Proprietary Digital Rights Management Systems and Music-Downloads - Obstacles for Innovation from a Competition Policy Perspective

The paper addresses the topic of DRMS with regard to the current situation in the music download market. DRMS were made obligatory by licensing contracts to companies in the music download business in particular of the four major music labels, EMI, Sony BMG, Universal and Warner. Fear of extensive pirating of music prevented these major labels from offering more liberal DRMS or copy protection free downloads. However, due to the lack of a common DRM-standard this development lead to substantial fragmentation of the market. Many companies, like Apple with their iTunes and iPod product bundles, developed a proprietary DRMS like FairPlay. Due to an attractive business model of comparatively low prices per track and a huge variety of titles of about five million tracks, Apple managed to obtain a dominant market position for music downloads. However, Apple was unwilling to license its DRMS to other companies or making it interoperable to their particular proprietary DRMS. This caused opposition from competing companies as unfair barriers to market access. Furthermore consumer protection organization challenged the proprietary DRMS due to the unfair restrictions imposed on the consumers. In Europe a couple of countries therefore challenged Apple for their unfair trade practices and initiated legal actions. High market concentration and vertical integration between music download websites and multimedia players are leading to unwarranted barriers of entry from a competition policy perspective. Therefore, the paper analyses this case study of applied DRMS in the music industry from the perspective of competition policy and anti-trust. Using Coase-theorem as a normative principle for the least interventionist approach to regulate music download markets to increase overall social welfare it concludes to certain policy recommendation how to regulate the music download industry