The Economist Flubs DRM
As weekly opinionated newsmagazines go, nothing holds a candle to The Economist. I rarely read everything I want to in an issue, but I always feel enriched by what I do read. I adore their well-written prose, and I often agree with their analysis, and even when I don’t it seems compelling. Were I stranded on a desert island with reliable mail service, it would be my link to the outside world. (At least until I remembered how to send snail mail.) So I was pleased to see an article on their website about Hollywood and piracy. This is an important story, and the article Businessweek posted a few months ago had little insight.
The Economist article was pretty good, given how early we are in the development of this saga. However, it had one analogy that was illustratively misguided. Consider the following comparison between movies and PC software:
In the 1980s, software companies used to fight online pirates with DRM technology. But they found that copy protection annoyed users, and got rid of it. The makers of Lotus 1-2-3, a spreadsheet program, abandoned it after finding that they had merely created a new market for software that could defeat copy protections. Now the music industry is realizing that often some of the downloaders it labels as thieves are actually trying out music before they buy it, and that controlled, legal file-sharing could be a marketing tool. Viral marketing of that kind, says John Rose, head of the anti-piracy effort at EMI, a music company, could be powerful. Hollywood should take note.
This comparison initially seems insightful and appealing. Both software and movies are information goods. The market for personal digital distribution of movies is in its infancy, just as software was in the 80s. Maybe the movie studios need to learn from the software companies and drop DRM, which will both make them more money and stop annoying consumers. However, a closer examination of the contexts of these examples shows it to be misleading.
First of all, one must understand why software vendors eliminated copy protection. Sure, the fact that it annoyed users and was circumventable was probably part of that decision. But there was a bigger story. First of all, you need to realize that the market for productivity software is one that includes significant network externalities. This means that even if I don’t pay for it, Microsoft benefits from my using their word processor, because I become trained in it and I help make its file format standard. Furthermore, people rarely have reason or desire to use more than one word processor (particularly in the 80s, where learning to use WordPerfect was about as easy as learning to fly a prop airplane). This is what led to the mantra that ‘it is better to have a user pirate my software than buy my competitors’.
But there was yet another reason that software vendors were willing to let users freely pirate software: those users were likely to eventually buy it. Being a legal owner of software entitles users to support and upgrades, which many business users want. And the software industry eventually developed a system of software audits that would allow business users to steal software, but forced them to pay for it later.
By comparison, it is unlikely that my owning a music company’s CD will either make someone else more likely to buy that CD or that it will keep me from owning one of their competitors’. (There might be a slight network effect if someone hears a CD in my house and then buys it, but given that the most sold music is by artists that are otherwise widely promoted, this seems minimal.) And as nice as the packaging of CDs and DVDs are, realistically once I possess them there is little value that can be delivered by the media companies. The Economist contends that non-DRM media can be a useful promotional tool. This might be true, but only if some other product that the consumer pays for is protected. This is a case for selective copy protection, not none at all.
Perhaps the consumer software market would be a better analogy, because music and movies are ultimately a consumer product. In my mind, there are two key categories of consumer software: games and operating systems. Games function similarly to music (this may be why every mall record store now seems to stock more video games than CDs), and game producers have been embracing a variety of DRM measures for years. One of the primary benefits that console makers provide to their publishers is the console’s built-in DRM. And Microsoft has embraced the much-maligned Windows Product Activation, which does a pretty good job of keeping most people from pirating their operating systems. Maybe they would stop this if there was a risk of someone installing a competitor’s product, but we won’t know that any time soon.
September 3rd, 2003 at 1:30 am
Aaron –
You implied that music and movies don’t have network externalities. I disagree. People generally get more enthusiastic about some piece of art when they know that enthusiasm is shared, especially if it’s shared in a way that defines them as part of a cultural subgroup. This is especially true for the most popular music and movies — their own popularity makes them more valuable to the people who identify with them. I’m not sure what an economic model of fashion looks like (and that, unfortunately, covers popular art!), but surely it must hinge on network externalities.
This feeds the grand fantasy of the free information advocates that popularity leads to profitability. And certainly there’s some vague truth to that — how I would love to have my music in 10 million people’s hands, even if I didn’t make a cent from it!
But I think you’re on target in your second, more important point: it’s dubious that owning an illegal copy of some creative work increases the likelihood of a later purchase in the same way it does for productivity software.
Paul