DRM (Digital Rights Management) has traditionally been thought of as a tool to enforce copyright. As such, it has failed spectacularly on several occasions (see e.g. Rubens 2002 about the DVD region code debacle or Orlowsky 2004 about the defeating of iTunes DRM). Practically every DRM solution with wide enough deployment for people to care was defeated within a short period of time.

In this article, we propose alternative business models which would provide the participating parties with the right incentives to do what other participants expect them to do, irrespectively whether or not copyright is enforced.

The proposed business models are based on several already successful business practices, which encourage creativity without relying on copyright protection. We strive to eliminate or minimize externalities by making sure that every participant is paid exactly for what they provide and pay exactly for what they get, while remaining in full control of whether or not to sell or buy services at a given price and are aware of the available alternative choices. Thus, the proposed business models can be expected to fare well in an unregulated free market.

Why does DRM fail as a tool of copyright enforcement?
The reason for this is that DRM is marred with severely misaligned interests of the concerned players:
1. Content authors, whose interests include compensation for their work, a loyal audience and wide publicity;

2. Publishers/distributors, whose primary interest is high revenue from content distribution;

3. Consumer electronics manufacturers, whose primary interest is high revenue from sales of devices;

4. Consumers, whose interests include low prices and a wide assortment of available content;

5. Governments, whose interests include high tax revenues, low enforcement costs, a reputation for enforcing laws and popular support.

DRM, in its traditional role as a tool of copyright enforcement, requires cooperation between authors, manufacturers, governments and publishers. In the light of the fact that devices with easily defeatable DRM sell better in an unregulated market, while implementing secure DRM is expensive, manufacturers need additional incentives to cooperate, such as government intervention and/or exclusive contracts (or even merger) with publishers/distributors. Also, manufacturers may choose to relocate to countries where such government intervention is smaller, thus providing governments with an incentive to defect from this cooperation. In addition, cooperation in copyright enforcement may erode the popularity of content creators, manufacturers and governments alike. The recent Sony-BMG case is an illustrative example of such backlash.

In such an environment, enforcing copyright in the face of extremely cheap, high quality alternative distribution channels (such as digital networks and recordable media) is a very difficult undertaking. On the other hand, content consumers have every reason to cooperate against copyright enforcement and can do so quite successfully, as has been observed with the widespread practice of burning CDs and DVDs for one another and the popularity of and considerable engineering effort put into peer-to-peer file-sharing and defeating DRM solutions.

For what are consumers prepared to pay?
As witnessed by the popularity of the otherwise quite expensive call-in and SMS votes on interactive television (such as those on Music Box, MTV and other commercial television channels), content consumers are prepared to pay for seeing their favourite content rank high in popularity ratings. Such voting systems typically allow for multiple votes, precisely because voting requires financial sacrifice on the part of the voter, thus multiple voting is indeed indicative of higher commitment.

There is also evidence (see e.g. Madden 2004 about how artists perceive the issue) that consumers are quite willing to pay the author directly, even if the content is available for free from other sources. The more intermediaries are between the audience and the author, the more reluctant the former become to pay, if there are other means to get hold of the content.

Without going into moral or legal arguments, several surveys and other research suggest (see e.g. Madden 2004 and Dufft 2005) that the overwhelming majority of music consumers and authors (in sharp contrast with publishers) do not consider file-sharing as a major threat to the creative community. Most, however, do think that authors should be compensated.

Thus, it is reasonable to assume that people would be even more willing to pay for expressing their support for their favourite artists, knowing that most or all of the money they pay will go directly to the artist.

As recently as December, 2005, Matt Philips from the British Phonographic Industry (BPI) stated the following in an interview to BBC: "Download services would be far more popular if we gave all the music away for free. But of course we wouldn't have a business then – it's important that you charge for the product and that money can be re-invested in discovering new talent."

In the next section, we hope to address Mr. Philips’ concerns in an innovative way.

Solutions for collecting and allocating such payments
Imagine a digital marketplace (e.g. a web- or mobile-portal) for content, where authors can offer their content, possibly with a short description and free samples for download in exchange for payment. All the payment is collected on accounts tied to corresponding pieces of content. There are no restrictions as to how much consumers can pay, except, perhaps a minimum price set by the author.

Content for sale is ranked according to the amount of money on these collector accounts. Thus, paying is essentially voting, informing other consumers about the popularity of the content. Authors can withdraw money from their accounts up to the accumulated balance. Thus, if they wish so, they can receive all the money their supporters paid. Alternatively, they can leave enough on the account to maintain or achieve high ranking.

In this model, the operators of such marketplaces are paid for exactly what they provide: discovering and evaluating talent. By being able to use the money left by authors on the collecting accounts, they essentially get access to interest-free credit. From their point of view, they get to sell their service at an auction price, which is the most they can hope for in a free market.

It is important to emphasize that ranking high does not directly increase or decrease the amount of money paid by supporters. We believe that the argument made in Fortunato (2005) applies to our system as well, which thus actually helps lesser known content providers (e.g. young artists) to attract attention and funding.

While, from a theoretical point of view, the proposed system works with unprotected content, DRM techniques can aid this business model by reducing the load on the operator; the operator in this case can sell only the rights, while the encrypted content itself is available for download from elsewhere, including peer-to-peer networks. In this case, DRM is not critical. If the minimal amount for getting the rights is lower than the effort required for defeating DRM, there is little motivation to attack it.

Another business model, which can even coexist with the previous one, is when customers are allowed to re-sell the content they have purchased at any price and in any quantity. In this case, the price customers will be willing to pay is considerably more than that of enjoying the content and voting for the artist; as it also includes the anticipated income from re-selling the content. Buyers who are also prospective sellers are interested in excluding free-riders, but protecting potentially very large files on storage and during transmission can be expensive. This is another point where DRM solutions can aid this business model: the content itself is available in encrypted form on web servers and peer-to-peer networks, but rights, including the decryption keys, are traded for money. Of course, the price will keep falling, but until it reaches a low level when protecting the content from non-paying consumers is not worth it any more, access to content will be kept restricted by those already accessing it. An extensive analysis of such a market is provided by Boldrin and Levine in their 2005 paper.

In both cases, it is instrumental to keep transaction costs as low as possible, as the transaction values on many occasions are very low. Both cash-like digital currencies with easy peer-to-peer payment and DRM solutions with small rights files enabling the use of large content files help reducing transaction costs to the point where the above outlined business models become viable.

The proposed models are by no means restricted to music. The primary criteria for the applicability of the two proposed solutions are the following.

In the case, where payment also constitutes a vote for the content, the applicability depends on how the reputation of the author influences the demand for current and future work by the same author. It is an interesting question, whether or not such a system favours already popular content. While intuitively one would think that the proposed ranking scheme is biased against lesser-known authors and their works, such intuition is not necessarily justified (see Fortunato 2005 for a similar example). For instance, in an ordered list the difference between the attractiveness of the first and the second placed items does not directly depend on the actual difference between the amount of collected (and unused) funds. Another possible objection is that the proposed funding scheme does little to help the emerging artist to recoup the significant upfront costs of production. We believe that this is primarily a question of credit and the proposed system can be relied upon as a source of re-paying such credit. Furthermore, it allows the customers to credit the author directly, assessing the creditworthiness on the basis of past work.

In the second case, when content can be traded freely, the essential element for making the market efficient from both authors’ and consumers’ perspective is the extremely low distribution cost, which includes the transaction costs of payment. DRM solutions that reduce the cost of providing (and restricting) access from the need to transfer and store the whole content in a secure fashion to transferring and storing rights objects securely, which is orders of magnitude cheaper. Without DRM, these costs would be clearly prohibitive for high-quality video content, while introducing DRM would make it applicable to practically any kind of digital content ranging from poetry and simple still images to multiple hours of high-fidelity video (e.g. films). It is equally important for instantaneous payments to be possible and cheap. In the case of payments, even intangible costs like the effort and time required to make the payment become significant. This is one of the greatest challenges in making such a system feasible.

Bottom line
We have outlined two content distribution models, which do not depend on copyright and use DRM solutions to lower transaction costs while keeping transactions secure. Unlike the case of copyright enforcement, the proposed business models do not provide manufacturers and users of DRM-enabled devices (that is, those in the very best position to defeat DRM solutions) with incentives to actually sabotage and attack DRM.

They do, however, provide sufficient incentives to author and share creative content, which has historically been the role of copyright. While copyright was perfectly adequate in a world where transaction costs and copying costs were reasonably high, it is becoming increasingly controversial and difficult to enforce in a networked, digital world. In particular, DRM techniques regularly fail as copyright enforcement tools, primarily because of misaligned incentives. In the proposed business model, for which copyright is not relevant, DRM is a tool of lowering transaction costs together with a peer-to-peer digital currency.


About the author: Daniel A. Nagy is an information security expert, interested in financial cryptography and the economics of cyberspace. Currently, he works for SEARCH-LAB Ltd, Budapest. He is also the lead developer of ePointSystem.ORG.

Status: first posted 15/02/06; licensed under Creative Commons