> Who decides what gets to be reverse engineered and what doesn't?

The service provider decides the terms and conditions, as long as they comply with the law. For example, Google decides whether pirated movies can be hosted on its cloud service, because it provides the cloud service. It's pretty clear.

In a pure capitalist system, competitors would emerge if the repressed service were genuinely in high demand and lawful. If it was not, then well, that's just how we regulate the world but this cannot be considered a case of one industry deciding the fate of another.