Jun
25
2009

Does DRM (digitally restricted media) make economic sense?

DRM - defective by design (photo by chegs - CC-BY)

DRM - defective by design (photo by chegs - CC-BY)

At first glance it seems obvious that slapping DRM on commercial music and video will stop people from copying the content, and will increase the profit of the content distributors. But a more careful analysis shows that this is unlikely to be the case.

The apparent DRM profit (i.e. the extra profit due to DRM being added) equals the profit per extra sale, times the number of extra sales due to the DRM. Those extra sales are from the people who tried to get a free copy of the media but couldn’t (due to the DRM) so they decided to buy a licensed copy instead.

But some costs must be deducted from this apparent DRM profit:

  • It costs a lot of money to develop a DRM technology, or to license someone else’s DRM technology
  • It costs extra to manufacture digitally restricted media
  • There will be court costs associated with trying to block the dissemination of “hacks” of your DRM scheme
  • It costs time and money to make sure that your media are compatible with the hardware that you will permit them to be used with
  • You will need a substantial support staff to help customers configure their media and devices to make them work together, or to explain to the customers why their “purchased” media won’t work on the device of their choice

You will also lose some sales, because:

  • Some potential customers just don’t buy digitally restricted media. Either they object on principle, or they’ve been burned before by losing the ability to use their “purchased” media
  • Some customers will demand a refund when their media won’t work on the device of their choice
  • People who have heard stories of DRM-related problems will be left with a “bad feeling” about your product

So how does the balance work out? It’s hard to estimate some of the costs, but this isn’t actually necessary because it turns out that the number of extra sales due to the DRM will be negligible. Those who are looking for a free copy of your media will generally download an unlocked copy from the internet, rather than try to copy an official DRM-laden product—and few of those people will encounter the “friction” that would lead them to buy your officially-licensed product.

Therefore, you would end up gaining little financial benefit from the DRM. You would incur additional costs, and frustrate your customers who have purchased media which is less functional that which they would have obtained if they downloaded an unlicensed copy.

Many companies, including Apple, have recognized that DRM doesn’t make economic sense, and have adjusted their business model accordingly. The others will do so too, or will go out of business. Long-term, there’s no other possibility.

Credit is due to Ploum, who first phrased the economic argument in this insightful way.

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