Freedom to Tinker

On Friday I wrote about DVD region coding, which allows the manufacture of DVDs that (in theory) can only be played in certain regions of the world. U.S. public policy, in the form of the Digital Millennium Copyright Act (DMCA), plays an important role in shoring up the region coding mechanism. Is this good public policy? Should the U.S. want DVDs to be region coded?

Let’s look at the economic effects of region coding. These days, the main effect is to allow the studios to price discriminate by selling the same DVD at a different price in the U.S. than overseas. Generally, we can expect the U.S. price to be higher – let’s assume the price is Pu in the U.S. and Po overseas. If it weren’t for region coding, this differential pricing would be hard to sustain, because people could buy DVDs cheaply overseas and resell them in the U.S. Region coding prevents this kind of reimportation.

(Similar issues arise in the debate over drug reimportation, where we also see U.S. producers wanting to price discriminate, and reimportation posing a threat to that price discrimination strategy. The drug reimportation issue is more difficult – there, policy decisions take on a moral dimension, because drug pricing is literally a life and death issue for some patients.)

If region coding were abolished, then the U.S. price and the overseas price for a DVD would equalize, at a level below the current U.S. price and above the current overseas price. The studios could no longer price discriminate, and so would be worse off. U.S. consumers would be better off – they would spend fewer total dollars on DVDs, and would get more DVDs for those dollars. Overseas customers would see a price increase, and so would be worse off. Total welfare would decline, with the gains of U.S. consumers outweighed by the losses of U.S. studios and overseas consumers.

But we shouldn’t expect U.S. policy to care much about the welfare of overseas consumers. And if we focus only on the impact on U.S. people and companies, then region coding doesn’t look nearly as good – it looks like a deliberate policy of boosting DVD prices in the U.S. Indeed, region coding acts just a like a tariff of Pu-Po dollars on each reimported DVD. If we didn’t have region coding, would Congress enact such a tariff? I doubt it.

(Note: My analysis above assumes that all movie studios are located in the U.S., so that the U.S. economy captures all of the producer-side benefits of price discrimination. If overseas studios use region coding to boost their prices in the U.S., this hurts U.S. consumers while providing no countervailing U.S. benefit, so region coding looks even worse.)

(Another note: Some readers may object that the U.S. shouldn’t be so selfish as to ignore the welfare of people outside its borders. Point taken. But surely you would agree that, whatever level of U.S. aid to the world community is appropriate, that aid should be used to attack a problem more pressing than the high price of DVDs.)

As I noted yesterday, part of the license that DVD makers have to sign is <a href="As I noted yesterday, part of the license that DVD makers have to sign is available on the DVD Copy Control Association (DVD-CCA) website. It’s 48 pages of dense technolegalese, consisting mostly of a list of things that DVD players aren’t allowed to do. On reading it, three things jumped out at me.

First, DVD region coding, the mechanism designed to stop DVDs bought in one part of the world from being played in another part, is the subject of much more regulatory effort than I expected. For example, there are special robustness requirements for region coding. (In the weird Orwellian language of DRM vendors, “robustness” is a code word denoting the use of deliberately complex, nonmodular designs so as to resist diagnosis, analysis, and repair.)

Second, it seems to be impossible to build a software DVD player that complies with the requirements. According to section 6.2.4.2 (page A-20),

Specificially, [software] implementations shall include all of the [required anti-reverse-engineering characteristics] which shall be implemented in a way that it is reasonably certain they: cannot be defeated or circumvented using widely accessible tools such as but not limited to debuggers, decompilers, and similar Software development products; and can only with difficulty be defeated or circumvented using professional computer engineering equipment such as … logic analyzers …

To comply with this, one would somehow have to write a piece of software whose data and algorithms absolutely cannot be determined by a person using a debugger or decompiler. We can be “reasonably certain” that any program written today can be understood using these tools. (It seems reasonable to read “cannot” as requiring absolute impenetrability, given that the next clause says “only with difficulty”.)

Third, the document bans DVD players from taking a movie that is encoded on a DVD at one level of resolution and outputting that movie on an analog output at a higher level of resolution. (Section 6.2.1.1 (2), page A-11) This ban holds even if the DVD publisher wants to allow a higher-resolution output. I couldn’t figure out what the purpose of this restriction might be. Maybe the document’s authors just got carried away after writing pages and pages of text limiting the functionality of DVD players.