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Last updated on April 21, 2014 at 8:55 EDT

Microsoft Moves to Control Management of Digital Property Rights

November 29, 2004

A decade ago, the expression “content is king” was seized upon by the new-media world while it was struggling to come up with a business model.

The slogan embodied the idea that drove Internet companies like America Online to team up with content companies like Time Warner to capitalize on the transition to digital communications.

Mostly, it hasn’t worked out that way. Today, “content is king” is still operative, but it is playing out more quietly. It is no longer the content itself that is getting attention but the control of the content.

One pioneer in this field of digital-rights management, or DRM, is ContentGuard, a privately held 30-employee company in Bethesda, Md. The small company was spun out of the Xerox Corp.’s Palo Alto Research Center, that fabled high-technology Petri dish that produced personal computers, “windows,”"icons,”"menus” and other innovations.

Microsoft and Time Warner have been trying since April to recieve approval to buy ContentGuard for an undisclosed price. But, in an indication of just how important the world of digital rights has become, the deal has been stalled while the European Commission considers whether the purchase would give Microsoft a monopoly in the digital-rights management market.

It has until January to decide, making the ContentGuard deal perhaps the first controversial case to be ruled on by the new competition commissioner, Neelie Kroes — although much of the foundation of the case was built under the direction of her predecessor, Mario Monti. This is the same organization, of course, that ordered Microsoft to cut Media Player, its ubiquitous audio and video software with built-in digital rights management, out of the Windows operating system.

Because music, video, photos and words are easily shared once they are in digital form, companies are motivated to engineer technological locks and keys for their content. Without digital- rights management, copyrighted material can be duplicated without payment to its originator.

Companies offering digital-rights management systems that are eventually adopted by software, hardware and consumer electronics companies worldwide could profit every time someone gains access to content, and that has investors, media companies and regulators keenly interested in how competition in the sector unfolds.

ContentGuard makes software that manages the owners’ rights, and it developed a programming language, called extensible rights markup language, known as XrML, that is already used by Microsoft and that is being promoted in the movie industry. Competing digital-rights management systems exist, but none — including ContentGuard’s — have yet to offer graceful solutions to all the problems that digital content creates, like how to permit limited “fair use” copying on all possible playback devices while preventing wholesale theft.

In August, the European Commission said that the purchase “would be liable to create or strengthen Microsoft’s dominant position on the market for D.R.M. solutions” and that the concentration “raises serious doubts” that it is in the public’s interest. But Microsoft really wants this company, so much so that last week, it and Time Warner invited a French company, Thomson, to take a one-third ownership stake in ContentGuard with them.

With Microsoft as a minority owner, and with a European company as part owner with voting rights, the partners hope that the commission’s concerns will be eased. Thomson, in addition to owning the RCA and Technicolor brands, holds the license for MP3, the dominant technology that translates music into digital form. But the commission itself has been circumspect about what Thomson’s move means to the deal.

Other European players have expressed concern about Microsoft. In September, Telecom Italia submitted a report to the commission that said “it is by now clear that any DRM solution for the PC environment can hardly compete with Microsoft’s established platform,” and “from such a favorable position, Microsoft may expand its DRM technology to consumer electronics products like portable devices, set-top boxes and game consoles.”

Two consumer groups — Privatkopie.net in Berlin and Bits of Freedom in Amsterdam — likewise urged the commission to “aggressively strike against anticompetitive behavior by dominant players using DRM as an opportunity to capture even more of the market.”

The European Commission’s antitrust regulators have allowed mergers in this area before. In 2002, the commission approved the joint purchase of InterTrust, a digital-rights management patent holder, by Sony and Royal Philips Electronics because “strong competitors are active in the markets” and because “DRM is a developing technology.”

As it turned out, InterTrust licensed its patent portfolio to Microsoft this year to settle a patent infringement lawsuit against the company. In one of many settlements Microsoft has negotiated this year, Microsoft paid InterTrust $440 million to settle the dispute over 150 InterTrust claims.

Many analysts say that a lack of adequate copyright control has held back digital commerce and contributed to piracy. But with opposition in Europe and competition worldwide — InterTrust, Macrovision, RealNetworks, Apple Computer, Adobe Systems, Sony and others are promoting different variations on the digital-rights management theme — it is not yet clear that Microsoft’s brand of electronic lock for content will be crowned king.