Labels Need DRM, but DRM Alone Won't Work
11.30.05
Sony BMG's CD copyright protection fiasco illustrates an obvious point and a paradox.
The obvious point: if you're going to use digital rights protection technology to safeguard digital entertainment for consumers, you'd better make sure you work the bugs out first.
The paradox: Sony BMG needs to have a DRM strategy in place, but it is bound to fail.
Before I explain the paradox, a quick review. Sony BMG inserted software onto CDs from artists like Neil Diamond and Celine Dion designed to keep consumers from making more than three copies of the discs or freely trading the music online or with friends. The company (or its subcontractors) also inserted a little piece of spyware that opened them up to virus attacks and legal action from Texas New York Attorney General Eliot Spitzer and practically everyone else. Massive recalls are underway.
Now, you can argue (correctly) that Sony has a right to protect its discs, should have a DRM scheme in place and merely goofed by either overreaching or doing bad quality control.
But the company was bound to fail. Because any copyright scheme for entertainment ever devised has been cracked and the underlying content made available to the masses. DVDs, videotapes, cable and satellite TV, cassettes - all are routinely copied and will continue to be, no matter how many legal eagles or what copyright protection scheme the studios employ. You could almost count in days the time it would take after the release of a copy-protected Sony BMG disc before gleeful hackers broke the code and posted how they did it on the web - along with pirated Sony BMG CDs.
So why do I say Sony BMG needs to have a DRM scheme in place if it is bound to fail? Because DRM schemes and legal strategies protect creators of intellectual property against theft by casual users only if the benefits of paying outweigh the liabilities of stealing.
Take cable. Anybody with a little chutzpah can steal a signal, even though it's encrypted. But most people don't because the perceived benefit of paying $50 a month for unlimited content to watch and record outweighs the hassle and legal liability of ripping it off.
Do some people rip off cable? Sure. But last I heard, the cable companies weren't going out of business and Hollywood was pretty gung-ho about its cable profits.
So if you define DRM as 100 percent security, the cable industry's encryption has failed. But they still make plenty of money. That's the paradox.
The problem for Sony BMG and other record labels is that the benefits of ripping off CDs still outweighs the liabilities of getting caught and the hassles of breaking the DRM or downloading songs from the web. So even if Sony BMG's DRM software is squeaky clean, it wouldn't completely stop the copying problem.
In fairness to Sony BMG, the company was well aware of that fact when it began copy-protecting its CDs. "Our intent was to create an educational speed bumps rather than to create a full stop," a Sony BMG executive said. "We wanted to give consumers the functionality they wanted while helping them understand they shouldn't make hundreds of copies."
For Sony BMG and other labels to stop ordinary people from hacking and copying, they need to lower prices and intensify their efforts to create new products like dual video-audio discs; they need to offer CD buyers exclusive benefits such as discounted concert tickets, free ringtones and downloads, and free access to exclusive websites. Ultimately, the labels will probably have to discard CDs entirely for another business model that persuades consumers to buy rather than steal.
Only then will a failed DRM strategy have a chance of success.
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7 comments:
There is no paradox: The primary function of DRM is not about preventing stealing. It's about offering a granularly articulated consumption scope - and delivering that in practice. So yes, DRM is a "value-subtract": the user actually gets a bit less consumption scope than in the unprotected format. The trick here is to get that scope and price and consumer expectation to meet. This translates both to a requirement to be very explicit on what is offered - and to the requirement to set the price accordingly. Stroud's cable pricing example is spot on.
Too bad the labels do not get this. User satisfaction is possible with DRM - but it requires pricing of restricted (protected) items below unprotected ones, proportionate to the reduced user experience. In case of noninteroperable formats (most everything on offer so far) the price differential should be really significant. Unfortunately, it does not look like the pricing is going to be improve anytime soon - what with noises aboit raising the iTunes track price. WIth that noninteroperable format, it still is too expensive to really work for the users.
The paradox is even worse than you describe: by its very nature, DRM will always add hassles for legitimate purchasers. No matter how well implemented, DRM will always be a value-subtract.
Consider: you're in a shop, with poor lighting, trying to decipher in the fine print whether the CD will play on all the CD-players in the house. And you're paying for the privilege.
Later, one of the CD players breaks down or gets stolen. What fraction of your existing CD collection will play on the replacement player? What fraction will tell you that you first have to de-register the music from the player you no longer have?
Meanwhile, the people who download MP3s off the net get them unencumbered.
It is a time of Power to the People, not of closed systems. DRM is a pressing issue, but to create correct behavior, you have to reward the good and punish the bad. IF the companies reward loyalty, they will get the revenue. It is a risk reward thing today. IF the lawyers pursue obvious bootleggers with civil suits, they'll get the message. Michael’s assertions are right on the money.
Consumer experience ranks as the key driver in commerce today. It is fudamentally the the driver in our company, Transformedia. As consumers become more informed and networked, this becomes bedrock. In Sony's own Press Release:
"Ultimately, the experience of consumers is our primary concern, and our goal is to help bring our artists' music to as broad an audience as possible. Going forward, we will continue to identify new ways to meet demands for flexibility in how you and other consumers listen to music."
SONY, SAP and even Microsoft are learning the lessons of the arrogance of closed systems. Open systems excel and are profitable. The speed of commerce and information has exceeded the ability to control or even monitor. The answers to this complex problem are simple, yet challenging to implement: it is a behavior issue, not a technology or legal issue.
Hi Michael
I read your article, and I totally agree.
Same goes for software. In fact some companies that sell software benefit from illegal copies specifically when the software needs a community of some sort, or to establish a brand name.
The people who copy would probably never pay any way, so the befit of bad protection is almost clear cut. Add to that the fact that any protection is breakable, and you understand why it does not even pay to invest too much effort beyond raising the bar, and creating the legal deterrence you mentioned.
Another aspect of DRM that you did not explicitly mention has to do with the Channel. As a distribution channel the last thing you want to do is keep an inventory of something anyone can copy.
In many cases the channel is the one creating the demand for a better protection. As a vendor, you have to show that you have made the effort, or you will not be able to distribute.
It's this balance of interests that will keep the copy protection / DRM business half protected for quite some time I suspect.
Michael,
That is an excellent piece. I have been saying much the same thing since 1998 (at the launch of the ill-fated Secure Digital Music Initiative (SDMI) effort - a long sad story).
All the litigation, multiple Digital Rights Management (DRM) schemes, and hand wringing will not save the labels double-platinum business model. There are so many other factors that are pressing upon their business (P2P being only a small factor) that they must, to quote Cary Sherman: "do three things. First, Get in the market. Second, get in the market. Third, get in the market." While they have begun to do so, one questions whether they are a day late and a dollar short.
As a copyright lawyer I condemn P2P distribution of other people’s intellectual property. While a nice statement of belief, it doesn’t solve the problem. Indeed, many studying the major label decline trace the beginning to the late seventies resulting from the singular focus on selling double-platinum. (Do you remember diamond? No one does because the top selling albums, as a percentage of sales began to decline in 1978).
The serious decline in sales began in 1998 when the labels raised prices, lowered output, and faced stiff competition from DVDs (which went from zero to $17.4 billion by 2003), games (from $3 billion to $10 billion), as well as ring tone, Internet (other than P2P), physical piracy of CDs, and Indie records. In addition, the double-platinum model is also eroding because of changing tastes. This is evidenced by the decline in major artist sales (the top three percent of releases) and the increase in sales of Indie records and label artists in the bottom 75 percent of the charts. It took the labels some five years to respond, finally permitting Apple to launch a service that at least has attracted some echo-boomers.
Yes, DRM is a component - a speed bump telling people when they are doing the wrong thing. FairPlay comes pretty close to allowing acceptable behavior. But without a vigorous marketing effort aimed at the target audience – the 12-24 year olds, giving them what they want, where they want it, when they want it, and at a reasonable price – I am afraid the labels are in for a long rough and perhaps fatal ride.
Best,
Jim Burger
PS: The views expressed here are solely mine and not those of my clients or law firm.
Hello Michael,
I don’t agree with a couple of points in your article on the Sony BMG Fiasco.
The notion that Sony has a right to sell CD’s with a designed defect in order to limit my right to copy a CD for my own use is just plain wrong.
This represents an assumption that I am guilty of bootlegging or illegal file sharing, whereas there is an assumption of innocence under both U.S. and Canadian law (yes, they made the same bone-head mistake in Canada as well.)
Furthermore if Sony BMG knowingly sells me a product that will affect the software in my computers in any way, and they don’t clearly inform me that they are doing so, they committing a tort, not unlike trespassing.
They can come up with any excuse they want but there is no moral justification for what they did. (I should mention I have worked in the record industry for over 30 years and at a fairly high level for the past 20 years.)
I also find fault with your suggestion that they should add value with non-sense like the Dual Disc. If somebody wants a 24-bit CD that’s fine but the overwhelming majority of consumers do not want this, and it is ridiculous that Dual Disc product is replacing (as opposed to augmenting) the existing 16-bit CD that has been around for over 20 years.
Major record companies have problems alright but pushing around consumers will only make matters worse.
Major record companies have focused on singles by celebrities at the cost of focusing on albums by artists. However the huge problem is that in the digital world, copyright protection is a nightmare and this applies to all media. The smart thing for major record companies to do would have been to embrace file-sharing and monetize it. They could have 35,000,000 North Americans paying $12.00 a month for “all they can eat”, and generate an additional 5 billion dollars a year. (And current CD sales would be more likely to increase than collapse.) Instead they want to charge more than the $0.99 that iTunes has established for a single and they watch the millions trickle in as they slowly go broke. I think the reason they didn’t go down that road is a) they have no faith in the true popularity of music, and b) they are indoctrinated to believe that catalogue sales are nothing more than a cash grab and they stubbornly maintain that the real money is in finding the next Michael Jackson (i.e their business model is totally unrealistic.)
Record companies could radically increase revenues and profits. They would then have to go into their general fund to develop new artists. This would require vision, planning, faith in the future, faith in music (and people’s love of music) and it may take a little time. Instead the majors haven’t been capable of thinking 2 business quarters down the line since the 70’s when the lawyers were in the legal departments, not the Presidents’ offices.
In a nutshell they lack vision and leadership. Instead they live in a climate of fear and despair.
The notion that Sony has a right to sell CD’s with a designed defect in order to limit my right to copy a CD for my own use is just plain wrong.
This represents an assumption that I am guilty of bootlegging or illegal file sharing, whereas there is an assumption of innocence under both U.S. and Canadian law (yes, they made the same bone-head mistake in Canada as well.)
If Sony BMG knowingly sells me a product that will affect the software in my computers in any way, and they don’t clearly inform me that they are doing so, they committing a crime, not unlike trespassing.
They can come up with any excuse they want but there is no moral justification for what they did. (I should mention I have worked in the record industry for over 30 years and at a fairly high level for the past 20 years.)
I also find fault the value of Dual Disc. If somebody wants a 24-bit CD that’s fine but the overwhelming majority of consumers do not want this, and it is ridiculous that Dual Disc product is replacing (as opposed to augmenting) the existing 16-bit CD that has been around for over 20 years.
Major record companies have problems alright, but pushing around consumers will only make matters worse.
Major record companies have focused on singles by celebrities at the cost of focusing on albums by artists. However the huge problem is that in the digital world, copyright protection is a nightmare and this applies to all media. The smart thing for major record companies to have done would have been to embraced file-sharing and monetized it. They could have 35,000,000 North Americans paying $12.00 a month for “all they can eat”, and generate an additional 5 billion dollars a year. (And current CD sales would be more likely to increase than collapse.)
Instead they want to charge more than the $0.99 that iTunes has established for a single and they watch the millions trickle in as they slowly go broke. I think the reason they didn’t go down the subscriber road is a) they have no faith in the true popularity of music, and b) they are indoctrinated to believe that catalogue sales are nothing more than a cash grab and they stubbornly maintain that the real money is in finding the next Michael Jackson (i.e their business model is totally unrealistic.)
Record companies could radically increase revenues and profits. They would then have to go into their general fund to develop new artists. This would require vision, planning, faith in the future, faith in music (and people’s love of music) and it may take a little time. Instead the majors haven’t been capable of thinking 2 business quarters down the line since the 70’s when the lawyers were in the legal departments, not the Presidents’ offices.
In a nutshell the Majors lack vision and leadership. Instead they live in a climate of fear and despair.
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