After the release of its Zune media player last Tuesday, Microsoft faces some awkward questions about compatibility. For the last two years, Microsoft has promoted a digital music format called “Plays for Sure,” which it licenses to other companies that want to build their own player devices or music stores. But Zune uses a brand new and incompatible system. Consumers who purchased music in the “Plays for Sure” format won’t be able to play it on their Zune devices. Microsoft may get extra flack for locking its own loyal customers out of a previous version of its product, but walls between digital music platforms have a long history. “Plays for Sure” music and the new Zune format have always been incompatible with Apple’s wildly popular iPod, and with the iTunes music store.

Compatibility issues didn’t always plague the music industry.

You might think those compatibility problems would represent a market opportunity for third-party software developers. But copyright law stands in the way. The Digital Millennium Copyright Act (DMCA), enacted in 1998, prohibits “circumvention” of copy protection such as that found in Microsoft and Apple’s music formats. The copy protection gets called digital rights management (DRM). Format-conversion software is, in most circumstances, illegal unless authorized by the company that created the format. Hence, the DMCA gives software companies a legal tool to bar competitors from building products compatible with their own, promoting the balkanization of the digital media marketplace into a cacophony of mutually incompatible formats. Not only does that inconvenience consumers, it also reduces intra-platform competition and effectively locks small entrepreneurs out of the market for media hardware and software.

Compatibility issues didn’t always plague the music industry. The late 1990s saw an explosion of new software and portable music devices based on the industry-standard, openly available MP3 format. Users could convert music on their CDs into MP3 files on their hard drives using software such as WinAmp. Then they could listen to those songs on the MP3 player of their choice. At least five firms were already offering such MP3 players when Apple entered the market in late 2001.

But the MP3 revolution almost didn’t happen. One of the first MP3 players was Diamond Multimedia’s Rio, released in the fall of 1998. The recording industry sued, arguing that transferring music from CDs to MP3 players violated copyright law. Fortunately, Diamond won the case. History would have been different if the CD format hadn’t preceded modern copy protection technology. Had the CD format included such technology, the recording industry could have used the DMCA to force MP3 “ripping” software off the market. That would have seriously stunted the market for MP3 players, as users would have had no legal way to listen to their existing CD libraries on the new devices.

Indeed, that exactly describes the state of the home video market today. Unlike CDs, DVDs contain digital rights management. Copying a DVD is therefore illegal under the DMCA—even if users know how to make the copy, and even if they own the DVD. As a result, users wishing to transfer their legally-purchased Hollywood movies to their computers, iPods, or other media devices have no choice but to re-purchase them from proprietary movie-download services.

There's scant evidence that DRM reduces online piracy.

Given these constraints, it shouldn’t surprise anyone that the online movie stores unveiled so far have been underwhelming. Amazon’s Unbox, for example, was universally panned by critics. It is buggy, has a clumsy interface, and makes it difficult for users to play the movies on ordinary TV screens. A few days after the Unbox launch, Apple introduced a movie-download service of its own. It was better received than Amazon’s offering, but was hobbled by the fact that only one studio—Disney—had agreed to participate. Movies downloaded from Amazon’s store will not play on Macs or iPods, while movies from the iTunes Store will only work with Apple’s proprietary products. Neither service is expected to support Microsoft’s Zune media player. Hence, buying DRM-encumbered movies locks the user into using proprietary devices manufactured or approved by a single company.

That’s a shame, because consumers’ ability to play their existing music collections on new devices was crucial to the MP3 revolution. The iPod was unveiled 18 months before the iTunes Store, and it sold well because consumers knew they could load it up with music from their existing CD collections. By the time Apple introduced the iTunes Store, there were hundreds of thousands of iPod owners eager for new content.

That path is closed to an inventor wanting to make the next great digital video product. The DMCA has created a chicken-and-egg problem for small players and heavyweights alike: no one will buy a device without movies to play on it, but no one will buy movies that only play on a new and untested product. It’s no surprise that the market for video devices has been dominated by deep-pocketed incumbents like Apple, Microsoft, and Sony, and that even these would-be entrants have struggled.

Supporters of the DMCA (who acknowledge that the law isn’t perfect) cite the need to fight online piracy as a justification for the anti-circumvention rule. But there’s scant evidence that DRM reduces online piracy—movies and music protected by DRM show up, shorn of their protections, on illegal file-trading networks as soon as they are released. Indeed, in a 2003 Rolling Stone interview shortly after the launch of the iTunes Store, Apple CEO Steve Jobs acknowledged as much: “We have PhDs here, that know the stuff cold, and we don't believe it's possible to protect digital content.” David Goldberg, the general manager of Yahoo’s music store, concurs. In an interview with Reuters last month, he said “The notion that a track I buy in DRM is protected and one without DRM isn't is a fallacy. It’s all nonsense.”

It’s no surprise that the market for video devices has been dominated by deep-pocketed incumbents.

Jobs noted that as soon as a single copy of a song is posted to a peer-to-peer network, it is distributed almost instantly to anyone who wants it. And since every important DRM system to date has been cracked, it’s inevitable that someone will be able to obtain that first copy. Hence, those willing to break the law and steal music will do so, with or without DRM. As Goldberg puts it, “you're just making it hard for people who want to do the right thing to get the music they legitimately purchased on the devices and services that they want.”

The DMCA needlessly inconveniences paying customers who want the freedom to play their legally purchased content on the devices of their choice. It locks out inventors who want to create cutting-edge media devices that allow consumers to use their existing music and movie collections in new ways. Fighting piracy is important, but we need to choose anti-piracy policies that are effective and don’t do excessive collateral damage. Judged from this perspective, the DMCA has been a failure.

Timothy B. Lee is a policy analyst at the Show-Me Institute in Saint Louis. He is the author of the Cato Policy Analysis “Circumventing Competition: The Perverse Consequences of the Digital Millennium Copyright Act.”