This edition of “What is…?” describes the regional coding systems used by the entertainment industry, with a particular emphasis on DVDs. This article will explain the technology behind region coding, describe how the system is enforced, and speculate on the commercial reasons for the system. It will then consider the economic effects of region coding and its possible legal implications, including a discussion of recent litigation in which region coding has been at issue.

This posting contains Part 1, which provides an introduction to how region coding works from both technological and legal perspectives, as well as the commercial justifications for region coding and its possible economic effects. Part 2 considers the legal issues raised by region coding, in the context of both competition/antitrust law as well as the anti-circumvention provisions that have been adopted as part of copyright law in both Australia and the United States.

What is region coding?

Region coding (also called “regional coding”, the “regional playback system”, or “RPC”) is a system by which digital products marketed and sold in certain geographic regions is technologically designed to be compatible only with playback devices designed for use in those regions. Regional coding is widely used on DVDs containing movie content (and DVD players) and Sony PlayStation games (and PlayStation consoles). While much of the following discussion focuses on regional coding as used by the film industry, PlayStation regional coding is considered in the context of recent legal activity.

The major film studios introduced the regional playback system for DVDs in 1996. The system works through a combination of software and hardware: movie DVDs typically contain a regional code used to encrypt their data, and DVD players contain a regional code in the hardware designed to decrypt the DVD for playback.

Technologically, region coding is part of the content scrambling system (“CSS”), which is itself an early example of digital rights management. CSS is an encryption system which both compresses data so that it fits on DVDs, and encrypts it so as to incorporate copy protection. The CSS compression algorithm is central to DVD technology, and is protected by a patent owned by hardware manufacturers Matsushita and Toshiba. This patent, and its conditions of licence, is discussed in more depth below.

The practical results of DVD region coding for users include the following:

— The regional code of DVD and player must match for a user to play the DVD.
— While users may purchase DVDs outside of their home region, unmodified DVD players designed for the local market will not playback these DVDs.
— Although some DVD players permit limited switching to other regions (ie, to regions other than that in which the player was sold), after a certain number of switches (usually 4 or 5) the player will be set permanently to the last region used.

With respect to filmed entertainment DVDs (which includes music videos as well as movies and television programs), the world has been divided into eight regions, although in practice only seven are used. These regions are allocated and numbered as follows:

Region 1: Canada, United States, United States Territories
Region 2: Japan, Europe, South Africa, Middle East (including Egypt)
Region 3: Southeast Asia, East Asia (including Malaysia, Singapore and Hong Kong)
Region 4: Australia, New Zealand, Pacific Islands, Central America, Mexico, South America, Caribbean
Region 5: Former Soviet Union, Indian Subcontinent, Africa, North Korea, Mongolia
Region 6: China
Region 7: Reserved
Region 8: Airplanes, cruise ships, etc.

Similarly, DVD players bought in these regions are similarly coded. The practical implication is that an Australian tourist visiting New York (Region 1) might legally purchase and import movie DVDs for their own personal use in Australia, but would be unable to view those movies on an unmodified DVD player purchased in Sydney (Region 4).

The licence agreement: access to CSS

As mentioned above, CSS is the subject of a patent owned by Matsushita and Toshiba. In order to manufacture DVD players that can read DVD media, it is necessary to have access to CSS, and thus to become a licensee of that patent.

In practice, the licensor of the CSS patent is the DVD Copy Control Association, which administers CSS. As of August 2001, the parties represented by the DVD Copy Control Association were numerous. Potential licensees include manufacturers of DVD players, DCD discs, and DVD-ROM drives for computers. A sample licence agreement may be viewed here. The license itself incorporates certain CSS technical specifications, which contain the actual obligations on licensees regarding the regional coding. Among other things, the technical specifications require that DVD players/drives must be designated for only one region and play DVDs designated for that region only.

It is important to realise that the region coding requirements do not constrain the manufacturers of content released on DVDs, but only the hardware manufacturers. DVDs without the regional coding system do not breach any contractual provision, but the reality is that most content providers will take advantage of the system to segment their consumer markets and attempt to increase their revenues, as further discussed below.

The CSS system is tightly protected, in particular by the anti-circumvention provisions in United States copyright law (17 USC §§ 1201 et seq). This law was put to the test in Universal City Studios, Inc. v. Reimerdes 111 F.Supp.2d 294 (SDNY 2000). This case concerned “DeCSS”, programming code that enables the decryption of files compressed with CSS – and thus can be used to remove DVD copy protection and regional coding. The defendant was the editor of “hacker” publication, who posted a copy of DeCSS on the publication’s website. Although he later removed DeCSS from the website in response to a court order, he then posted links to copies of DeCSS available at other locations. The District Court for the Southern District of New York held DeCSS to be a device designed to circumvent CSS, and thus in violation of the anti-circumvention provisions of copyright law.

Why region coding? The market for DVDs

Why does region coding exist? In short, the system is an ingenious way for the entertainment industry to segment its market and protect various revenue streams. Recent developments suggest, however, that the original perceived need for the system has begun to erode.

Traditionally, the main source of revenue for movie studios was box office takings, ie, in-cinema screenings of motion pictures. In recent years, this reality has changed. According to The New York Times, while DVD sales represented 28.7% of movie studio revenues for feature films in 1996, DVD sales represented 47.9% of revenues in 2004. During the same period, theatrical release revenues dropped slightly, from 24.5% to 23.1%. Interestingly, during the same period video (and DVD) rentals have dropped from 23.8% to 12.0% over the same period. (The reason for the drop in rentals is unclear, and is likely to be the result of several factors, including the affordability of DVDs and their greater longevity when compared to video tapes.)

Regional coding assists movie studios to keep separate and protect these revenue streams. Industry justifications for region coding include (1) protection of copyright material (the movies), (2) the preservation of in-theatre revenues, and (3) as a means of protecting against parallel imports.

Protection of copyright material

This reason given for regional coding is essentially a justification for the CSS encryption system. The idea is that without encryption, the production of high-quality digital content might fall, as content providers (the movie studios) would be less willing to produce content for which they would not earn a reasonable return. CSS reduces the risk of piracy, which is a considerable problem for DVDs, as it is very easy to make high-quality copies of unprotected DVDs. However, the regional coding system does more than protect against piracy. It also prevents consumers from playing lawfully purchased and imported DVDs on locally-purchased DVD players.

Preservation of in-theatre revenues

Another possible justification by the movie industry for regional coding is the preservation of theatre screening revenues. For many years, there was a distinct lag between when movies were released in the United States and in the rest of the world. By separating North America into Region 1, the industry could ensure that consumers outside of Region 1 would continue to go to movie theatres, rather than simply purchasing movies on in advance of their release locally.

However, this justification is quickly eroding. Many films are now released outside of the United States soon after their United States premieres. From looking at release dates for blockbuster films on the Internet Movie Database, the average delay was two to three months between American and Australian release dates, but sometimes was only a few weeks apart. In a few cases, releases are simultaneous (as was the case with the Star Wars prequels).

The argument that region coding exists to preserve in-theatre revenues is not particularly strong when it comes to old movie titles and television shows, which for the most part are also issued with region coding. There appears to be little reason why the entertainment industry has not decided to release older titles without regional coding. The supply of titles differs between regions, and in particular with respect to older releases. The vast majority of titles are issued for Region 1 only, and many titles are not issued at all outside that region. In addition, some titles are released in the other regions, especially non-English language titles.

Protection against parallel imports

Parallel imports, simply put, are genuine (ie, not pirated) products that are legally-purchased in one country, and then offered for sale in another country without the permission of the holder of intellectual property rights in those products. Parallel imports are sometimes referred to as “grey” products, and trading in them is referred to as a “grey” market.

An argument advanced by the Australian DVD Association in the past has been that region coding protects consumers against parallel importation of DVDs. The assumption behind this argument is that parallel importation of DVDs is undesirable from the consumer’s perspective. To the contrary, many consumers would welcome parallel imports of DVDs, as the range of titles available would increase. Not allowing the parallel importation of DVDs is, however, to the advantage of the movie studios, which can then enforce separate, geographically-defined markets

To date, the parallel importation of movies for commercial resale is not permitted under Australian law, although the parallel import of CDs, software, and books are allowed. Filmed entertainment has been treated differently than music, software and books, and it is unlikely (despite efforts to the contrary) that provisions allowing for their parallel importation will be recommended, according to the Australian Attorney-General, Philip Ruddock.

Economic effects

What are the economic effects of regional coding? In other words, why does the movie industry support this system? There are several potential reasons and consequences.

Market segmentation

Region coding allows movie studios to segment the global market into sections, which enables the use of different marketing and release date strategies in each region. It also enables the studios to decide how much of an investment they will make in a particular title, based on the estimated demand in each region-defined market. In addition, the use of a technological means of segmentation prevents substitution between regions, and enforces the market segmentation boundaries.

The fact that the same titles are not released in each region, or at least not at the same time, shows the use of this market segmentation ability. For example, the majority of titles are released for Region 1, and many never reach other regions. In 1999, only 720 titles were available in Region 4, compared to over 5000 in Region 1. Some non-English language films are never released outside of their home region.

Price discrimination

Region coding also allows the industry to charge different prices for the same titles in different regions. Even with exchange rate equalisation, prices tend to differ between regions.

Product differentiation

Even if the studio producing a particular DVD charges the same price for a title in all regions where it is released, the content on that DVD may differ. For example, additional features (both those disclosed on the packaging and surprise “Easter eggs”) are not always included in non-Region 1 DVDs. In addition, not all versions of a title offer the choice between widescreen and standard format. In Australia, the competition/antitrust law regulator, the Australian Competition and Consumer Commission, has argued that DVDs marketed in Region 4 (which includes Australia) are of poorer quality than those sold in Region 1.

Creation of artificial barriers to trade and reduced competition

Even if importing Region 1 DVDs into Australia for sale was legal, there would be no market amongst consumers owning unmodified DVD players sold in the Australian market. This aspect of CSS might thus create an artificial barrier to trade between countries.

In addition, since only the licensees that abide by the regional protection conditions retain CSS license, potential DVD manufacturers that might be willing not to agree with those conditions will not have access to the crucial piece of technology necessary to make a functioning DVD player.

Consumer lock-in

Finally, region coding creates consumer lock-in. This means that once consumers commit to a collection of movie DVDs or PlayStation games coded for a particular region, and purchase a player/console compatible with that region, they are then “locked in” to continuing to purchase movies or games only from that region.

Although lock-in is a function of geographic location in this context, it nonetheless influences the consumer’s choice of titles. Switching is not practical, unless the consumer has access to a player that has been modified to be multi-region or regionless, and thus is compatible with content marketed for any and all regions. Alternatively, some consumers might be able to purchase an additional DVD player from the second region from which they purchase the most content.

Each alternative has its problems. The first option – using a modified DVD player or PlayStation console – will be discussed in greater depth in Part 2, which considers the legal issues raised by region coding and the efforts to bypass this system.