Music Downloads and the Flip Side of Digital Rights Manageme(7)

Vernik,Purohit,andDesai:MusicDownloadsandtheFlipSideofDRM

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

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piratedversionandthusdoesnotsufferacompeti-tivedisadvantage.Allelsebeingequal,whenDRMrestrictionsareremoved,itreducesconsumers’incen-tivestoengageinpiracy.

Therealizedlevelofpiracy,however,alsodependsonthepricefortheDRM-freelegaldownload,whichinturnisdeterminedbythepricecompetitionamongthethreeproducts.RemovingDRMrestrictionsmakespiracyeasierthroughareductioninthecostofpiracy,creatingincentivesforthedownloadretailertodecreaseitsprice.Furthermore,withoutDRMers.The lemaynotbeermissions@.

Proposition1A.When =0,thenremovingDRMrestrictionsleadstoadecreaseinpiracywhen

> S=

4eMt 1 3eT

T 3eT t eM 4eMt 1

otherwise,itresultsinanincreaseinpiracy.

When =0,thelegaldownloadprovidesthesameproductbene tsasthetraditionalformatandthepiratedproduct;i.e.,thereisnodisutilityassociatedwiththelegaldownload.Therefore,removingDRMbpircotrestrictionssbunicalscase,costofhasstealingonlyonefromeffect—itycedecreasesthetech-Tiloopteseliminatingweseethatifto eT, ∈ 0 1 .Inthisilbhotheralicanwords,DRMevenleads isaboveaparticularcutoff,thenwhentoareductioninpiracy.Intgnvaiadpetitionstillseereadgdownloadbetweenadecreasewemakestealingeasier,wetheinthelevelofpiracy.Thecom-aeraredoesnotchangetraditionalwhenformatandthelegalmssndigitalremoved.However,thecompetitionDRMbetweenrestrictionstheioibecausedownloadhtscparticular,the costandthepiratedversiondoeschangeDofpiracyislowerwithoutDRM.InieRD/ pDhu= eT+2t 1 / 2wq,ynnretailer’s pDoaiDRMdemand= eT+becomes2t 1 eTt ,and DUD/more/ 2 eTt .Thedownloadsrdnforveeseundertherestrictionsdigitaldownloadarelifted,andresultingpricealowerinsensitivelevelalowerwhenpricecensisavaedisutilitythatsomeinthisconditions.case,legalTheconsumersimportantbearpointofnotopiracydirectnotedlAPstealne.ithigherbearfromthethecostDRMofstealingversion;onlybutdoconsumersnotgetwhoanyisselc’srandNow,utilityitorAhtforDRMconsiderfromimposesthethepiratedageneralgood.

costcasewhere >0usaPropositionthelegal1B.

buyersofthebyproduct.loweringThistheleadsutilitytoihteohtProposition1B.EliminatingDRMleadstoadecreasettginpiracywhenhngiidryul pc > S

onicse,dti= 1 9e2

T eM +8TeMt 1+ 1 +32eMt2 1 2 2 3et 1 e

TTlos+2t 1

hbeotherwise,itresultsinanincreaseinpiracy.

SwMrRehOtminedTheimpactFoNydownloads,bythecompetitionofremovingamongDRMpiratedonpiracyisdeter-Ina:uctandtraditionalmusicintermsmusic,ofprod-legalthngoarebene tsaswellasprices.WhenlegaldownloadsirydtionssoldpetosversiononwithCopasistheirDRMprotection,consumersfacerestric-availableuseoftheproduct,whereasthepiratedincreases,thedisutilitylessbuyingfromwithoutDRMrestrictionsrestrictions. Ingeneral, = R downloadattractive.providesWithoutthelegalthesameDRMrestrictedproductrestrictions,productbecomesbene ttheaslegalthe

restrictions,thelegaldownloadisonparwiththetraditionalformatintermsofthegrossproductbene- ts.Thisparitybetweenthetwoformatsremovesthelegaldownload’scompetitivedisadvantage,creatingincentivesforthetraditionalretailertoreduceitspriceandforthedownloadretailertoincreaseitsprice.Thedownloadretailer’sequilibriumpriceisdeterminedbythenetoftheseeffects.

Thechangeinpiracyvolumeisdeterminedbythechangeinthedownloadretailer’spricerelativetothereductioninthecostofpiracy.Whenthedown-loadretailer’spricefallsmorethanthereductioninthecostofpiracy,thenetutilityoflegaldownloadincreases,andthepiracyvolumedecreases.Interest-ingly,undersomeconditions,evenwhenremovingDRMleadstoanincreaseinthedownloadretailer’spriceandadecreaseinthecostofpiracy,thepiracylevelcanbelower.When isremoved, < S ,thecostofpiracydeclineswhenDRMbutthebene tsofproductparityarelimited,andthedownloadretailercouldstillchargeahigherprice.ThiscasesupportstheRIAA’sfearsthatremovingDRMwillincreasepiracy.

Propositions1Aand1Bshowthatthattheindus-try’sbeliefthattheremovalofDRMleadstohigherpiracyisnotalwaystruewhenweconsidertheadverseimpactofDRMrestrictionsonconsumers’willingnesstopurchaselegaldownloadsandthepricecompetitionamongthethreeformats.Itisimportanttonotethatthis ndingcanexistevenwhenDRMimposesnonegativeutilityonlegalpurchasers.4.2.EffectonRecordLabel

WenowconsidertheimpactofremovingDRMrestrictionsonthepro tabilityoftherecordlabel.Asnotedearlier,theidealDRMmechanismwouldnotpenalizelegalbuyers,andyetitwouldimposeacostonpirates.WhenthelabelhasaDRMmechanismwith butpirates =0,stillthenfacelegalapurchaserscost.Inthisarecase,notpenalized,removingDRMdoesnothelpthelegalbuyers,butitdoesmakethecostofpiratingeasier.Thiswouldsuggestthatthe rmcouldnotgainfromremovingDRMwhen =0.However,thisisnotthecase.Inparticular,