Vernik,Purohit,andDesai:MusicDownloadsandtheFlipSideofDRM

MarketingScience,ArticlesinAdvance,pp.1–17,©2011INFORMS

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eitherindividuallyorasabundle.Itwouldbeinter-estingtoinvestigatethecompetitionandpro timpli-cationsofabundlingstrategyforrecordlabelsthatfacethethreatofpiracy.Second,thismodelsepa-ratesdigitalandtraditionalretailers;infuturework,itwouldbeworthwhiletoalloweachretailertoofferboththedownloadableandtraditionalformats.ThiscannibalizationcanhaveinterestingeffectsontheimpactofDRMprotectiononmusicpricesandprof-its.Third,itwouldbeinterestingtocomparetheroleofcopyprotectionindifferentindustriesandacrossdownloadretailer.Finally,wealso ndthatundercertainconditions,piracyandlabelpro tscanbothincrease.Itisimportanttonotethatthispositiverelationshipbetweenpiracyandlabelpro tsoccurswithoutanynetworkeffectsinthemodel.Thatis,piracydoesnotcontributedirectlytoconsumerutil-ity;instead,ithasapositiveeffectbasedsolelyonhowitaffectspricesofthelegalproductsinthemarket.

AlthoughtheideaofeliminatingDRMisstillananathematosomeinthemusicindustry,theideaofers.The lemaynotbeermissions@.

bpircotsdoingawaywithDRMrestrictionsisbeginningtobyuctakehold.Forexample,thefourmajorrecordlabelssilo(e.g.,Sony,Universal,Warner,andEMI)arecom-optingaroundtotheideaofsellingDRM-freemusicesilbht(Wortham2008).TheideaofeliminatingDRMisalignalsobeingsuggestedinthecomputergameindus-vaiadrtry.Forexample,anindustryjournalrecentlynotedeathatahighlysuccessfulgame,Spore,camewithDRMdgaermrestrictionsthatweresoonerousthat“theDRMssnencouragedthousandstogettheircopyillegally”ioihts(Ernesto2008).AttributingabnormallyhighpiracyciehulevelstoDRMisconsistentwiththeanalysisinourwqpaper.Althoughourmodelisdevelopedwiththe,ynnmusicindustryasitsprincipalbackdrop,itcanbeoaisreadilyextendedtootherinformationgoods(e.g.,rdnveemovies,books)thatcanbedigitizedanddistributedseovertheInternet.

censaTheindustryisclearthatimposingDRMrestric-vaedltionsimposescostsonconsumers;aslongastheseAPcostsarenottooonerous,thenconsumerswillmovene.itiawayfrompiracy.However,itisimportanttobeclearsselabouttheoveralleffectofthesecosts.Iftherecordc’sritorlabelsellsDRM-restrictedmusic,thentherestric-AhtutionsimposedbyDRMlowertheoverallsatisfac-saihtionfromthedownloadedproduct;furthermore,thisteohtcostisbornebyallconsumers,eventhosewhopur-ttgchasethedownloadlegally.Ouranalysisalsosug-hngiidgeststhatrecordlabelsmaybebetteroffiftheyryulpcfocusedonincreasingconsumers’moralcostsofcopy-onicingratherthanincreasingtheirtechnicalcostofse,dticopying.Furthermore,we ndthatremovingDRMloshbeincreasesconsumerwelfareforallsegmentsoftheSwmarket.Inparticular,traditionalconsumersofCDsMrRebene tfromalowerprice;consumersoflegaldown-hOtoloadsgethigherutilitywithaDRM-freeversionevenFNythoughthepriceofthelegalversionmayincrease;Ina:and,interestingly,consumerswhoobtainpiratedver-thngosionsbene tbecauseitiseasiertostealmusicwhenirdthereisnoDRM.

ypetosThepresentmodelalsosuggestsseveralavenuesCopforfurtherresearch.First,wehavetreatedourbasicproductasamusicalbumandabstractedawayfromthebundlingproblem—atraditionalCDissoldasabundleofsongs,whereasdownloadscanbebought

differentapplicableformats.othernotonlyAstomentionedtheearlier,ourmodelisIninformationgoodssuchmusicasindustrybooksandbutmovies.alsotofromtheparativeoneabsenceanother,ofdataweonarehownottheseabletoindustriesdevelopdiffercom-ofstaticsthatcapturethedifferentialimpacttheseDRMestingindustriesacrossindustries.becomeavailable,ButasitmoredataaboutFinally,toDRMitwoulddevelopbefurtherwouldbeinter-interestingindustry-speci cinsights.inginthepresenceofnetworktoconsiderexternalities.theroleExist-ofnalityliteratureonassumesonthatpiracypiracyasvolumeapositivedependsnetworkexter-challengesthedegreeinvestigatethisofassumption,DRMprotection.Becauseourinverselyworkferentexternalities.effectswhetherintheeliminatingfurtherpresenceDRMresearchofpositivemighthaveshouldnetworkdif-Acknowledgments

Authorsarelistedinreversealphabeticalorder.Thispaperispartiallybasedonthe rstauthor’sdoctoraldissertation.Theauthorsthanktheeditor-in-chief,EricBradlow,andthereviewteamfortheircommentsandsuggestions.

AppendixDigitalRetailer

A.OptimalityofIntroducingaInthissectionwederiveconditionsunderwhichintro-ducingsomeformofdigitaldownloadsisoptimalfortherecordlabel.Wederiveandcomparetherecordlabel’sprof-itsinthefollowingcases:(1)therecordlabelsellsthealbumexclusivelyinthetraditionalformat,(2)therecordlabelsellsthealbuminthetraditionalandDRM-restrictedfor-mats,and(3)therecordlabelsellsthealbuminthetradi-tionalandDRM-freedigitalformats.

ConsiderthecasewhentheonlylegallyavailablealbumsaresoldinthetraditionalformatbyretailerT.Asdiscussedearlier,themoralcostofpiracyforconsumersinsegment

Hishighenough(eH

prefernotbuyingmusicM≥ to tpirating.);thereforeThetheselocationconsumersoftheconsumerwhoisindifferentbetweenbuyingthetraditionalversionandnotbuyinganythingisderivedbyequatingUTB x tozeroandsolvingforx.ThislocationisgivenbyxwhoH= ispTindifferent+t /t.ThebetweenlocationbuyingofthetheLsegmenttraditionalconsumerversionandstealingthedownloadableversionisderivedbyequat-ingUTB x andURDS

x eL andsolvingforx.ThislocationisgivenbyxL= pT+t eM / 2t+eT .