This article examines the ongoing development of digital music distribution via the Internet. Many observers have been critical of the old-line music industry’s resistance to what appears to be a tidal wave of consumer interest in digital content delivery. However, the music industry contends that it will be willing to participate in digital distribution once it develops methods to protect its content from piracy and ensure payment and collection of fees necessary to compensate artists. Their efforts are being spearheaded by an industry-wide standard-setting group formed in 1998, the Secure Digital Music Initiative. While many have accused SDMI members of being protectionist and resistant to change, this article examines past technological evolutions and argues that in fact they are being revolutionary and efficient by allowing many avenues to development, rather than settling on a single standard. As a result, a standards battle of great proportions is underway in the music industry, not unlike the transition from Beta to VHS, the adoption of cable across America, or the current transition from analog to digital television. Though consumers may be confused, and the transition prolonged, law and economics theory posits that the resultant technology will ultimately be far superior to the imposition of standards that may quickly become obsolete. Unfortunately, the slow pace of development and adoption may ultimately be the old-line music industry’s downfall, as entrepreneurs and consumers have warmed to the MP3 format and appear unwilling to switch to secure formats that offer less content and more restrictions.

I. Introduction

1. Internet insiders have described the Secure Digital Music Initiative (SDMI), the music industry’s response to electronic music distribution, as anti-competitive, backward looking, and antithetical to the music industry’s need to move forward into the digital age. This coalition of dominant players from the music and technology industries resembles a cartel that improperly excludes small entrepreneurs and artists not associated with the major labels. Such a coalition has the potential to thwart, rather than encourage innovation. However, though anti-competitive motives may lurk in the background, research from similar horizontal standard-setting coalitions reveals that SDMI could have significant pro-competitive effects, such as pooling research, resources and ideas. Moreover, the law and economics literature is replete with conduct that has engendered antitrust scrutiny, but has nevertheless been condoned because it encouraged innovation and more efficiently led to technological improvements. Interestingly, when put through a law and economics analysis, the often-criticized aspects of SDMI may be justified in the interest of competition, innovation, technological development, and consumer choice, all motives that are encouraged by antitrust and law and economics theory.

2. Though law and economics theory can justify many of SDMI’s actions, objections to them pose formidable obstacles to consumer and professional acceptance of its standards. In order for SDMI to be successful, it will need to address these negative perceptions head-on to restore legitimacy to its efforts.

3. Part II of this article discusses the digital music distribution environment as it existed before SDMI. Part III reviews SDMI’s objectives and accomplishments. Part IV explores internal obstacles to SDMI’s future success, such as the lack of interoperability between SDMI-compatible devices and compression formats, and SDMI’s desire to achieve technologically elusive perfect security. Part V examines external issues that threaten to derail SDMI before it even gets off the ground, such as the pervasiveness of the consumer preferred MP3 standard, the perceived illegitimacy of SDMI’s motives, the uncertain impact of the America Online - Time Warner - EMI merger, consumer privacy concerns, and new technologies (Napster, MyMP3.com). In conclusion, I offer predictions about the likely course of SDMI and digital music generally over the next few years.

II. Pre-SDMI Digital Music Environment

4. MP3 [2] is the most popular compression format for downloading, trading, and listening to music on the Internet.[3] The Internet music industry is predicted to hit $1.6 billion by 2002, and approximately 500,000 MP3 files are available on the web.[4] MP3 is an open format without security protection.[5] This lack of protection has caused concern among copyright owners whose property is being freely traded on the Internet without financial accountability.[6] Indeed, some speculate that more than 90% of MP3s currently in circulation were obtained without the copyright owners permission.[7] However, it is important to note that the MP3 compression format also has legitimate uses.

5. Traditional copyright enforcement mechanisms have had mixed success in the Internet environment.[8] The virtual locations of files and Internet Service Providers (ISP) that host those files are easily identifiable by their uniform resource locator (URL) code. United States copyright owners can demand that domestic ISPs remove infringing files pursuant to the Copyright Act,[9] which provides ISPs safe harbor from infringement prosecutions as long as they comply with notice and takedown requests. If ISPs refuse to take down infringing websites, however, they are as liable for infringement as the website owners. Of course, this method of enforcement is very costly for copyright owners who must devote time and resources to tracking infringing websites and notifying ISPs, and these costs are likely to increase exponentially as the number of infringing files proliferates.

6. In the international context, where the United States Copyright Act has little force, copyright owners are forced to proceed against individual website owners largely without the aid of ISPs. Identifying infringing website owners and physical addresses to send cease and desist letters to typically ends the inquiry, as the infringer’s physical location may be impossible to determine.[10] If the copyright owner is able to send a cease and desist letter, it may lack strength as she has no jurisdictional authority to enforce her exclusive copyright rights.[11]

7. Several additional factors have increased copyright owners’ digital music enforcement difficulties. The Internet subscriber base in the United States recently reached one hundred twenty two million,[12] forty-four percent of all adults. College students have access to high quality, ultra fast T1 lines,[13] which increase the ease and convenience of downloading large video and music files. In addition, the popularity of MP3 players,[14] which allow MP3 files to be played away from the computer, has increased consumers desire for musical content. Even if the artists could track all of these infringements, it is not likely that they would want to prosecute, since these are their most ardent fans and supporters.

8. A distinction should be made between the copyright owner and the artist. Often they are different entities, as artists may choose to assign their copyrights to publishers in exchange for marketing and distribution. When an artist makes such an assignment, enforcement of the copyright falls to the publisher. The distinction between creation and enforcement often results in publishers and artists having different perspectives on new technology.

9. The Internet and MP3 technology have provided artists with the opportunity to communicate directly with their fans,[15] allowing them to avoid the major label process.[16] Some artists have become disenchanted with major labels that require them to gain the approval of artists and repertoire (A&R) managers and to abide by fixed studio to retail timelines, often forcing them to alter or shelve what they believe to be their best material.[17] Recently, some labels, sensing the value of digital rights, have required their artists to sign over those rights without additional compensation.[18] This has further alienated many artists and drawn them to Internet sites that offer greater financial stakes and increased autonomy.[19]

10. While the major labels fret over the piracy that results from the proliferation of MP3 files, independent and Internet-only labels have developed relationships with both artists and consumers.[20] These entrepreneurs have grasped the opportunity to establish their brand identities by giving away free downloads and by helping consumers locate their favorite tunes.[21] Internet-only labels pose a great threat to the major labels, since the Internet-only labels had less copyright-protected material initially, and therefore have less to fear from MP3 piracy. As a result, they have been freer to test new business models and distribution formats.[22]

11. Notably, with the increasing consolidation of entertainment content producers and distributors, resulting from the recent AOL-Time Warner-EMI and CBS-Viacom mergers,[23] the Internet provides an opportunity for niche marketing and exposure for those artists who do not fit into the predominant musical genres.[24] It also provides a new outlet for older consumers who shun the teenybopper retail environment, and prefer classic back-catalog albums that are too costly to keep in inventory and that are therefore frequently out-of-stock.[25]

12. While the music industry has been the focal point of the digital distribution maelstrom thus far, the other entertainment industries are not far behind.[26] The digital TV,[27] film,[28] and book[29] industries are all watching the music industry’s digital distribution security debate with great interest, hoping to be able to free ride on its solutions. This reliance gives the music industry’s current standards battle additional importance, because solutions developed in this segment of the entertainment industry will be applied to the other segments.

III. The Secure Digital Music Initiative

A. Objectives

13. Following defeat in its effort to secure a preliminary injunction preventing Diamond Multimedia Systems from shipping its Rio MP3 Player to market,[30] on December 15, 1998, the Recording Industry Association of America engineered the formation of the Secure Digital Music Initiative (SDMI).[31] By this point it was clear to the established music and technology companies that electronic music distribution was more than a fad, and that the only way for the companies to remain viable was to figure out how to parlay their success in the physical world into the digital environment.[32] These adaptive efforts coalesced when over 100 music and technology companies joined together to form SDMI to chart the future of digital music.[33]

14. At the February 26, 1999, kick-off meeting, Dr. Leonardo Chiariglione, Executive Director of SDMI, announced its objectives:

SDMI is a global initiative providing a forum where technology companies can work together to create an open architecture and specification for digital music security. The ultimate goal of the initiative is to enable consumers to access and enjoy music in new ways, while ensuring interoperability among digital products and services so as to enhance the consumers listening experience.[34]

15. The guiding principles behind SDMI are that a successful security standard will spur the “growth of legitimate markets for digital delivery of copyright recorded music,”[35] that the standard will be “widely adopted by the technical industries and their customers,”[36] and that the standard will be voluntarily implemented by SDMI participants.[37] SDMI believes that these objectives will be met “[b]y supporting a wide variety of agreements between rights owners and consumers,…enabl[ing] multiple new and flexible business models to emerge in the marketplace.”[38]

B. Accomplishments

16. SDMI has moved fairly quickly, especially given the number of members and competing agendas,[39] to establish the framework for the creation of SDMI-compliant music and players.[40] On June 28, 1999, SDMI adopted reference architecture for moving encoded music in various formats onto devices consistent with SDMI rules.[41] SDMI published this “standard”[42] on July 13, 1999.[43] Phase I is an open format that accepts all content, including MP3, beginning immediately.[44] During Phase I, SDMI music will be encoded with a watermark that will be used to identify it as legitimate in later phases.[45] It is important to note that there is no increased security for SDMI music during Phase I, nor is there any way for consumers to distinguish between MP3, both legitimate and pirated, and SDMI watermarked music.[46] The only distinguishing feature between an MP3 player that is SDMI-compliant and one that is not is that the SDMI-compliant player has been created and tested for its ability to identify the SDMI watermark.[47]

17. Though one of the key tenets of SDMI is that adoption of its standards by participants will be voluntary,[48] in deciding on the watermark for Phase I, SDMI selected Verance (formerly Aris/Solana) as the exclusive provider of the Phase I screening technology.[49] According to SDMI, selection of one watermark provider was necessary,[50] although it is not clear why exclusivity was necessary for this particular feature of the standard and not for others.[51] Importantly, once this selection was made, it became imperative for all hardware manufacturers planning to bring SDMI-compliant players to market in time for the holiday season to ensure that their technology was compatible with the Verance Phase I watermark.[52] Unfortunately, the final contract with Verance was not signed until December 6, 1999,[53] and the Big Four music companies (Warner/EMI Music, Universal Music, BMG, and Sony Music) did not agree to license the watermarking technology from Verance until March 20, 2000.[54]

18. With Phase I SDMI-compliant players and applications on their way to market, SDMI announced the required functionality for the Phase II screening technology on December 9, 1999,[55] and issued a Call for Proposals on February 28, 2000.[56] The call for proposals describes the technical and legal requirements companies must meet when applying to be considered as a Phase II screening technology provider, and notes that proposed technologies must be compatible with the Phase I watermark.[57] The proposed functionality for Phase II calls for a screen that creates default rules, restricting the user to four copies from original CD, DVD, electronic music distribution (EMD), or MP3 files (both legal and pirated).[58] One copy stays with the host machine and three may be loaded to peripherals.[59] The screen does not allow transfers to the Internet or other host machines.[60] Consumers requiring more than four copies will have to go back to the original and begin the process anew.[61]

19. Once the Phase II technology has been selected and implemented, Phase I SDMI-compliant players will be given the signal to upgrade to Phase II.[62] The actual design of the upgrade system has not yet been determined, but it will use the encoded watermark to trigger acceptance of approved SDMI files.[63] SDMI emphasizes that the transition mechanism will not cut off any functionality from the Phase I application or portable device.[64] However, consumers who want to be able to play or copy SDMI-compliant music through an SDMI-compliant player or computer program will have to upgrade to the Phase II watermark screening technology.[65] SDMI emphasizes that the only content SDMI-compliant devices will be unable to play, is illegally copied SDMI music beginning in Phase II.[66] Such music will be identified by the lack of an approved watermark. Apparently this screening process will not affect MP3 files that are freely shared by the owners without watermarks, but rather it will only discriminate against SDMI files that are lacking the required mark.[67]

IV. SDMI Internal Obstacles

20. The two most daunting obstacles to SDMI’s success are of its own making. The first, lack of interoperability, was the result of dominant forces within SDMI that preferred the “winner take all” gamble of standards adoption. By going it alone, and creating individual rather than group standards that conform to SDMI’s loose architecture, successful companies stand to gain the most if their standard is adopted. This approach has led to a proliferation of standards and consumer confusion. The second internal obstacle is the conflict between the music and technology companies over the acceptable level of copyright protection. The music industry wants perfect protection and is working to achieve this goal through both legislative and technological means. The technology industry realizes that perfect protection is difficult to achieve and once achieved will be vulnerable to hacking and working around. Given its desire to get hardware to market as soon as possible, the technology industry is willing to move ahead with enough protection to keep honest people honest. The outcome of this struggle will probably determine the success or failure of the SDMI effort.

A. Lack of Interoperability

21. From the very beginning of this process SDMI had two important and conflicting objectives.[68] The first was to provide a forum for music and technology companies to come together to determine the future of digital music in an open environment where, in order to foster efficiency, sharing was encouraged.[69] The second was to ensure that the association and its standards remained voluntary, so that any standard developed would serve only as a guideline for others.[70] From these two objectives, SDMI’s leadership believed that widely adopted interoperable standards would emerge.[71] Unfortunately, interoperability was last on the agenda in an environment that fostered competition by making adherence to standards voluntary.[72] What happened instead was a race, both to be first to market with new technologies, and to form alliances with companies thought to be most likely to win the standards war.[73] Music and technology companies kept one foot in SDMI and the other in the marketplace, ensuring that they had a stake in SDMI while waging a standards battle.[74] The result was consumer confusion due to the proliferation of compression formats and players, all compatible with MP3, but largely incompatible with each other.[75] Due to uncertainty about which technologies will win the standards battle and which compression formats will agree with which players, consumers may take a wait and see approach and accept the new technology slowly, waiting until evidence of mass adoption is plain.[76]

22. Such an outcome may be undesirable for consumers, but many economic scholars believe that incompatibility is the best approach to achieving innovation in high technology networked markets.[77] Compatibility is desirable for consumers because it narrows their decision making to traditional factors like price and availability,[78] rather than deciding which technology is superior or most likely to be adopted by other consumers.[79] However, economists argue that compatibility in high technology markets is actually socially undesirable for consumers because it leads to inefficient inertia that retards innovation.[80] Once consumers have settled on a standard, and all manufacturers adhere to that standard, other potentially superior innovative technologies may be ignored in favor of maintaining the status quo.[81] Moreover, manufacturers in compatible markets may collude to maintain price and profits, removing the incentive to invest in research and development.[82]

23. Thus, compatibility may remove important incentives for dominant players to innovate. If a particular standard is selected as the one with which others must be compatible, the dominant manufacturer may cease to develop new technology and lose its technological advantage, and ultimately find that its technology has become obsolete.[83] Scholars further argue that incompatibility in high tech markets gives potential new innovations a “winner take all” effect.[84] The first manufacturer to stumble upon the next major innovation will reap all of the benefits of its victory, rather than sharing in a single standard equally with other manufacturers. This high stakes battle encourages research and development investment in new technology, and equalizes opportunities between large and small firms,[85] thus further spurring innovation. This is precisely the type of environment that should be encouraged when technology is rapidly evolving. If standardization and compatibility were preferred in this situation, it could lead to the rapid adoption and irreversible lock-in of inferior technology,[86] rather than continued development of superior technologies.

24. SDMI’s objective to provide a forum for cooperation was a good one, as rivalry among dominant players in standard setting may lead to inefficient over-development of separate standards and thus delay adoption of a single standard. However, participation in SDMI’s cooperative environment did not preclude individual participants from pursuing parallel technologies. By working both within the group and outside of it, parallel paths to innovation were pursued.[87] This inter-standard competition created a level playing field where old-line and new-media firms could compete on an equal footing. The result is a process that encourages innovation, with each manufacturer vying for consumer adoption and searching for the best technology in the digital music environment. Though in the short term consumers may be confused, in the long term they will benefit from the rapid development of superior technology.[88]

B. Labels Want Perfect Copyright Protection

25. Part of the tension within SDMI revolves around the level of copyright protection that will be acceptable to the music and technology industries.[89] The technology industry realizes that perfect security is not achievable and once a new standard is adopted, it will be circumvented, forcing further technological development. Instead of going through this circular process, the technology industry would prefer to get their gadgets to market with enough protection to keep honest people honest.[90] The music industry prefers to wait until an acceptably high level of protection is developed,[91] and initially it resented the inclusion of even legitimate MP3 files in the new SDMI environment.[92] Critics of SDMI note that not only is perfect copyright protection impossible to achieve, it is more copyright restrictive than the law allows.[93] As a result, the music industry’s attempts to expand copyright protection through legal and technological means will continue to be a roadblock to SDMI’s progress and consumer acceptance.

1. Law and Legislation Favoring Copyright Owners Rights Expansion

26. As digital technology was expanding the potential for communication among consumers and between creators and their fans, the entertainment industries were lobbying Congress to limit the impact of digital copying on their underlying businesses.[94] Copyright in this environment is perceived as a zero-sum game: as consumers’ rights expand, copyright owners’ rights contract. As a result of this perception, the copyright industries have sought to ensure that copyright protection will not be compromised in the digital age, though digital technologies make infringement easier than it has ever been. They have sought to make the law conform to their ends, and in this respect, they have been quite successful.[95]

27. The Audio Home Recording Act[96] (AHRA), passed in 1992, was the result of a compromise between the recording and technology industries to prevent digital copying without financial accountability to copyright owners.[97] The legislation was developed amid music industry concern over consumer availability of digital audio tape recorders (DAT).[98] The AHRA imposed a compulsory license on hardware manufacturers[99] and required them to install a serial copy management system (SCMS) or some other approved system to prevent successive generation copying.[100] In return for meeting these increased burdens, the hardware manufacturers and distributors received immunity from copyright infringement prosecution based on manufacturing, importing, or distributing “a digital audio recording device, a digital audio recording medium...or for using any of these devices or media for personal, noncommercial recording.”[101] The additional financial and technological burden assessed by the AHRA delayed the DAT recorders entry into the consumer market, increased its retail price, and removed the consumer benefit (successive digital copying), successfully thwarting its popularity. DAT use today remains effectively limited to recording professionals.[102]

28. The entertainment industries also expanded their enforcement power by transforming civil penalties for copyright infringement into criminal ones. The No Electronic Theft Act (NET),[103] passed in 1997, provides that a copyright infringer can get up to six years in prison for a second offense, three years for a first offense, or a substantial fine for distributing as little at $1,000 worth of music.[104] The NET Act defines a criminal infringer as any person who infringes a copyright willfully “for the purposes of commercial advantage or private financial gain” by the “reproduction or distribution, including by electronic means…one or more copies or phonorecords of one or more copyrighted works, which have a total retail value of more than $1,000.”[105] Importantly, the NET Act also amends the Copyright Act definition of financial gain to include receipt, or expectation of receipt, of anything of value, including the receipt of other copyrighted works.[106]

29. Most recently, Congress enacted the Digital Millennium Copyright Act of 1998 (DMCA).[107] In addition to provisions enabling liability actions against ISPs that host infringing material,[108] the DMCA prohibits circumvention of technological measures used to protect copyrighted works.[109] However, the DMCA does not yet take into account the extent to which fair use can be used as a defense to circumvention.[110] Critics have noted that the DMCA provides an unprecedented amount of control to copyright owners by providing that the mere unlocking of technologically secured copyrighted works is an actionable offense.[111] This amount of control, they argue, is beyond what copyright law allows and is anathema to the free flowing Internet environment.[112]

30. These three amendments to the Copyright Act have not been fully tested by the courts. As a result, they are subject to the interpretations favored by the parties.[113] The Recording Industry Association’s (RIAA) attempt to broadly interpret the AHRA was thwarted by the Ninth Circuit in the Diamond Rio litigation.[114] In that case the court refused to go along with RIAA’s assertion that personal computers were included in the AHRA’s definition of digital audio transmission devices.[115] The NET has been underutilized as an enforcement tool, likely due to copyright owners’ reluctance to prosecute their core constituencies. There are currently three cases interpreting the DMCA that test its anti-circumvention provisions.[116] Observers are hopeful that courts will recognize a fair use privilege, rather than tilting towards a more restrictive interpretation.[117]

2. Questionable Legality of Securing Rights by Technology that are Granted to the Public by Law

31. As a result of SDMI’s efforts to encourage research and development and to bring new technologies to market, digital rights management firms are closer to developing perfect copy control systems.[118] However, they are not quite there yet, as evidenced by recent successful efforts to crack SDMI’s code.[119] If digital rights management firms are successful in the future at creating an impenetrable code, the result will be an increased ability for copyright owners to control the total use of their works beyond what the Copyright Act allows.[120] Many fear that consumers clearly enumerated and judicially recognized rights of fair use[121] and first sale[122] will be disregarded by overreaching copyright owners who want to be able to track every circulating copy of their works. It is as if copyright owners have forgotten the deal that was struck in the Copyright Clause,[123] which states that copyrights are granted “[t]o promote the progress of science and useful arts…by securing for limited times to authors…the exclusive right to their writings.” The exclusive rights are enumerated and do not include all possible rights.[124] The ultimate goal of the Copyright Grant is to benefit the public by increasing the volume of works available to it for consumption.[125] The economic benefit that results from the exclusive grant is essentially a bribe to ensure that authors and scientist will continue to create.[126]

32. SDMI’s attempts at technological lock down have not gone unnoticed by artists[127] and independent labels,[128] many of whom have organized and become quite vocal against these efforts. Organizations such as the Electronic Frontier Foundation,[129] Art to Heart,[130] and Musicians United[131] hope to raise consumer awareness about the rights that are at risk and to lobby Congress on the public’s behalf.[132] Unfortunately it appears that SDMI’s technological ability to prevent fair use and disregard consumers’ first sale rights will arrive before a legislative solution or even consumer awareness of encroachment.

33. The Stephen King e-book test is a good example of a copyright owner’s exercise of expansive control and consumer acquiescence.[133] King’s publisher offered the book for sale to participating e-booksellers. These booksellers either charged consumers $2.50 per copy or used the book as a promotional tool by offering it for free and advertising other King books and merchandise.[134] Consumers downloaded copies that could not be printed or sent to anyone, effectively limiting them to reading the book on their computer screens.[135] More than 500,000 consumers downloaded King’s 66-page short story,[136] which will not be released in any other medium,[137] so they are happy. Stephen King estimates that he will make at least $450,000, as opposed to his normal magazine publication fee of $10,000,[138] so he is happy. His publisher was paid a handsome sum for doing no more than brokering the deal between King and the e-booksellers, so they are happy. No paper was used in this transaction, so the trees are happy. So who is getting the raw end of this deal? Consumers are, because once their rights are ceded they will not be given back. It could be the case that within a reasonable price range, consumers will be willing to cede their fair use and first sale rights in return for cheap desirable content. This is the hope of SDMI and the rest of the entertainment industry. However, the music industry should use caution when cross applying research from book publishing to music. Books are primarily one-use items. Once a book is completed, the consumer may want to share it with a friend, but probably does not want to re-read it. Music, to the contrary, is a repeat use item. A consumer who owns the song wants to be able to play that song at home, in the car, and on headphones, as well as share it with friends. While usage restrictions may be much less noticeable in e-book distribution, they will become glaringly obvious in the music environment.

34. Entertainment companies should not simply take consumers’ fair use and first sale rights without some acknowledgement that consumers are relinquishing them in return for a bargain.[139] By taking these rights through technological, rather than legislative means, SDMI is removing consumers’ ability to choose the bargains they would like to strike in return for content.[140] SDMI is saying very simply “you will have to pay to play.”[141] This is precisely the virtual world to which Professor Lawrence Lessig refers when he speaks of code becoming law in cyberspace.[142] Lessig argues that although copyright law recognizes consumers’ right of fair use, code writers, the true governors and law makers in cyberspace,[143] see fair use as a programming bug that stands in the way of their goal of perfect control.[144] He notes that the values of cyberspace have moved away from communal interaction and toward commercialism.[145] In this new environment, programming that increases commerce is good, while programming that reduces commerce is bad. Lessig further notes that engineers are making these critical value judgments without any input from either consumers or their representatives in the legislature.[146]

35. There seems to be nothing to stop entertainment providers from moving to protect their content through technological means in the digital environment in ways that would be deemed unacceptable in the physical world. These actions are of questionable legality and should be challenged in the courts and by the public’s representatives in the legislature, before important rights are ceded and become unrecoverable.

V. SDMI External Obstacles

36. In addition to the potentially devastating internal obstacles SDMI faces, it faces a number of external obstacles, each of them formidable in its own right. The first, and perhaps most important of the external obstacles, is consumer adoption.[147] MP3 is the most popular and widely used music compression standard. Consumers can now find almost any song they want to hear in the MP3 format, especially since the launch of Napster.[148] Given the broad availability and acceptance of an existing standard, consumers simply have not demonstrated a desire for a new secure compression standard. In fact, the only complaint about MP3 among audiophiles is that the sound quality, although good enough, could use some improvement.[149]

37. Even if consumers did see value in a secure compression format, reports from the Internet front suggest that trendsetters in that environment despise the SDMI organization and are particularly embittered by its attempts to limit consumers’ rights through technology.[150] SDMI opponents point to several factors that undermine its legitimacy. First, they suggest that instead of creating a standard to exist alongside of MP3, SDMI’s real goal is to eradicate the unsecured standard.[151] Second, they accuse SDMI of promoting a vaporware specification, not intended to be successful, but rather to disrupt consumer adoption of other formats.[152] Third, as a result of SDMI’s restrictive membership criteria, it facially resembles an anti-competitive cartel, in violation of antitrust law.[153] Even if the restrictive criteria pass antitrust scrutiny, some of those excluded may question whether or not their interests will be best served by the resultant solution.[154] Fourth, the same SDMI members that determine the adoption of exclusive technologies often hold patents on the required technology.[155] This leads some to accuse SDMI members of double-dealing and acting in undisguised self-interests.

38. There are several ancillary issues that also threaten to derail, or at the very least redirect the SDMI effort. The recent AOL–Time-Warner–EMI merger increases industry concentration, thereby raising antitrust concerns.[156] More importantly though, this merger emphasizes the possible synergy between the entertainment and Internet worlds, and that probably quickens the race to get online. Recent rumblings in the retail community suggest that retailers are planning their own race into the digital domain because, ironically, of their resentment of label efforts to disintermediate them.[157] Once consumers understand that watermarks have been added to all of their CDs with the ability to track their usage habits, they will surely complain that their privacy has been invaded,[158] though by then it may be too late. Finally, while the major recording and technology companies went into a cocoon to figure out the future of digital music distribution, the rest of the world did not take a time-out. Instead, Internet entrepreneurs have been busy creating innovative business models, which have increased the security threat SDMI was formed to guard against.[159] As SDMI’s deliberations continue, it will continually have to reassess the harms it is working to prevent.

A. MP3 Locked-In As Preferred Standard

39. MP3 is the most popular music compression format on the web.[160] Its dominance is undisputed. The issue that SDMI must tackle is whether or not this early lead will be predictive of the future outcome of the battle between MP3 and SDMI-compliant compression formats and devices. Some argue that MP3 is already locked in as the accepted standard and that all SDMI efforts will fail as a result.[161] Many MP3 supporters concede that it is vulnerable to replacement by a superior standard.[162] However, ardent MP3 users are unwilling to switch to a new standard, even if it is superior, which will jeopardize their connection to other Internet music lovers.[163] On the other hand, SDMI supporters suggest that consumers care about content and that they will only become SDMI-compliant when their favorite tunes are available exclusively in that format.[164]

40. Assuming that MP3 and SDMI provide similar benefits and burdens for consumers, the simple question becomes: “How can SDMI influence consumers who have already adopted MP3 to switch?” Some economic scholars argue that there is nothing SDMI can do because the Internet is a networked environment prone to early adoption and lock-in.[165] Lock-in occurs when consumers adopt a product or technology that links to others in a networked environment.[166] Once this link has been solidified, it may be difficult to break. As a result, even inferior technologies and processes may become imbedded and impossible to dislodge.[167] This problem is also described as one of excess inertia, which occurs when an inferior standard accumulates a large installed base that results in a “socially undesirable failure to adopt an improved technology.”[168] Commonly cited examples of locked-in inferior standards are the triumph of VHS over the superior Beta standard in videocassette recorders, and the adoption of the QWERTY keyboard over the more efficient Dvorak model.[169]

41. Others debunk the idea that inferior technologies can win standards battles just by being more widely adopted, and argue that the superior and most efficient technology or process will ultimately prevail.[170] They believe that market forces will sort out these standards battles,[171] countering that VHS and QWERTY won because they were the best, most efficient standards, not just because they were adopted by the masses.[172] They also argue that market forces can be influenced more by consumer expectations than by past market behavior.[173] Therefore, being the first widely adopted standard is not enough to ensure success in the market. In addition, consumers have to believe that the one who produced the standard has, and will continue to have, the best technology.

42. If SDMI believes the efficiency optimists argument, then it is not too late for them to succeed. If SDMI is truly a superior standard then it will win. SDMI must begin by managing consumers expectations. If early adopters of MP3 come to believe that the best content will only be available on SDMI-compliant devices, and if they believe that its audio quality is superior to MP3’s, they may be enticed to switch.[174] However, once SDMI entices consumers to switch, it will face the reality that its secure standards are more restrictive and inconvenient than the open MP3 standard.[175] The question for consumers is then whether they are willing to give up their fair use and first sale privileges in return for greater content and potentially superior audio quality.[176] Some early SDMI adopters do not seem to be willing to make this trade-off and complain about the cumbersomeness of SDMI-compliant players.[177] Some consumers liken the SD