The Korean music industry has negotiated a deal that puts a monetary price on the inconvenience customers experience due to Digital Restrictions Management (DRM) technology. According to a DRM Watch story:
In an agreement with the Korea Music Producers’ Association (KMPA), [the online service] Soribada will charge users KRW 500 (US $0.51) for DRM-protected music tracks and KRW 700 ($0.72) for non-DRM-protected tracks….
How should we interpret this deal? DRM Watch starts out on the right track but then goes terribly wrong:
The above figures can be read in a number of ways. Most importantly, they reflect the idea that users can do less with DRM-protected tracks than with unprotected ones, including some things that provide a better user experience and/or are allowed under Korea’s copyright laws.
But beyond that, those figures imply that KMPA is assuming a piracy rate for unprotected tracks of 40% relative to the piracy rate for DRM-protected tracks. Put another way, if KMPA assumes almost zero piracy for protected tracks, then it is assuming that for every unprotected track purchased, 0.4 tracks are illegally copied. We would be interested to know if there were any quantitatively analytic basis for that 40%.
To see what is wrong with this logic, let’s apply the same argument to an analogous situation. Suppose a first-class air ticket to Chicago costs $720, and a coach ticket costs $510. We cannot conclude that the airline expects 40% of first class tickets to be stolen! The price differential merely encodes the fact that customers value the first-class seat more than the coach seat.
In the same way, if non-DRM songs cost more than DRM songs, we can safely conclude that customers like non-DRM songs better.
It’s tempting to say that the 40% price difference reflects the value of the functionality that the average customer loses due to DRM. That’s more plausible than DRM Watch’s theory, but it’s still not quite right, because the price difference may be a price discrimination strategy.
Price discrimination by versioning is a standard tactic in information markets. For example, software companies often sell “standard” and “pro” versions of their products, where the standard version is just the pro version with some features disabled. High-end customers buy the pro version, and more cost-conscious customers buy the standard. By having two versions, the vendor can extract more revenue from the high-end customers, while still extracting some non-zero revenue from the cost-conscious customers.
KMPA’s two-tier pricing looks like a straightforward example of product versioning. The non-DRM version is for higher-end customers who know they like the song and are willing to pay for flexible use of it. The DRM version is for cost-conscious customers who might not be entirely sure they will like the song.
If this is a versioning strategy by KMPA, it may make sense for them to reduce deliberately the usefulness of the DRM version, even beyond the inherent limits of DRM. Think of the software vendor with standard and pro versions – the limitations of the standard version are not dictated by technical necessity but are chosen strategically by the vendor. The same may be true here – KMPA may have an incentive to make the DRM version less useful than it could be.
It’s worth noting that KMPA can rationally choose this versioning strategy even if it knows that DRM does nothing to stop copyright infringement. Indeed, the versioning strategy may even be rational if DRM causes infringement. All we can conclude from the KMPA’s pricing strategy is that DRM reduces customer value. But we knew that already.
Another possibility of course is the DRM (or decoder) has spywarelike characteristics (think XCP) and is “sticky”. Then getting it onto many PCs increases a side revenue stream.
Edward: Your ticket example is exactly the same as mine. Perhaps I used the wrong terminology with English being not my first language.
Regarding music quality, I was indeed aiming at MP3 vs. MP3 (or comparable formats). I agree there is a large variety of music for which MP3 doesn’t work adequately. But that has little to do with DRM, except to the extent that popular hi-res formats don’t support DRM. In that case you may indeed get a better product, by some metric, but not by some other, e.g. size. But then you can presumably make your own MP3/WMA files out of the hi-res format.
I think it is erroneous to assume the pricing differential is due to one factor only and ignore other potential factors that may be part of the pricing decision. DRMWATCH assumed the savings on reduced piracy was the only factor taken into consideration and then extrapolated the price differential to calculate the value of DRM to the labels on that saving only.
But there are other factors that could all be part of the decision to price lower and these may have a significant monetary value to the labels particularly when the long term view is considered. Some that spring to mind are:
– Perhaps they are trying to condition users to accept DRM by making DRM protected tracks substantially cheaper initially, but with a reduced differential over time as DRM becomes more accepted.
– Is the DRM a “sticky” DRM. For example, does it install something on the PC/device that doesn’t get removed easily (like SunnComm’s MediaMax), so that over time the ability to defeat the DRM becomes more difficult (using SunnComm as an example, once MediaMax is on the PC, using the Shift Key will no longer act as a bypass for subsequently bought MediaMax CDs). So by pricing a lot lower, they are trying to infect as many PCs/devices as possible in the near term, increasing the long term effectiveness of the DRM.
– Are they trying to promote one particular flavor of DRM over another to make it the defacto standard. So the low price is just a push for market share for that DRM and may have little to do with short term piracy reduction.
– Recognition of the reduced functionality of DRM disks as Ed suggested.
Any or all of the above factors, and many more, could contribute to the price differential, not just the piracy reduction.
Regarding the airline seat analogy, perhaps a better one is the difference between buying a restricted low-fare ticket (where you cannot change the travel times without a sizable (e.g., $75) fee) or an unrestricted ticket for the same day and destination but for a higher cost.
The airline certainly doesn’t expect someone to steal the unrestricted tickets, but people on a budget are willing to deal with the restrictions of the cheaper tickets and are willing to bend their schedule and their travel times around those restrictions. Someone who doesn’t want to give up the flexibility will purchase an unrestricted ticket, which can cost substantially more. (Hey, like the 40% more that the parent article refers to.)
cm,
If, as some vendors do, you can purchase a CD-quality non-DRM version (say, FLAC or WAV or CDDA or CD ISO) or you can purchase MP3s or OGGs with or without DRM, then there is a measurable and noticable quality difference. The vendors I listen to (Magnatune for example) don’t use DRM on anything, but they do understand that the descriminating listener wants something of higher quality than MP3.
Are you sure all of the cds you’re buying for $14-$19 are unencumbered?
I think that the only news in this story is the fact that the
same company offers two different versions of content,
a DRM-encumbered version and an unencumbered version.
We have pricing tiers in the US today, but not imposed
by the same company. I can buy a lower-value, DRM-
encumbered CD from iTunes for $9.99, or a higher-value,
non-encumbered CD from the store for anything from
$14-$19.
Homo Economicus: Then you are making exactly the 40% piracy argument.
Ed: The airline seat analogy is not entirely appropriate, as first class and economy seats are of different perceptible quality, whereas DRM music is arguably of the same quality as the non-DRM one, provided you can play it in all scenarios that you would like (but then presumably you can’t).
Maybe a better analogy would be fixed-flight tickets vs. open tickets.
Perhaps the KMPA is trying to ensure they get the same total revenue from all music, including that which is pirated from the non-DRMed sources, as they would if there was no piracy at all and all music sold was the lower cost DRMed one. To achieve this “revenue neutral” state in the face of piracy the non-DRMed and thus piratable music would have to be priced higher to also pay for the pirated music that the KMPA claims it is losing money from.