Braden Cox at Technology Liberation Front writes about a law school symposium on “The Economics of Self-Help and Self-Defense in Cyberspace”. Near the end of an interesting discussion, Cox says this:
The conference ended with Dan Burk at Univ of Minnesota Law School giving a lefty analysis for how DRM will be mostly bad for consumers unless the government steps in and sets limits that preserve fair use. I had to challenge him on this one, and asked where is the market failure here? Consumers will get what they demand, and if some DRM is overly restrictive there will be companies that will provide more to consumers. He said that the consumers of DRM technology are not the general public, but the recording companies, and because society-at-large is not properly represented in this debate the government needs to play a larger role.
I would answer Cox’s question a bit differently. I’m happy to agree with Cox that the market, left to itself, would find a reasonable balance between the desires of media publishers and consumers. But the market hasn’t been left to itself. Congress passed the DMCA, which bans some products that let consumers exercise their rights to make noninfringing use (including fair use) of works.
The best solution would be to repeal the DMCA, or at least to create a real exemption for technologies that enable fair use and other lawful uses. If that’s not possible, and Congress continues to insist on decreeing which media player technologies can exist, the second-best solution is to make those decrees more wisely.
Because of the DMCA, consumers have not gotten what they demand. For example, many consumers demand a DVD player that runs on Linux, but when somebody tried to build one it was deemed illegal.
Perhaps the Technology Liberation Front can help us liberate these technologies.
There is more than one “market”. If I could set up a tollbooth on a congested bridge during rush hour (and not get arrested), two markets would be affected. One would reward me with “market success” and the other one just wouldn’t count.
My tollbooth would be a “market success” because a few thousand people would pay me to zip in to work a lot faster. Why? Because another segment of the market doesn’t count — the few thousand who cannot afford the toll and have to find an alternate route weren’t paying anyway.
That is why, for example, if a copyright owner uses DRM to eliminate the secondary market for copies (such as the “disposable” DVD that is cheaper to buy but will only play for 48 hours) the copyright owner’s calculus may result in a net gain — market success — even though it depends for its gain on millions of people unable to rent, borrow or buy used DVDs. The limited play DVD may be cheaper than the unlimited play, drawing more purchasers of “new”. and the copyright owners feel no pain from lost resales and rentals from which they derived no additional revenue.
One market — composed of people happy to pay $6 for limited play instead of $15 for unlimited play, or who are not price-sensitive and will pay $6 just to not have to return the cheaper rental, may reward the copyright owner with economic success. The less affluent, who depend on the used DVD market or cheap rentals because they can’t afford even $6, never factored into the copyright owner’s equation anyway because they were in the secondary market. For them, the market has failed, but many economists don’t even see, much less measure, markets that cannot self-correct.
I see consistantly pessimistic assumption/axiom that music will become impovrished if every copy of a CD is not charged for.
That is not neccesarily true. Phish and the Grateful Dead both actively encouraged taping and free distribution of their concerts. They made money by charging for live concerts.
This is simply a new business model that came about in light of new technology. I’m not saying that it won’t drastically change the music business, but that might not be a bad thing. (For example, it could move control away from the large megacorporations in the RIAA and put it back in the hands of the artists and fans.) New technology dramatically changes any field it touches.
Cypherpunk,
you take the recording industry as all of music writing and performing, while it is not even mentioned in labour statistics, cf. http://www.bls.gov/oco/ocos095.htm
there is no separate page for composers: quite a lot of them live of ASCAP, which fits your description of a Department of Content; please be aware on what you like to turn down: the spectre you decry arrived 90 years ago and does fine today.
A quick comment on the DMCA. First, it is a complicated law with many provisions. I will just talk about the part which criminalizes defeating copyright protection measures. In effect, this part of the DMCA legally requires us to treat weak DRM as if it were strong DRM.
First, this is largely unenforceable. Look at DeCSS for an example. Unenforceable laws are bad laws. Many other provisions of the DMCA, such as limitations on encryption research to legitimate researchers, are bad as well. On the whole, I oppose DMCA. But that’s not the question at hand.
For the sake of argument, let’s pretend that the DMCA were magically enforceable, and it would allow bad DRM to work like good DRM. Then economically, that would be a good thing. That is, consumers and content producers would be better off in a society with the DMCA than in one without it.
My reasoning is as I described above. Without DRM, content becomes a public good. It is a standard economic result that public goods are under-produced. And further, as Tito points out in a subsequent comment, DRM may not even be possible for static content like music, because you can always record it. DRM might only be possible for active content like games, and only then if special tamper-proof encrypted black boxes are used to run the games. One future scenario has music primarily being produced for advertising, and given away for free to advertise games and other products that you can make a profit on.
I believe that we face a musically impoverished future unless we either find some way to make DRM work for music, or else we have much more intrusive government involvement. This might take the form of socialized music (full of practical problems); or banning P2P (which leads to crypto wars); or, yes, some kind of workable DMCA (which I don’t see how to enforce).
It’s a bad situation all around. In this context, while I would not necessarily say that DMCA is the least of the evils, it’s important to see that the alternatives are bad as well, and DMCA is probably not the worst option. And we should understand that DMCA does not cause a market failure; it is an attempt to remedy a market failure.
The movie industry as we know it would certainly die if it were perfectly legal to distribute digital master copies of movies, and do with them whatever one wished.
That may or may not be true. You state it as axiomatic, but it’s not.
johnny, I assume you’re not advocating such a system–what are you suggesting?
No, I’m not advocating such a system. I was suggesting that the movie and music industries have historically cried wolf at the appearance of any new technology.
They were wrong about cassettes, which would destroy the recording industry. They were wrong about the VCR, which would destroy Hollywood. In view of their past predictions, I can’t think of any reason to give credence to their current cries of woe.
DRM and the Market
In light of yesterday’s entry on DRM and competition, and the ensuing comment thread, it’s interesting to look at last week’s action by TiVo and ReplayTV to limit their customers’ use of pay-per-view content that the customers have recorded. If custome…
In this situation, the concept of the “market operating freely” almost begs the question.
When I’m tweaking Libertarian-types, sometimes I point out for example that the Libertarian Party receives a trivial amount of votes or campaign contributions, so it’s been rejected by the market at large, so by their own logic of the market being best, Libertarianism must be wrong.
Yes, I know the flaw in the above, it’s a joke. But it points out something subtle – you have to define a market in the first place before talking about market outcomes. Copyright itself is such an artificial creation that the definition of the rights virtually determines the marketplace contours – which, note, is exactly the rationale for the DMCA! (that is, without defining yet more rights – “paracopyright” – the outcome was undesirable).
Michael S: Right, so it’s a public interest balancing act between rightsholders, device makers and the public. I would incline to letting people make and sell what they like, and require evidence of harm before banning it. The evidence for P2P harming the music industry isn’t very compelling.
And as for distributing copies without compensation, it’s not legal and few people are arguing that it should be. However, anti-circumvention laws like the DMCA have serious bad side-effects; they cause a lot of collateral damage to innovation.
Either the “sue filesharers” or the “compulsory license as there is for songwriters, cable TV and player pianos” solutions would be better.
Sorry, I should have said: “… should be legal MERELY because it’s ‘capable of substantial noninfringing uses’ …”
“Yep, and the same would be true for the movie industry, if it hadn’t been killed off 20 years ago by the VCR.”
The movie industry as we know it would certainly die if it were perfectly legal to distribute digital master copies of movies, and do with them whatever one wished. johnny, I assume you’re not advocating such a system–what are you suggesting?
By the way, the argument that a product should be legal because it’s “capable of substantial noninfringing uses” is clearly bogus. Guns, for example, are almost always used in “noninfringing” ways, but they’re extremely heavily regulated nevertheless.
Cypherpunk,
My original post was not about whether or not we should have DRM. Indeed, I said pretty clearly that I was happy to let the market work that out, if the market were allowed to operate freely. The issue is not DRM vs. no DRM, but DRM vs. DRM+DMCA.
It is the advocates of the DMCA, the advocates of government interference in the market, who bear the burden of proving that there is a market failure and that the DMCA remedies that failure. The proof just isn’t there.
You can’t justify the DMCA by arguing hypothetically about what might happen in a world with perfect DRM. We know that DRM is far from perfect.
And, more to the point, we live in a world with the DMCA, so any claimed benefits of the DMCA should be visible already. Where are they? Copyright owners are quite unhappy with the present situation. If the DMCA can be justified, it can only be justified by arguing that it has made infringement much more difficult than it would have been absent the DMCA. I don’t see how such an argument could be made.
There is another fundamental question here. Is DRM even possible?
The only way that can happen is to outlaw general purpose computing devices (aka computers). Even then it will be breakable, but all “breaks” must be done one by one in hardware and can’t be replicated as a program, thus severely limiting their distribution relative to software breaks over the internet.
Other than that, as Schneier said “Making bits uncopyable is like making water not wet.”
Regardless of you views on where fair use should be, and the role of DRM, is anyone ready to sacrafice the entire technology industry in the US in order to protect the entertainment industry?
Side note, Cypherpunk, market failure is not when all sides would be better off, it’s when there is a net loss in “economic welfare”. Monopolies are a market failure, and they certainly benefit the monopolist!
the copyright regime did succeed in providing abundant supply of recreational artwork – the 20th century did witness the rise of an industrial strength production of books and music, that even scaled better than demand – according to http://www.riaa.com/news/marketingdata/cost.asp marketing and promotion are the biggest spenders in music business.
however, recent advances in technology are to, or allegedly already did, create a break in that growth, by lowering the barrier that separates private and public sharing of copyrighted works: copyright does not fare well with the fact, that anybody with internet access may become a worldwide publisher of said works – more so now, that grokster e.a. are not to be made part of the police force.
in comes DRM: mechanical supervision of compliancy, with warts though- please read the riaa’s statements on what makes a cd valuable to consumers (first paragraph, link above), and then think of, what consequent application of DRM would take of that. I guess we will agree, DRM with no holes will never succeed in a market, where copyright is the norm, because there is no value left.
scope the debate in terms of strategy and tactics (whats the goal, and how to reach it): copyright rewards authors to further progress; DRM limits access to works to protect authors rewards. there is no direct link from DRM to progress! there is only the speculation that the production of large quantities of rewards, a goal, that the record industry eg. is very good at achieving, will also promote the goal of creating progressive works (of this, I am not so sure).
the choice the public faces in debating DRM is not between having music made and not having music made at all – thats what the record companies make you believe; rather, its about the role, these same companies play, in producing and distributing it! that said, I dont have a clue on how to continue – but the firm believe, that people will always enjoy music, pay for it, and make it.
This was an interesting post,Cypherpunk, especially in regards to what makes a market failure, but your logic fails at a critical juncture.
“This reduces the profits to the point where the music doesn’t get made.”
Yep, and the same would be true for the movie industry, if it hadn’t been killed off 20 years ago by the VCR.
Some will reject p2p because they consider it thievery. Audiophiles will reject it because of the degradation of sound. Others will reject it because they want to have the CDs to play in their cars.
The idea that p2p will kill sales is ludicrous. P2P might, in the short run, have a bad effect on sales. Or maybe not. In the long run, the industry will adapt or die, as industries have, from colliers to saddle-makers.
The short-sighted view is yours. In no case will music get to the point that nobody pays for it, which seems to be the crux of your argument.
A market failure, by definition, is a situation where everyone would be better off than in the current conditions, and everyone would (privately) agree that they are better off, but where we can’t reach it by market mechanisms. An example would be a pothole filled private road owned by residents, where each person would genuinely be better off if he made a fair contribution to a road improvement fund; but it doesn’t happen, because some people refuse to contribute, hoping that others will put in extra money so the road gets fixed anyway. Common causes of market failures are externalities, where the actions of some market players have impacts on others that don’t affect the decisions of the players; transaction costs, where it would be too expensive to set up deals between all the participants; and public goods, like the road, which get supplied automatically to more people than those who paid for them.
Digital content has many players. There are the people who create it; the companies which package, distribute and market it; technology companies which create the products used to play the content; and consumers who purchase it. In the case of music, we’ve got musicians, singers and songwriters; record companies; creators of CD players, MP3 players, computers; and consumers who enjoy music.
To have a market failure, you have to propose a situation where every one of those groups would be happier than under market conditions, but we can’t get there using just market mechanisms. It’s not enough to want to redistribute wealth from some groups to others, just because you like them better. That’s not market failure, that’s communism.
Ironically, the situation without DRM does meet the classic definition of a market failure. That’s because music becomes a public good. Once some people buy it, they can share it with everyone else, who get it for free. This is a classic public good, like the private road above, where the road repairs benefit even those who don’t pay for them.
Specifically, there are probably situations where a musician could make music that people would enjoy; and where those people if asked to pay for that music would be willing to do so, because their enjoyment is greater than the cost; and where this payment is enough to give the record companies a profit and repay the musician’s effort; and this would help the technology companies sell more products. Eveyone would benefit. But it doesn’t happen under a situation where file sharing is widespread, because people can get the music for free and they don’t have to pay for it. This reduces the profits to the point where the music doesn’t get made. Even though everyone would be better off if the music were made, it doesn’t happen if there is too much file sharing. This is a market failure.
DRM can, in principle, remedy this. It attempts to turn digital content from a public good into a private good. This eliminates the market failure and makes everyone better off. Everyone. Even consumers.
That may seem paradoxical because superficially it might seem that consumers are better off if music is free than if they have to pay for it. But this ignores the interests of the other players. If music creators don’t get paid, there will be little music for consumers to enjoy.
Now, we are in a bit of a special situation here, because we are transitioning from music as a private good to music as a public good. Even if there is less and less new good music being made, we can still listen to the greats from the 60s through the 90s. We can get all the Beatles and Nirvana we want.
But that’s a short-sighted view. In a few decades these old groups will be no more popular than Benny Goodman and Al Jolson are today. Imagine if that was the only music you could get for free, music from your great grandparents’ time. It would be a musically impoverished world.
That’s what we’re going to have in a few decades if music continues on its transition to becoming a public good. The alternative at that point is for the government to step in as it does with other public goods, like roads, and be responsible for music. In addition to the Department of Transportation we’ll have a Department of Content, responsible for the nation’s music and other entertainment.
Once you see the alternatives, maybe the idea that DRM will actually benefit all parties, including consumers, doesn’t seem so crazy. The important point is that DRM is not a market failure. Lack of DRM is the market failure, because it makes content a public good.
Imagine that circumvention of the DRM’d media files was impossible — imagine that we lived in a world where the anti-circumvention clause of the DMCA had no reason to exist. In such a world would the market take care of itself?
In other words, can the market choice take care of companies releasing DRM’d products, by allowing consumers to vote with their dollars? In the media market, the purchases a consumer makes are not interchangable — that is to say, if a person purchases a Beatles CD which is only available from a single label, the consumer cannot substitute an Elvis Presley CD from another label if the consumer likes the DRM or lack thereof of the other label better. The Presley CD and the Beatles CDs are not interchangable. The distributor of either has a limited, government granted monopoly on distribution, and they are the only source of the good.
I believe this tension is similar to the tension caused when people began selling player pianos without compensating the copyright holders of the sheet music. Eventually congress forced the player piano maufacturers to pay the sheet music makers, but as a compulsary license, not according to the open market because these sheet music holders had a limited monopoly on their work.
Where is the market failure? Just attempt to do any of the things traditionally falling under the fair use defense using DRM’d products… try to excerpt, try to parody (which involves taking more than a little of the work), try to provide a work (or a part of a work) for your students to download (multiple copies for classroom use).
The fact that people won’t be able to do this (and anonymously at that) is the main problem with fair use and DRM. And where’s the market failure? It’s easily illustrated with the Grey Album example… or any other sampling-intensive work. (In that case, it’s easy to argue that we need a compulsory license for sampling.)
It seems that the trick here is that, yes, if many consumers simultaneously demand something, they will get it. But fair use is such a micro-level, case-by-case thing that people will be frustrated, not all at once, but over a much larger period of time. It’s the little spontaneous frustrations that implicate reasonable, personal and fair use.
That is what the DRM market will fail at.