ArticlesinAdvance,pp.1–17issn0732-2399 eissn1526-548X

/10.1287/mksc.1110.0668

©2011INFORMS

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MusicDownloadsandtheFlipSideof

DigitalRightsManagement

JesseH.JonesGraduateSchoolofBusiness,RiceUniversity,Houston,Texas77005,vernik@rice.edu

FuquaSchoolofBusiness,DukeUniversity,Durham,NorthCarolina27708{purohit@duke.edu,desai@duke.edu}

DinahA.Vernik

DevavratPurohit,PreyasS.Desai

D

igitalrightsmanagement(DRM)isanimportantyetcontroversialissueintheinformationgoodsmarkets.AlthoughDRMissupposedtohelpcopyrightownersbyprotectingdigitalcontentfromillegalcopyingordistribution,itiscontroversialbecauseDRMimposesrestrictionsonevenlegalusers,andtherearemanyindustrypractitionerswhobelievethattheindustrywouldbebetteroffwithoutDRM.Inthispaper,wemodelconsumers’utilitiesandtheirincentivestopurchaselegalproductsversuspirateillegalones.Thisallowsustoendogenizethelevelofpiracyandunderstandhowitisin uencedbythepresenceorabsenceofDRM.Ouranalysissuggeststhat,counterintuitively,downloadpiracymightdecreasewhenthe rmallowslegalDRM-freedownloads.Furthermore,we ndthatadecreaseinpiracydoesnotguaranteeanincreasein rmpro tsandthatthatcopyrightownersdonotalwaysbene tfrommakingithardertocopymusicillegally.Byanalyzingthecompetitionamongthetraditionalretailer,thedigitalretailer,andpiratedsourcesofinformationgoods,wegetabetterunderstandingofthecompetitiveforcesinthemarketandprovideinsightsintotheroleofdigitalrightsmanagement.

Keywords:gametheory;competitiveanalysis;piracy;entertainmentmarketing;digitalmusic

History:Received:March18,2009;accepted:May8,2011;EricBradlowservedastheeditor-in-chiefandDuncanSimesterservedasassociateeditorforthisarticle.PublishedonlineinArticlesinAdvance.

1.

AccordingtotheRecordingIndustryAssociationofAmerica(RIAA),globalpiracyofmusiccauses$12.5billionineconomiclosseseveryyearandhascontributedtoa50%declineinCDsalesoverthelastdecade(RIAA2009).Asaresult,theRIAAhaspaidparticularattentiontotechnologicalsolutionsthatwouldmakethesharingofmusicmoredif cult.Ontheotherhand,EMI,amajorrecordlabel,begansellingsomeofitsmusicinadownloadableformatthatdoesnotincludethekeytechnologicalpiracy-preventioncomponent(EMI2007).Thispresentsaninterestingconundrum:IftheRIAAisrightandglobalpiracyisrampant,thenwhyisEMIeliminatingakeytechnologyinpreventingpiracy?Thesecon ict-ingviewsoftheworldareattheheartoftheproblemweaddressinthispaper.Inparticular,wedevelopaformalmodeltoaddressthefollowingquestions:Aslabelsmoveawayfromdesigningtechnologiestothwartpiracy,whatwillhappentothelevelofpiracy,andhowwillitaffectthepro tabilityofthemusicindustry—therecordlabelaswellasitsretailers?Weshowthatthesetechnologiesaffectnotonlypiracyandlegaldownloadsbutalsothemarketfortradi-tionalCDs.Byhighlightingtheroleofcompetitionnotonlybetweenthelegalandillegalchannelsbut

1

Introduction

alsowithinthelegalchannel,weofferfreshinsightsintotheeffectofpiracy.Althoughwefocusonthemusicindustry,wealsonotethatourconclusionsaregeneralandapplymorebroadlytothedigitalworldofbooks,movies,videogames,etc.,wherethebasicproblemofdealingwithpiracyisanongoingissue.AsnotedbyVanTassel(2006,p.5),“Contentprovidershavealwaysviewedpiracyasaseriousproblem,butinthelastfewyears,useofunlicensedcontenthasundergoneexplosivegrowthandthreat-enstounderminetheveryfoundationsofbothtra-ditionalbusinessesandelectroniccommerce.”Thebeliefisthatifpiracycanbereduced,boththetradi-tionalbusinessesandtheironlinecounterpartsstandtobene t.Asaresult,asigni cantamountofefforthasgoneintodevelopingdigitalrightsmanagement(DRM)technologiesthatmakecopyingdif cult.DRMcontrolshowenduserscanaccess,copy,orconvertinformationgoods,suchassoftware,music,movies,orbooks.Forexample,theoriginaliTunesFairplayDRMsystemrestrictedusersfrominstallingmusiconmorethan veauthorizedcomputersorburningasongmorethanseventimes,andsongsdownloadedfromWalmartMusiccanbeplayedonlyonWindowsPlaysForSurelicensedproducts(Ducheneetal.2005).