Joystiq reports that a group of hackers have found a way to insert a firmware patch into the Xbox 360 that bypasses the disc verification (read: DRM) process that would determine whether the disc was a copy or not - so long as the drive is a Toshiba-Samsung TS-H943 DVD drive.
No doubt Microsoft will be able to solve this problem by replacing the Toshiba-Samsung TS-H943 with a different DVD drive, or the HD-DVD drive they're talking about adding as an option, but the point remains that much of the money Microsoft sunk into making sure that the Xbox 360 was unhackable has now gone down the toilet.
In the long term, piracy cannot be prevented by technical means without preventing customers from accessing the content you're trying to sell them. Companies should be looking at more ways of creating customer goodwill instead of pouring their money into the black hole of the DRM industry.
"Companies should be looking at more ways of creating customer goodwill instead of pouring their money into the black hole of the DRM industry"
Great point. But it only offers a normative statement and not a prescriptive set of actions. How does a company create goodwill AND make money doing it? How does a middleman protect their value proposition without recreating scarcity or ineffeciency in the value chain? People LOVED TIVO! Lots of goodwill but no protected business model and therefore no business. How do companies avoid this fate?
With regards to customer goodwill, how does Nintendo do it? They repeatedly release old titles with minimal changes for their new platforms, such as the NES Classics series, and their fans keep buying them, despite the fact that every game is already trivially available via emulation and piracy. Their latest "virtual console" digital download system is just another incarnation of this idea. Studying their approach towards customer relations might be a good place to start. Perhaps, by keeping most of their games accessible to the young, they are in a unique position to leverage nostalgia and brand loyalty as their audience grows older. Of course, the consistently high quality of Nintendo's games might also have something to do with customer goodwill.
However, I'm not sure exactly how much goodwill Microsoft has lost given their inclusion of anti-hacking security measures, DRM being one of them. Among their fans, they have managed to build a lot of support in a single console generation... Xbox fans seem to be a lot more vocal in their support than Playstation fans of late. Sure, the worldwide released was somewhat botched in the US, but outside of Japan, Asia has really become a significant beachhead for Microsoft, thanks to aggressive pricing, good distribution (riding on their software business) and decent game localization standards.
Console security really isn't all that bad... nobody likes the prospect of encountering a successful console hacker on Xbox Live. Microsoft has gone a lot further than the other console makers (thus far) in addressing various drawbacks of platform-locking. For instance, Xbox Live Arcade allows the purchase of cheap, indie content with minimal fuss for the consumer, and it's pretty easy for a homebrew game developer to get a developer license, as long as the developer has a company. XNA opens a pipeline for migrating PC games over to the console without having to suck up the cost of a devkit at the outset. Heck, even the Xbox controller is now a multiplatform USB device, allowing you to test your control scheme during prototyping. Windows Media Connect lets you view your digital videos and pictures on your TV, which was one of the friendlier activities one might want to perform on a hacked original Xbox.
The DVD hack is nontrivial. No doubt, a random will soon be able to find someone to perform the hack for them at a price. But what does the consumer gain in return? A voided warranty, region-unlocking, and the ability to play illegal copies of games. I'd say the only advantage one gains that would be both legally defensible and significant to the mass-market is the possibility of backing up one's favorite games. However, I really don't see many people making their console-purchasing decisions on that factor, and if Bill Gates gets his way, the future is in downloadable content, which is a backup by its very nature.