Why Microsoft is cozying up to Hollywood (and selling us out)

EFF attorney Fred von Lohmann (who writes Deep Links at eff.org) just posted this pithy analysis to the pho mailing list (I'm sure he won't mind my reproducing it here), in light of the announcement that Microsoft's next operating system, Vista, will feature components that will please Hollywood but displease consumers:

Hollywood is saying, loudly and to anyone who will listen, "unless we get content protection that satisfies us, our next-gen HD video will not be on your platform." (Since there are only a handful of major studios who control 90%+ of commercially important film and TV content, this kind of cartel threat is relatively credible.)

In the past, this would have been an empty threat, since someone
could just build a device to play their content, whether they liked
it or not. Not so since 1998, thanks to the DMCA. Now, if Hollywood
encrypts its content, tech vendors need to get permission before they
can build a device to play it.

So here's what's happened since 1998:

1. DVDs are encrypted, which means that you have to sign a license
before you can build a DVD player or recorder. So Hollywood gets veto
power over new DVD features, thanks to the DVD-CCA license.
Companies that build cool DVD products get sued (see, e.g.,
Kaleidescape).

2. Cable added DRM to its set-top boxes and CableCard architectures,
for fear that Hollywood would otherwise favor satellite (which, as
the minority player, was happy to court Hollywood) with "premium"
content.

3. Blu-ray and HD-DVD are now in a DRM bidding war to please
Hollywood, as demonstrated by the Blu-Ray DRM features announced this
week.

4. Microsoft is now adding DRM to Windows, for fear that otherwise
Hollywood will lock them out of next-gen HD Hollywood content,
thereby slamming the door on convergence home theater PC products
built on Windows Media Center Edition (MCE) technologies. After all,
the traditional consumer electronics companies would be quite happy
to have the next generation DVD products play only on purpose-built
Blu-Ray boxes. (Of course, MSFT may also have its own reasons to want
access to Hollywood stuff, insofar as it would distinguish their
platform from Linux, which will never play Hollywood DRMd content.)

The computer industry in general is actually quite afraid of being
left out of the Hollywood party -- I remember hearing stories about
how DVD almost never made it to PCs, because the computer industry
was so late to the negotiating table. After all, from Hollywood's
POV, the mainstream market for DVDs is playback on DVD players in
your living room. The PC home theater stuff is niche today, untested
tomorrow, at best. For the computer guys, on the other hand, this
convergence stuff is a critical part of their effort to convince you
that you actually need to buy new PCs and displays (pesky thing --
PCs are too good and lasting too long, so you need something to push
consumers to upgrade or buy another one).

In short, it's classical economics -- on one side you have a supplier
cartel with market power (Hollywood), on the other side you have
several competing technology platform providers (MSFT, the major CE
companies, etc) each eager to get picked by the cartel (and thereby
gain competitive advantage over those not picked).

As is usual, consumers lose because the upstream cartel supplier
gobbles up surplus consumer value. ...

Hollywood's chief interest in DRM is not winning the war against
piracy, but rather getting control over disruptive technologies. See,
e.g., DVDs. The DRM was cracked long ago and there is no evidence
that CSS is inhibiting the circulation of Hollywood movies via P2P
and other media. But CSS continues to pay big dividends for Hollywood
by allowing them to control, via licensing, the feature-set of the
entire DVD player/recorder market. That gives them a rein on
innovators (like Kaleidescape) that might otherwise disrupt the DVD
market.

So MSFT is *not* staking its (or Hollywood's) future on the DRM being
uncrackable. Rather, it's staking its future on the bet that giving
Hollywood a say in the future of video in Windows will pay off in
favored access to next-gen Hollywood content, which will, in turn,
drive consumers to buy Windows machines and applications.

Reasonable minds certainly can differ on whether that's a good bet.
What you can't deny is that consumers lose in the bargain, thanks to
the combination of market power on the part of the Content Cartel and
the DMCA to back-up the Cartel's threats of withholding content from
those who don't play ball.

Here is Fred's more polished post at DeepLinks: Why Would MS Do Hollywood's Bidding?