Researchers say DRM drives away legitimate customers

Rich Fiscus
10 Oct 2011 11:41

According to research set to be published in the November-December issue of Marketing Science, DRM drives some consumers to piracy but doesn't affect those who were already predisposed to it.
Dinah Vernik from the Jones Graduate School of Business at Rice University along with Devavrat Purohit and Preyas Desai of Duke's Fuqua School of Business came to a number of conclusions which directly contradict entrenched positions in the entertainment industry.

If you have ever read or heard a statement from an executive at a record label, movie studio, or book publisher, you're likely familiar with the set of assumptions:

1. Piracy is the biggest threat to sales
2. Deterring piracy will mean higher profits
3. DRM restrictions reduce piracy

Obviously, if you buy into these assumptions, the logical conclusion is that more DRM means less piracy and higher profits. As the Duke and Rice researchers show, none of these things should actually be assumed.

Although their research was restricted to music, they say their findings apply equally to other types of content, such as video and e-books. Their principle finding was that DRM doesn't reduce piracy. In fact, they found it has just the opposite effect.

Consumers, they say, are hesitant to pay for music with DRM restrictions because it prevents them from doing normal things, such as making a backup or playing it on their choice of device.

According to Vernik:

The recording industry acknowledges that consumers bear the additional costs of imposing DRM restrictions on digital music, which lowers the overall satisfaction of those who purchase music downloads legally. This dissatisfaction with sometimes onerous DRM restrictions could nudge consumers toward piracy.

The study shows these restrictions affect only those with legal intentions, since those are the people who purchase DRM-laden music. As it points out, pirated versions of the same content have no such restrictions.

What may be lost to many people is the second, and equally important, conclusion offered in the paper. Less piracy does not necessarily equate to more profit. They conclude it would ultimately lead to more competition and lower prices.

It doesn't address how content producers may be able to increase profits without DRM. However, that question has already been examined in past research, and the answer is once again the opposite of the standard thinking in the entertainment industry.

A 2010 paper from Professor Raghuram Iyengar, Assistant Professor of Marketing at the University of Pennsylvania's Wharton School, suggests a significant price drop would increase both retailer and label profits significantly.

This is consistent with basic economic principles, which tell us the price of a mass produced product will ultimately be just above the cost of making each additional unit. In this case, the product is a download and the costs are royalties for the labels and bandwidth & server/operations costs for the retailer.

None of this should surprise anyone. All the research is showing is that basic economics applies to the content industry, regardless of the monopoly power which comes with copyright.