Progress on Point Release 14.2 February 2007 Periodic Commentaries on the Policy Debate

Copy Protection and Games: Lessons for DRM Debates and Development

by Solveig Singleton*

Technical protection measures for copy protection for music, movies, and books are sometimes controversial. Digital rights management (DRM) may allow consumers to use content as they became accustomed before digitization and before the Internet. But it might not. It is tempting for policymakers, like consumers, to take a backwards-looking view of what the media consumption experience "should" be like, particularly with regards to fair use. But this would be bad policy. The market landscape is just too complex and fast-moving. And it offers plenty of protection for consumer interests without legal interference. Content producers want and need to reach their audience; and consumers do not care about the right to make backup copies at any cost.

The history of computer and console games illustrates this need for forbearance very well. This paper compares the evolution of better-protected console games with that of the somewhat less well protected games developed for the personal computer (PC). The history of games shows that the vision of protected content as automatically less desirable or as being used to foist other undesirable features on consumers is a distortion. Competition among protected and unprotected formats is alive and well, and consumers have a wide array of products at different price points from which to choose. Also, the technological picture changes with astounding rapidity in the face of changes to the distribution or storage media. Any top-down mandates are likely to be outdated almost before they are written.

One piece of the puzzle that is missing from the history below is, exactly how much did game file size, distribution media, and other factors affect piracy and industry revenues over time? The extent of piracy is difficult to measure even today, and early game producers either could not or did not reliably track sales, much less illicit copying. Piracy might substitute for sales or to varying degrees; some illicit copying might lead to sales or add subscriptions revenues. This is frustrating for policymakers. But it is useful to note that entrepreneurs developing new games must live with this same sort of uncertainty and risk, and so for the purposes of this paper, we have left these questions largely unanswered.

* Solveig Singleton is a lawyer and an Adjunct Senior Fellow with the Progress & Freedom Foundation. The views expressed here are those of the authors, and do not necessarily represent the views of the Foundation, its Board of Directors, officers or staff.

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PC Games

In the early 1980's, the very first generation of games for the personal computer was released with no copy protection whatsoever.1 This state of affairs came to an end rather quickly, with some exceptions continuing to this day.2

One early next trend in copy protection was to write instructions into the game file to restrict copying. This was abandoned because it caused compatibility problems with many new PC's coming on to the market, and users complained about the nuisance.3 Another strategy was hardware-based--a small slot in the side of the floppy was covered, preventing copying entirely. The measure could be defeated by the careful use of an Exacto knife, but this was tricky enough to limit its appeal.

In those days games were kept on 5 ¼-inch floppy disks; they were small enough that there was no need to copy them to a hard drive. Furthermore off-the-shelf machines did not come with hard drives. As software began to use more memory, hard drives came into general use. Consumers also wanted to make backup copies.4 In the late 1980s, therefore, early copy protection systems that prevented copying entirely were largely abandoned, first for software generally5 and then eventually for games.

Another method of copy protection had developed during the same time and survived into the early 1990s. This method involved requiring the user, when prompted, to enter certain phrases from the (paper) manual that came with the game. Sometimes this was a part of the game itself; "Conquest of Camelot" required the player to have learned certain medieval "flower codes" described in the manual. Manual-based copy protection could be defeated by enterprising youngsters making photocopies of the manual. Some game makers made this harder by printing one page of the manual on special paper, or including a layered "code wheel" with the game the use of which was required to identify the proper section of the manual. But manual-based copy protection schemes did not survive the advent of the Internet in the early-mid 1990's, over which

1See Jack Scholfield, "Computer Guardian (Newsview): How to Come Out on top in Games," The Guardian, December 5, 1985. 2See Brendan Sinclair, "Copy Protection Company Encourages Piracy," Gamespot Video Game News," available at http://videogames.yahoo.com/newarticle?eid=445011&page=0 (quoting Brad Wardell, lead designer of Galactic Civiliations II: Dread Lords, explaining, "[Copy Protection] is only industry-accepted in the PC game industry… Most of our business is in the application software market . . . and such copy protection measures are not used. I don't have to keep my Adobe Photoshop CD in the drive to use it. We simply applied the PC application software model of IP protection to our games--release the game with no CD-based copy protection and include a unique serial number that they need to use in order to obtain updates.") 3 Kenneth Lee, "Teens Add to Piracy Problem," Los Angeles Times, January 23, 1992, p. E3. 4 Philip Elmer-DeWitt, "A Victory for the Pirates?; Software Firms Abandon Their Key Defense Against Illegal Copying," Time Magazine, October 20, 1986, p. 86. 5 Lillie Wilson, "Computer Whiz Still Feels Bit of Program Piracy," The Post-Standard, June 12, 1988, p. C1 ("Most home computer games have kept their built-in copy protections, but the rest of the software industry gave up such protections one or two years ago, [Professor J. Robert Cook] says. The built-in devices created trouble because they prevented legitimate owners from making back-up copies of their own data… But perhaps more compelling to the industry, the protection devices never really worked.").

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copies of the manual and simple "cracks" of the segment of the program that referred to the manual could be readily distributed.

Pre-broadband, in the early 1990's, many games began to be distributed on CD. At first, the file size of these games compared to the average hard drive and available bandwidth for downloading was huge. Pirates would sometimes distribute copies with the video and audio tracks removed, but these had limited appeal.

As broadband took off, what ultimately evolved was the use of the CD key. PC games today require that one enter the unique 16 digit string of numbers that comes with the purchased game in order to install the game. After that, one may generally make copies so long as you enter this key, although some distributors allow only a limited number of copies to be made. PopCap, for example, which makes relatively simple "casual" games for the PC, limits copies to six; each time a copy is made the game checks with the PopCap server as to how many times the key has been used. Multiplayer games will not allow two users to log on simultaneously with the same key.

Finally, some wildly successful multiplayer games such as Blizzard's World of Warcraft have limited their need to control piracy of copies of the software--because everyone who actually uses the software to play must give their credit card number to subscribe and become a member of the online world.

Because PC games use media, equipment, and copy protection systems compatible with general-purpose hardware, storage media, and software, PC games have been more susceptible to piracy than console games. 6 They face interoperability challenges and must work with a more complicated interface (keyboard/mouse), and as such tend to be harder for the user to install, set up, and master.

On the other hand, PC games are generally more innovative than console games, because the general-purpose platform is constantly being upgraded. (The exception is console games for which a new console has just been developed and released; the console developers will be able to deploy cutting-edge tech that has not yet made it into standard general purpose computers. As of this writing, the Nintendo Wii is a good example.)

Partly because of the appeal of the specialized console interface to consumers, and partly because investment flows to media more easily protected from piracy, PC games have been steadily losing market share to console games. Microsoft's Vista represents an attempt to boost the PC's popularity as a game platform for players and

6The effect is even more pronounced for Macs than for PCs, as Mac developers are working with a precariously small market to begin with. See Peter Cohen, "Piracy Bleeds Mac Game Makers Dry," Macworld: Game Room, available at http://www.macworld.com/weblogs/gameroom/2006/06 (Describing a visit to a site where pirated copies were downloaded, "It wasn't at all unusual to see three or four times the number of downloads than retail sales… the difference between selling 5,000 copies of a game and selling 2,500 copies and seeing another 2,500 stolen can be the difference between breaking even or even making a small profit--or losing money hand over fist." Page 4 Progress on Point 14.2

developers,7 and it remains to be seen if it will catch on.

Console Games

The first successful console game system was the Atari 2600, released in 1977.8 Early console games were protected by hardware and format limitations; only a GamePak could be loaded into a Nintendo system, and only a Nintendo system could read the format of a GamePak. They did not work with general purpose computers or with standard storage media. Atari, Sega, Mattel, Sony, and ultimately Microsoft also used this closed model. As a result, console games' piracy problems are somewhat less acute than those faced by PC game developers. Counterfeiters must entangle themselves with illegally replicating the cartridges or selling "mod chips" that enable players to refit their consoles to read standard media.9 This is enough bother to keep developers willing to invest, as there is a mass market of consumers not likely to bother with counterfeits or mods. Laws such as the DMCA keep cracking tools in the grey market, so that game producers do not face the prospect of a user-friendly "cracker" pull-down menu in Windows.10

This general rule does not apply equally to all consoles. Microsoft, for example, chose to design the Xbox so that it is quite similar to a PC. The advantage of this is that developers who wish to design games for the Xbox need not develop a highly specialized set of skills or use highly specialized tools. Games for the Xbox can be developed more easily and at lower cost; so can cracker tools. At the opposite end of the spectrum is the PlayStation III. The equipment is so weird that few developers will have the credentials to work with it.

The advantage of linking games to specially developed hardware is that games face few interoperability challenges. The interface can be relatively simple. Compared to a personal computer, game hardware is cheap and easy to use--though game companies lose money on every sale of hardware,11 they are able to make it up on sales of games. Game hardware can be especially tailored to the needs of gamers (by including motion sensors, for example). For these reasons alone, console games have a broader appeal than PC games. As noted above, the PC game market is shrinking (even taking into account the wild success of Massive Multiplayer Online Games like

7"Windows Vista: Simply Great Gaming," Computer Gaming World, January 1, 2007. 8 Marty Shroeder, "History of Video Games: From 'Pong' to the Wii," The Observer, Feb. 7, 2007. 9See,e.g. "Video-game Pirates on the Loose," Tech News on ZDNet, August 6, 1999, available at http://news.zdnet.com/2100-9595_22-515372.html. ("While the standard PlayStation will not read an ordinary CD-ROM, consumers can purchase "MOD" chips that enable PlayStations to read standard PC CD-ROM and Japanese PlayStation games. In fact, on of the reasons Nintendo decided to use cartridge ROM instead of the far less expensive CD-ROM with the Nintendo 64 is that cartridges are harder to duplicate. While this decision has hurt their business, it has cut back on the level of piracy.") 10 See generally, Solveig Singleton, "The DMCA Dialectic: Towards Constructive Criticism," Progress and Freedom Foundation Policy On Point, May 2006, available at http://www.pff.org/issues- pubs/pops/pop13.11dmca.pdf. 11 See, e.g., Brian Dipert, "Got Game?" EDN, pg. 51, December 16, 2005 ("Microsoft has … lost $4 billion over the last four years on the console." [reference omitted]).

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Blizzard's World of Warcraft), while console games are expanding. A part of this is the lower risk of piracy as well as the appeal of the interface.

The most obvious drawback to the console model is that consumers who wish to play every hit game might end up buying multiple pieces of equipment (some games are released only for one platform, some for multiple platforms). Some consumers are willing to do so. Most are not.

A less obvious but probably more important consequence of the console model is that its resistance to illicit copying made developers ultimately able (some reluctantly, others not) to supply a rental market.12 In 1990, the Software Rental Amendments Act prohibited the rental of software because of a link to piracy,13 but game cartridges were exempted.14 Some consumers routinely buy console games. Some only rent. Many rent, then buy; one early estimate was that about 79 percent of rentals in the United States lead to sales15 (by comparison, one study found that pirated copies tended to supplant sales).16

Lessons for DRM Debates.

Before interpreting the history of copy protection in games to have meaning for copy protection debates of today, it makes sense to consider how similar games are to other media.

Most games today are produced in a long, elaborate collaboration between designers, programmers, script writers, and artists, all of whom must be paid. They may involve the production of original art, text, and music, or the use of excerpts from other

12 See, e.g. Steven Palmer, "Blockbuster to Launch Rent-A-Game Trial," Global News Wire, July 7, 1999, p. 2 ("A retail industry insider said: 'Renting console games is easy and a similar model to videos, but with PC games, the packaging will degrade quicker and there will always be piracy issues."). 13The software rental market had never thrived, perhaps because most people who needed to create a Lotus 1-2-3 spreadsheet would continue to use it and would need the software on an ongoing basis. Rachel Parker, "Trade Groups Endorse Bill to Outlaw Software Rental," InfoWorld, September 5, 1988, p. 42. Software rentals by libraries are still permitted, on the theory that a non-profit venture would be less of a threat. Scott Mace, "Congress Restricts Software Rental; SPA Succeeds in Push for Law to Stop Unauthorized Software Rental," InfoWorld, November 12, 1990; Karl Vick, "Super Mario Ruled Intellectual Property," St. Petersburg Times, September 22, 1990, p. 8A. 14 Nintendo was the strongest opponent of the exemption; they thought they ought to get licensing revenues from the rental outlets. But video game dealers and the Software Publishers Association testified that the games were resistant to copying, and that many rentals led to sales. Mark Seavy, "Video Game Firms Battling Copyright Bill," HFD-The Weekly Home Furnishings Newspaper, August 13, 1990, p. 102. Sega seemed to embrace rentals early on, and even Nintendo eventually conceded that rentals were an important source of sales. Scott Hendrick, "Lewis to get top VSDA Honor," The Hollywood Reporter, May 6, 1994. See also, Steve Makris, "Sony Accused of Pondering Locking Out Borrowed, Rented Games from its Playstation," Sault Star, p. E8, July 15, 2006. 15 Simon Morgan Warr, "Game War Heroes," The Independent, p. 6, August 23, 1992. 16"Macrovision Study Reveals Widespread Gaming Piracy," Business Wire, March 14, 2005 ("The surveys of 6,000 Microsoft Xbox and Sony PlayStation 2 users found that 21% of gamers play pirated games, but 73% would have bought the game within one month if a free version had not been readily available."). Page 6 Progress on Point 14.2

copyrighted works for which rights must be negotiated.17 Their economic characteristics bear perhaps the closest resemblance to movies. Both are typical of the entertainment industry in that success of a product is hard to predict, and money lost on flops must be made up on hits. Both have in common high production costs and large file size, and both are often consumed once. That is, most players will play a game through the levels once over a period of weeks, and then move on to another game; most movies are watched once, except for a few favorites. Large file size means that moving to broadband and more capacious hardware means that their piracy problems can be expected to grow in future, absent countermeasures.

But game producers can sometimes secure an income stream by selling services (or hardware) associated with the game (such as membership in a community); this is more difficult with movies. And games are more sensitive to quality loss, because file errors may ruin game play entirely.

Books Games Songs Movies Software

Development Low Big & Middle Big! Middle Costs Growing Consumption Varies Varies Many Once, Many Pattern times usually times

Quality Low High Middle Middle High

Issues

File Size Low High Low High High

Associated Some Many Rare Rare Some Services (i.e. updates) Product Varies $15-60 $1.00 $4-$40 Varies Price Equipment None About $20- $200 About Price $2000 800 $2000 (PC Platform) Rental Yes Console No Yes No Market (illegal) (illegal)

Lessons for Policymakers

A comparison of the copy protection history of PC and console games reveals a numbers of key insights into digital rights management for policymakers.

17See also, Solveig Singleton, "'FreeCiv' and its Discontent: Policy Lessons From Open Source Games: A Case Study," Competitive Enterprise Institute, 2003, available at http://www.cei.org/pdf/3755.pdf. Progress on Point 14.2 Page 7

• Content producers do respond to consumer complaints about clumsy copy protection; they are also sensitive to the fact that copy protection can add cost to their content and hardware. There is a limit to how much flexibility technology can give consumers without defeating its own purpose, but this varies widely with market context. But consumers do have power.

• Interoperability with general purpose media increases piracy risks for content. It also may add to development time and costs. Hardware-linked protection is most durable.

• Copy protection technology must change very rapidly to adapt to other changes in media storage and distribution technologies.

• Markets of the past often had less need for copy protection because the technical limitations of the media (capacity to handle large size files, for example) serve as copy protection in themselves, and when these limitations are overcome, some substitute must be found.

• When one sector is perceived to reduce piracy risk more effectively than another, investment will move out of the latter and in to the former, unless some stable revenue stream can be found from something other than selling copies.

• Effective Copy Protection Supports Supply for a Rental Market: Content producers were willing to tolerate a rental market for console games, but not software.

• Consumers do not always demand what advocates think they ought to demand. Consumers will buy special-purpose hardware when it is easy to use and not too expensive. They do not demand interoperability or the right to make backup copies at all costs. The leading concern for gamers is the quality of the content, not the presence of technological protection measures. Copy protection systems have failed. 18 Game systems have failed, but the claim that a media has failed because of copy protection should be taken with a grain of salt. The Nintendo GameCube, for example, has comparatively effective copy protection, and it has been asserted that this has caused its slow sales. But further investigation shows that the lineup of games for the GameCube's launch was widely considered weak, the platform was not attractive to developers, and that other systems were already well-established in the market.19

• Beware of Expectations. There are few complaints about copy protection schemes for console or PC games compared to music or movies. Games are a

18 See "Digital Rights Management: A Primer: Developing a User-Friendly Means of Protecting Content," Screen Digest, p. 305 No. 420, September 1, 2006. 19See, e.g. "GameCube, Path to Nowhere," http://209.85.165.104/search?q=cache:Yk_Gx6lbMREJ:www.actsofgord.com/Proclamations/chapter01.ht ml+GameCube+consumers&hl=en&gl=us&ct=clnk&cd=10. Page 8 Progress on Point 14.2

young media, and few "fair use" advocates or consumers come to them with fully-formed expectations of what "ought" to happen. By comparison, music and movie producers are hampered by consumer expectations formed in an age before the Internet and digital media. The market has changed, and the consumer experience will also (mostly for the better). People tend to be backwards-looking. Policy must not be.

The lack of settled expectations has also helped game developers be imaginative in responding to the piracy problem, focusing on trying different business strategies rather than sending up a legislative outcry. To be fair to the producers of music and movies, games' interactive nature helps in supporting new business models. Music and movie developers do not have the luxury of ongoing daily contact with the consumer. By contrast, game buyers frequently check back to engage with the community, play online in groups, or load patches and updates. Furthermore, many game companies have failed in the course of their ongoing experiments. Finally, without some supporting legislation such as the DMCA, which helps compensate for the inability of the legal system to deter piracy through suits against individual copiers, game developers would have less ability to experiment with new business models.

Conclusion

Computer and console games are an excellent example of markets in action. Games and systems protected by different methods coexist and compete alongside experiments with unprotected systems, sales coexist with rentals. This produces a cornucopia of offerings at different price points for consumers. The picture of technological copy protection measures as part of an anti-consumer conspiracy is grossly distorted. This is consistent with the general operation of markets, in which it is in the interest of producers to supply what consumers demand. Furthermore this whole pictures changes very rapidly.

The best policy going forward is for legislators to leave entrepreneurs' experiments with DRM alone, while continuing to support copyright with appropriate enforcement institutions and actions. Whether a given technological protection measure allows consumers much flexibility or none at all, consumers have real choices among these in competitive markets.

The Progress & Freedom Foundation is a market-oriented think tank that studies the digital revolution and its implications for public policy. Its mission is to educate policymakers, opinion leaders and the public about issues associated with technological change, based on a philosophy of limited government, free markets and civil liberties. The Foundation disseminates the results of its work through books, studies, seminars, conferences and electronic media of all forms. Established in 1993, it is a private, non-profit, non- partisan organization supported by tax-deductible donations from corporations, foundations and individuals. PFF does not engage in lobbying activities or take positions on legislation. The views expressed here are those of the authors, and do not necessarily represent the views of the Foundation, its Board of Directors, officers or staff.

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