Traditionally, grey markets were uncommon because they were limited to goods that had substantially lower prices in foreign market segments as well as low importation costs.  This is because the importation of grey market goods into the United States can become so costly that grey market distributors cannot sell at a substantial discount, thereby eliminating any incentives to engage in grey market activity.  In the case of computer software, dealing with high importation costs is no longer an issue.

With the rising popularity of digital distribution, grey market software can now be sold over the Internet in a matter of seconds with nearly zero overhead.  Grey market distributors purchase bulk licenses for Asian-region software at a substantial discount and then resell these licenses to Western gamers for prices much lower than retail.  This is exactly what happened with Activision’s latest hit, Call of Duty: Modern Warfare 2.

After a few days of play, the purchasers of grey market licenses are now being banned from accessing Valve’s servers in order to play the game online.  Valve’s official line is that anyone who purchased only a CD key transacted with an illegitimate seller and he or she will need to purchase a valid license through Steam or a brick and mortar retailer.  Gamers, to say the very least, are not pleased.  Their anger seems to be directed at anyone who had any involvement with Modern Warfare 2–be it Valve, Activision, or Infinity Ward.  But who is really at fault?  And how can developers, distributors, and publishers avoid angering their customers in the future?

The heart of the problem seems to stem from consumer confusion over just what they are getting when they conduct a transaction for computer software.  While traditional media sales (books, movies, CDs, etc.) tend to involve an actual purchase of a good, nearly all computer software transactions employ an End User License Agreement (“EULA”) in order to characterize the transaction as the transfer of a license to use the software rather than an outright sale.  This legal technicality effectively eliminates the software from being covered by the first sale doctrine and gives software publishers immense post-sale control over their products.  Whether or not these types of agreements are good for consumers is still up for debate and certainly beyond the scope of this post, but one simple fact remains:  Modern Warfare 2 players are not purchasing a copy of the game–they are acquiring a limited license to play the game.

In an effort to create distinct market segments and effectively engage in price discrimination, the Modern Warfare 2 EULAs contain region-specific licensing terms.  As a result, the licenses sold in bulk (and at a substantial discount) in foreign markets are only authorized to be used in those markets.  So, when Valve discovered that distributors of Thai Modern Warfare 2 licenses were selling them to players in the United States, Valve enforced the terms of the EULA by banning owners of these grey market copies from their servers.  Gamers who purchased these Thai CD keys were enraged that their “legitimate purchases” were being banned when, in fact, they were not legitimate purchasers at all, but illegitimate licensees.  While I can easily understand why these gamers are upset–no one likes feeling ripped off, this is not a new phenomenon for grey market goods.

Past purchasers of tangible grey market goods (think Japanese-manufactured cameras and watches) were well aware that the substantial savings one could receive from purchasing grey market goods were not without certain inherent risks.  The most common risk associated with grey market goods was the lack of post-sale support.  If a consumer’s grey market camera breaks, they may be able to ship it to an overseas warranty repair center at substantial cost, but more than likely they will simply have to purchase a new camera.  The premium paid for a camera at a legitimate domestic retailer came with the added benefit of warranty support and/or other services.  Grey market consumers of old were well-aware of this trade off and it seems to me that the sale of grey market Modern Warfare 2 licenses should be treated the same way.

Gamers that purchase grey market licenses are simply given a CD key for the game.  These gamers then type this code into their Steam client (also subject to a separate EULA containing region-specific language) and download the game from Valve’s servers.  Then, in order to play the game online, gamers must again connect to Valve’s servers and communicate with Infinity Ward’s proprietary match-making service, IWNet.  Each of these occurrences (downloading the game and playing online) require additional post-sale services from the game’s manufacturer and/or developer.  Post-sale service was not expected by purchasers of tangible grey market goods, so why should purchasers of grey market computer software expect this service when they run a program in violation of their EULA?

Initially, it may seem difficult to understand why it is fair for the developers of Modern Warfare 2 to ban grey market licensees, but it makes more sense when you consider the effects of these players in the aggregate.  Distributing a game as complex as Modern Warfare 2 can be a costly endeavor–bandwidth, development, and server maintenance is not free.  In order to cover these costs, Activision and Valve have to decide on a pricing scheme for their software.  An integral part of this scheme is price discrimination.  Price discrimination allows Valve and Activision to cover the substantial costs of developing and maintaining a game like Modern Warfare 2 by making the software available at a profit-maximizing price in different market segments.  With $50 million in development costs and $200 million in advertising for Modern Warfare 2 alone, not to mention the ongoing maintenance costs, it is easy to see why this profit maximization is important.  Unfortunately for gray market licensees, this can only be done when market segments remain segmented, which means banning Thai-market CD keys from being used in the US.

The real bad guys in this scenario seem to be the individuals that gamers are praising as heroes–the modern day Robin Hoods bringing cheap gaming to all, grey market distributors.  These merchants are well-aware of Modern Warfare 2’s licensing terms and should be held accountable for selling these licenses to players outside of their region.  While one could easily claim that these online merchants are unaware of their customers’ locations, this argument tends to fall apart when you view their websites.  Maybe it’s just me, but I find it peculiar that a website selling Thai-market CD keys is entirely in English, has an American flag in the upper left corner, and lists their prices in US dollars by default.

So, what can be done?

First, gamers that have purchased a now-banned CD key should demand their money back from these grey market merchants.  Second, Valve should hold these distributors accountable for their actions.  If Valve can track what region a CD key is intended for, they can also find a way to track which merchants purchase these keys in bulk.  Those caught selling their keys to out-of-market gamers with regularity should be denied the ability to purchase keys for future games.  Had this been done before (Valve’s Team Fortress 2 also had a series of grey market bannings), perhaps we would not be running into this issue now.  As it stands, gamers are losing money to shady overseas merchants and game developers are forced to deal with the aftermath.  While it may take some time for any real change, I can only hope that the public outcry will at least create more savvy shoppers.  Heck, we may even catch a person actually reading an EULA or two in the future.

Valve’s announcement came just one day prior to the FTC’s DRM Town Hall at the University of Washington School of Law and was mentioned during at least one of the panels. The decidedly vague press release stated in part:

Headlining the new [Steamworks] feature set is the Custom Executable Generation (CEG) technology that compliments the already existing anti-piracy solution offered in Steamworks. A customer friendly approach to anti-piracy, CEG makes unique copies of games for each user allowing them to access the application on multiple machines without install limits and without having to install root kits on their PC.

The new features also include support for in-game downloadable content (DLC) and matchmaking. The in-game DLC support allows developers to deliver new content as they choose (paid or free) from inside the game itself, allowing users to make immediate purchases and experience the new content in the same game session. The Steamworks matchmaking now includes the robust lobby system shipped and tested in Left 4 Dead.

Stardock’s announcement was made during the FTC Town Hall and, while somewhat similar to Valve’s announcement, Stardock’s “GOO” technology presents some very compelling differences:

The new technology, known as Game Object Obfuscation (Goo), is a tool that allows developers to encapsulate their game executable into a container that includes the original executable plus Impulse Reactor, Stardock’s virtual platform, into a single encrypted file.

When a player runs the game for the first time, the Goo’d program lets the user enter in their email address and serial number which associates their game to that person as opposed to a piece of hardware like most activation systems do. Once validated, the game never needs to connect to the Internet again.

Goo has a number of unique advantages that developer Stardock believes both gamers and developers will appreciate:

1. There is no third-party client required. This means a developer can use this as a universal solution since it is not tied to any particular digital distributor.
2. It paves the way to letting users validate their game on any digital distribution service that supports that game. One common concern of gamers is if the company they purchased a game from exits the market, their game library may disappear too. Games that use Goo would be able to be validated anywhere.
3. It opens the door to gamers being able to resell their games because users can voluntarily disable their game access and transfer their license ownership to another user.

* * *

Because Goo ties the game to a user’s account instead of the hardware, gamers can install their game to multiple computers without hassle.

Continue reading for some (not so) brief commentary and links to the full press releases.

When I first read Valve’s announcement, I was certainly interested in the technology. While scant on details, it seems that CEG will remove two of the largest consumer concerns with current DRM technology: installation limits and buggy root kits. However, three of my main concerns with DRM technology were left unaddressed: information privacy, “first sale” rights, and the inoperability of software following abandonment of authentication servers.

While many PC gamers are aware of the access and resale limitations imposed by DRM, most don’t give any thought to information privacy implications. As part of my research for a forthcoming paper on DRM and privacy, I’ve become increasingly shocked at the amount of information that is often collected by DRM software and the myriad of companies that are privy to this information. Fortunately, Stardock saw fit to address all of my concerns to some extent with their GOO technology.

First, GOO’s compatibility with both boxed software as well as all existing digital distribution platforms is attractive because it provides consumers with the ability to validate their software on any number of servers in the event that their particular retailer goes out of business or shuts down its authentication servers.

Second, GOO has the ability to allow software resale, which is typically prevented by current DRM technology. While I’m excited about this development, I’m interested to see how it works in practice. Stardock touts the feature, but does not seem to say that it will be universal; my best guess is that this secondary market feature will be left to individual developers to activate. I also think it’s prudent to point out that the technology allows gamers to “transfer their license ownership,” which all but confirms that this technology will in no way work toward eliminating the (in my opinion) legal fiction that consumer software transactions are licenses rather than sales.

Finally, I like that GOO creates a protection scheme where “[o]nce validated, the game never needs to connect to the Internet again.” While studies have shown the some offline DRM still connects to the Internet to transfer usage statistics, the fact that “Goo’d” games do not require an Internet connection will allow gamers to block Internet communication through computer firewalls for all but a limit number of possible multiplayer servers.

Press releases:

I’ve been watching the live feed in between classes and so far it has been extremely interesting and oddly entertaining. The current panel is discussing DRM consumer issues. This talk envelopes not only typical copyright-related issues, but also touches upon computer security and information privacy concerns. Stop wasting your time reading this and check it out now!

2009 FTC Workshop: Digital Rights Management

The asserted patent involves technology used to create a “Human Movement Measurement System” comprising a hand-held tracking device in communication with a base station that can be used to create an interactive gaming experience, among other capabilities. Nintendo’s Wii video game system uses an interactive hand-held remote in communication with a base station to reproduce users’ movements on televisions and other display screens.

I will be interested to see how this one pans out. Honestly, Nintendo has made enough money off of the Wii that settling this case would be wise. The full press release is available here.

As I was browsing the web and doing my best to avoid fretting over looming exams, I came across the curiously named blog Banana Pepper Martinis. Banana Pepper Martinis is apparently the personal blog of L. B. Jeffries, a pseudonymous game reviewer at www.popmatters.com. It would appear that L. B. Jeffries is also a law student and recently completed a note on the interaction of video games with copyright law. An excerpt of the introduction follows:

Video games and copyright law have always had a tenuous relationship. The problem is threefold. First, players significantly alter the content of video games and keep them from ever being a fixed series of images. Second, the software used to generate the images has rarely been considered a protectable asset by the courts unless it is copied in its entirety. Third, courts have typically relied on the audio visual display clause of the Lanham Act to protect the images produced by the software and to dismiss the player input as a relevant aspect. Although this system worked when video game disputes were first coming about and well into today, a new trend in video games may upset this method. The culture of player modifications and improvements to pre-existing games that have traditionally been viewed as fair use by the courts creates a new problem for copyrights and video games. Do these qualify as fair use, a derivative work, or both? If the player is increasing the value of someone’s product without compensation, what rights do they have to their original work and what rights do the companies have to these improvements? The first part of this essay will outline the Legal Background that was established during the eighties that people rely on to demonstrate their copyrights and the rulings that create a loophole for player modifications. Then it will discuss the current trends in video games that are leading to this problem. Finally, it will go into the Legal Analysis courts use for copyrights and how those can best be applied to video games.

Head over to Banana Pepper Martinis to read the paper in its entirety.

Answer: E.S.S. Entertainment 2000, Inc. v. Rock Star Videos, Inc.

In this recently decided case, The United States Court of Appeals for the Ninth Circuit considered “whether a producer of a video game in the ‘Grand Theft Auto’ series has a defense under the First Amendment against a claim of trademark infringement.”

In this case, E.S.S. Entertainment 2000 alleged that the virtual “Pig Pen” strip club in Grand Theft Auto: San Andreas infringed its trademark and trade dress associated with it’s Los Angeles-based “Play Pen” Gentlemen’s Club. However, the court sided with Take Two Interactive/Rockstar and found that the game’s content is protected by the First Amendment. The full opinion is certainly worth a read, as it is full of humorous quips:

Both San Andreas and the Play Pen offer a form of low-brow entertainment; besides this general similarity, they have nothing in common. The San Andreas Game is not complementary to the Play Pen; video games and strip clubs do not go together like a horse and carriage or, perish the thought, love and marriage.

Or perhaps the following:

Undeterred, ESS also argues that, because players are free to ignore the storyline and spend as much time as they want at the Pig Pen, the Pig Pen can be considered a significant part of the Game, leading to confusion. But fans can spend all nine innings of a baseball game at the hot dog stand; that hardly makes Dodger Stadium a butcher’s shop. In other words, the chance to attend a virtual strip club is unambiguously not the main selling point of the Game.

Overall, I’m satisfied with the court’s logic and hope to see more First Amendment protection for trademarks used in artistic expression.

On Thursday, October 23, THQ filed suit in the Central District of California for trade dress and copyright infringement. THQ alleges that the box art for Activision’s SCORE International Baja 1000 The Official Game infringes the trade dress and copyright of THQ’s Baja Edge of Control.

As you can see from the picture above, the similarities are quite striking. THQ alleges that both the front and back packaging of the games in question are “virtually identical,” including the color, position, and appearance of the vehicles as well as the environments depicted on the box.

THQ is concerned that Activision will benefit from the millions invested in marketing Baja Edge of Control.

While there are only so many ways you can make a video game about the Baja 1000 look exciting, the similarities here are substantial. THQ also previously contacted Activision and requested that they create alternative packaging for SCORE International Baja 1000.

Patent Arcade and Laws of Play will be closely following the case, which is docketed as: THQ Inc. v. Activision Blizzard, Inc., case number CV08-06999. The full complaint can be download on the Patent Arcade website.

[via Patent Arcade]

Eugene Volokh, UCLA’s Gary T. Schwartz Professor of Law, just posted some interesting commentary concerning a recent Dutch court conviction of two youths for stealing virtual items in Runescape. Under Dutch law, the virtual goods are considered goods, so their theft constitutes a criminal act. However, the goods were not “virtually stolen.” Instead, the two boys committed physical violence against a classmate who eventually transferred his items to the attackers.

I would recommend heading over to The Volokh Conspiracy and reading Prof. Volokh’s comments concerning the difference between “virtual theft” and “real-world theft of virtual goods.” The difference between the two is significant and worth considering. As virtual worlds tend to more realistically parallel real-life, it is not improbable to believe that individuals will attempt to enforce virtual crimes in real courts. I agree that the law should not prohibit virtual crimes; however, I’m not sure what games Prof. Volokh has seen that feature virtual rape.

[via The Volokh Conspiracy]