Digital rights management and software innovation

Abstract

In order to avoid an undersupply of immaterial goods (e.g. content or software) and to reach a balance between the creator's interest (control of property rights) and the interest of the public (access to an immaterial product as a public good), the government has various possibilities to foster innovation. Governmental action can supply the public good through a governmental agency; it can induce production of the public good by paying the inventor ex ante; it can reward the inventor ex post for providing the public good; it can create and enforce institutions in order to protect the inventor against imitation or undue competition; or it can assist the inventor in designing devices that increase the excludability of the immaterial good (e.g. Fisher 2004). Following the latter two paths, governments have installed the institutions of copyright and patent right. As a result, the creator is granted the exclusive right to benefit from the fruits of his or her invention for a certain period of time, whereas the public profits by obtaining access to the intellectual good. This "natural" property right of one's own ideas goes back to the Venetian Statute of 1474 when the first patent rights were granted (http://en.wikipedia.org/wiki/Patent). This article focuses on digital rights management and its impact on innovation and competition in the software sector. Due to the variety of potential innovators in this area, such as proprietary software firms, open source software firms, complementary asset owners and even code developing software users, one can assume that software innovation is not only triggered by commercial motivations, such as the prospect of monetary and material benefits from innovation, but also by access to, and experimenting with information and its application, as well as non-commercial motivations such as the pleasure of having created and implemented something new and useful (Brügge et al. 2004; Picot and Fiedler 2006). Digital Rights Management (DRM) prohibits all production or distribution of circumvention devices intended to bypass copy protection of computer programs (Picot and Fiedler 2004a). It consists of the definition and enforcement of property rights (e.g. copy right and contract law) by means of mandatory technology routines on the one hand and of enforcing law (such as the Digital Millennium Copyright Act (DMCA) and the EU Directive 2001/29 EG) on the other. Thus, DRM helps, at comparatively low costs, to define and enforce rights on digital goods according to the rightholders preferences. Hence, according to economic theory, DRM should foster innovation in the area of software due to more complete definition and enforcement of rights and, thus, increased commercial motivation (Coase 1960). On the other hand, contrary to traditional copyright and patent law, the combination of DRM technologies and legal norms like the Digital Millennium Copyright Act does not grant first sale, fair use and first sale rights to the public (Picot and Fiedler 2003). DRM systems enable right holders to protect their material in a way that has never been possible with copyright law alone (e.g. Chicola et al. 1998; Lessing 2001; Bechtold 2002). Therefore, the combination of DRM technology and law can effectively stop public access to useful information. This concern is even added to when we take into consideration the fact that software has inherent positive network externalities that tend to lead towards the creation of natural monopolies (see e.g. Microsoft products such as Windows, Excel and Powerpoint). Once a product or system sets a de-facto standard, Digital Rights Management enhances this effect by making it even more difficult for new firms to attack. As monopolists do not have to defend themselves against competitors, the incentive for investment in research and development seems in turn very low (e.g. Shavell and v. Ypersele 2001). Thus, Digital Rights Management threatens to lock out other potential innovators in the IT sector, such as small proprietary software firms, open source software firms, developing software users and complementary asset owners, thereby reducing competition for monopolists and leading to even less innovation in the software area. (Lessig 2001; Picot and Fiedler 2004b; Samuelson and Scotchmer 2001). Thus, DRM seems contradictory: it appears to provide an incentive for the development of software and, at the same time, to hinder access from competitors as well as non-commercially oriented innovators, thereby potentially reducing innovation. To resolve this conflict, there is a very vivid debate among the different stakeholders regarding the potential pros and cons of Digital Rights Management regarding software innovation as well as the optimal legal design of DRM. Therefore, we would like to analyze the effects of Digital Rights Management on software innovation in more detail. The remainder of this paper is organized as follows: Section two gives basic information on Open Source Software (OSS) and DRM. Section three analyzes the effects of Digital Rights Management on Open Source and proprietary software developers and section four concludes this article. © 2006 Springer Berlin · Heidelberg.