A Possible Solution to the DRM Debate
Ever since the explosive growth of the internet and the increasing popularity of online file-sharing, the music industry has worried about how to deal with piracy. When consumers illegally download copyrighted music, artists and record labels don’t see the money that they would otherwise get from the music being purchased. In order to avert this potentially major loss of revenue, many media companies began implementing digital rights management (DRM) technologies. DRM prevents customers from using media in ways other than which the company intends it to be used; examples include a song of which one would be unable to burn a certain number of copies and a movie that could only be viewed on the computer to which it is downloaded. Proponents of DRM believe that the technology is necessary to prevent rampant copyright violations that could bankrupt the recording industry, while opponents argue that the technology is too restrictive and infringes on consumers’ rights. Whose rights, then, are more important: the companies’ or the consumers’? As reported in Ars Technica, a new study uses game theory to argue that we can have it both ways — not only will disabling DRM be more convenient for customers, but doing so will also increase music sales, benefitting the industry.
The study, by Dinah Vernik of Rice University and Devavrat Purohit and Preyas Desai of Duke University, models the music market in two different situations. In the first, albums are bring sold both as CDs and as downloads with DRM, while in the second, CDs and DRM-free downloads are available. Different consumers have different preferences between physical and digital formats. In addition to the choice of purchasing physical or digital media, each consumer can also opt to steal the music by downloading it illegally. This has the costs of taking more effort and being opposed to many consumers’ ethical views, but it has the advantage of being free. Some consumers will be more willing to pirate music than others.
This information can be used to construct a game to model the situation that works as follows. First, the record label decides what formats of the album it will sell and at what prices it will sell them to the retailers. The retailers then choose at what prices they will sell the album to consumers. Each consumer then chooses the album format that will maximize his or her utility. This game has a Nash equilibrium consisting of wholesale and retail prices for each format such that neither the record company nor the retailers would be able to make more money by changing their prices and none of the customers would be able to increase his or her utility by changing his or her choice of album format. The analysis used to find the equilibria is rather mathematical and quite complicated, but the end result is that the equilibrium without DRM is potentially more beneficial to all parties involved than the equilibrium with DRM. Depending on the values of certain parameters, removing DRM can either increase or decrease the volume of music piracy and either increase or decrease profits for the record label; counterintuitively, under certain conditions, the amount of music piracy and the profits for the record label can be positively correlated. Additionally, when DRM is removed, the profits for the retailer selling physical copies of the album could either increase or decrease, while those for the download retailer would always increase. Removing DRM would increase the happiness of the consumers because the albums would be less expensive and would have more functionality. In total, removing DRM would provide a definite benefit for some parties, an indefinite outcome for others, and no definite losses for anyone included in the model. This result suggests that perhaps the music industry could ease up on its copyright restrictions and make its customers happy, all without damaging its profits. This way, both sides could end up as winners.