other DRM competitors reasonable and non-discriminatory (RAND) access to ContentGuard's technology.

According to the Financial Times, "ContentGuard owns a string of promising patents and other intellectual property rights that are valuable for the development of such technology." ContentGuard has asserted that its patents encompass DRM implementations based on any rights expression language (REL) and it should be compensated if companies use one in their DRM schemes. The company notably contributed its XrML (eXtensible rights Markup Language) to MPEG-21, the international framework of standards for digital media, which used it as the basis for the International Organization for Standardization (ISO) approved MPEG REL.  

This adoption is an incredible step forward for the industry, as MPEG REL is used to specify terms and conditions for the authorized distribution and use of any digital resource such as music and video files, online learning materials as well as enterprise documents and data. Microsoft has been using XrML in its own DRM technology, including the Windows Rights Management Services released last November and currently uses the rights language in its DRM product lines -- giving it a slight edge in overall consumer user adoption.

For many, it should come as no surprise that ContentGuard's new ownership structure is being scrutinized so heavily, because with the adoption of the Open Digital Rights Language (ODRL) in Open Mobile Alliance's OMA DRM standards, the global rights language race is for all intents and purposes now firmly rooted between two standards-based organizations: the OMA and MPEG.  OMA's DRM technology is royalty free. This appealing factor could help the mobile industry advance one step closer to making seamless and transparent digital content distribution a commonplace reality.

The eventual outcome of the takeover could have severe market effects in the long term, as p2pnet reports: "DRM may have started out as a way to hardwire owners' music and movie rights, but it's now also being touted for confidentiality purposes in the corporate field."  p2pnet quotes the EC as stating that DRM solutions are "likely to become pervasive" throughout the IT industry and "the notified concentration may have spill-over effects on a number of related markets ranging from mobile telephony to word processors." It further quotes the EC: "This joint acquisition could also slow down the development of open interoperability standards. As such, this would allow the DRM solutions market to 'tip' towards the current leading provider, Microsoft."

Microsoft and Time Warner have two weeks to respond to the EC's official statement and may request a hearing to present their arguments. Various observers have suggested that a Statement of Objections is normal during an in-depth probe. After one is issued, the companies involved may propose actions that would address the EC's concerns. 

The deadline for the EC to issue a final decision, whether to approve or block the new alliance, is January 6th. However, odds are the takeover will not officially be blocked as the new EC Commissioner, Neelie Kroes, serves as a board member on a number of multinational companies and is viewed by many as pro-business. If the buy is determined to violate Europe's antitrust laws, the bad news for ContentGuard is that it could be prohibited from operating in Europe. This would be a major setback.

Despite the EC's concern about the future impact on the market, observers are predicting that the takeover will be approved as long as Microsoft and Time Warner allow third parties to access ContentGuard's technology through fair licensing terms -- although the definition of "fair" has yet to be determined.

(Thanks to guest contributor Todd Beals for this article.)

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