Music Downloads and the Flip Side of Digital Rights Manageme(3)

Vernik,Purohit,andDesai:MusicDownloadsandtheFlipSideofDRM

MarketingScience,ArticlesinAdvance,pp.1–17,©2011INFORMS

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ormusicwebsites(e.g.,/).2Iftheychoosetoobtainanillegalcopy,theyincuramoral,orapsychological,costaswellasthesearchcostof ndingthemusicalbum(Hennig-Thurauetal.2007).Inparticular,consumersmayfeelguiltyaboutperforminganillegalorunethicalactionorfeelthethreatofembarrassmentorshameassociatedwithbeingcaught.Boththeseeffectsdecreasethelike-lihoodofconsumersengaginginpiratingactivity(SinhaandMandel2008).Finally,onamorepracti-callevel,iftheychoosetopirate,consumersneedtoers.The lemaynotbeermissions@.

restrictions.In§4,wecomparetheeffectofremovingDRMrestrictionsontherecordlabelandtheretail-ers.In§5,werelaxsomeoftheassumptionsofourgeneralmodel,andin§6,weconcludethepaperandsuggestsomedirectionsforfutureresearch.

2.

Wedevelopamodelinwhicharecordlabeldis-tributesmusicthroughmultipleretailersandcon-sumershavethechoiceofeitherbuyingorpiratingModel

bpircotthemusic.Below,wedetailourassumptionsaboutsbyuctheproduct,theconsumers,andthe rms.

silooptes2.1.Product

ilbhtTheproductweconsiderisanalbumofmusicthatalignconsumerscanobtainineitheroftwoformats:tradi-vaiadtional(i.e.,CDs)anddownloadable(e.g.,MP3orAACreadg les).BecauseCDsinthetraditionalformataresoldaerwithoutanyDRMrestrictions,weassumethatthemssncontentisDRM-free.However,musicthatissoldinioidownloadableformatcanbeeitherDRM-restrictedhtascieorDRM-free.Thus,DRMisanadditionalfeatureofhuwqthedownloadableproductthatcaneitherbeonoroff.,ynnWefollowthetimelineinthemusicindustryby rstoaisanalyzingthemarketwithDRM-restricteddownloadsrdnveeandthenmovingtoanalyzingDRM-freedownloads.secensa2.2.Consumers

vaedlWedevelopdemandfunctionsforvariousproductsAPbydevelopingamicromodelofconsumersandthenne.itianalyzingconsumers’optimalproductchoicesforassegivensetofprices.Thebaseutilityforamusicalbumlc’sritoisgivenby >0,whichre ectsthepurejoyoflisten-rAhtuingtothatparticularalbum.However,consumers’netsaihutilityisaffectedbytheirpreferencesforformat(tra-teohtditionalordownloadable),theircostofstealing,andttgtherestrictionsimposedbyDRM.Wedescribeeachhngiofthesenext.

idryulpcon2.2.1.Format.Someconsumersmayliketheicse,portabilityofthedownloadablemusic,whereasoth-dtilersmightlikethebookletandartworkortheabilitytooshbedisplayaCDasapartofmusiccollection.PreferencesSwMrbetweenthesetwoformatsaredistributeduniformlyRehonalinesegmentinthe 0 1 interval(HotellingOtFo1929),suchthatthedownloadableformatislocatedatNyIntheleftextremeandthetraditionalformatislocateda:tattherightextreme.Thetransportationcosttcap-hngoturesconsumers’disutilityofchoosingaformatthatirydisnottheiridealformat.

petosCop2.2.2.CostofStealing.Consumerscaneitherpurchasealegalcopy(traditionalordownload-able)orobtainanillegalcopyfromavarietyofsourcessuchaspeer-to-peernetworks(e.g.,eDonkey)

spendingetthesomeillegaltimecopyandofeffortin ndinganddownload-components:Weal.2007).

thealbum(e.g.,Hennig-Thuraumodelthetotalcostsofpiratingthroughthesumerstechnical/searchthemoral/psychologicalethicaltodifferintheircost,costse.cost,e,twoMandTofClearly,pirating;wee.g.,expectacon-adoesveryputernothighconsumerseecostoranovicecomputeruserwillhighlyhavepiracyofpirating,asstealingwhereasoraanconsumerexpertwhocaptureusersegmentsthiswillheterogeneity,haveamuchcom-welowerpiratingcost.Tothepiratinghigh(thatdifferintheirmoralmodelpiratingtwoconsumereffort.Inhavealowercost,H)segment,moraleH

andpiratinginconsumersthecost,lowfacee(ahighmoral

M,LL)segment,M<eH

they

M.Thereare sumers∈ 0 1 highinconsumersinsegmentHandH

(1 )con-choosesuchsegmentthatconsumersL.WeassumeineMissuf cientlysumerstoureinobtainsegmentHwillneversegmentpiratedmusic,whereassomecon-certain1).3ThisisconsistentLmaywithengageempiricalinpiracy(seeFig-lessfreeofwhetherconsumerstheyalwaysareavailablebuydigitalgoods, ndingsregard-thatbetweenResearchers(SmithandontheInternetforhaveTelangalso2008).

notedaofratepeer-to-peerexpertisenetworkswithdigital(Zentnertechnologypositivecorrelation2006).Toandusagecomponent,thiscorrelation,eweforassumetechnicallythatthesophisticated

technicalincorpo-T,islower2

BecauseCDsarenotDRM-restricted,musiccanberippedoffaCDanduploadedtoapiratedmusicwebsiteorapeer-to-peernetwork,oritcanbegiventoafriend.Thuspiratedmusiccanbedown-loadedevenwhendigitalmusicisnotlegallysoldorsoldonlyinDRM-restrictedformat.Forexample,inMay2002( veyearsbeforethe rstDRM-freedownloadablemusicalbumwassold)theInter-nationalFederationofthePhonographicIndustry(IFPI)estimatedthattherewere3millionsimultaneousglobalusersand500million lesavailableforcopyingatanygiventime(IFPI2002).

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Moreformallystated,weassumethat

eLM< eT 3 eT+11t 1 3 eT+4t 1 1

and

eH3 e2

TM

>T 1 2 3e 1 2

T+4t 1 1