From Software Business Community

Business models on DRM

Definition of Business models on DRM

Better business models are the Holy Grail of the digital age ^[1]. Digital Rights Management technology (DRM) makes new kinds of business models possible. DRM encompasses a variety of technologies used to identify digitized works and to control their use. DRM appears to be at the foundation of whatever business models will actually succeed in the digital age. ^[1]

Motivation for DRM based business models

Intellectual property rights owners value control over their works because unauthorized copying and redistribution destroys their ability to market their works and to maximize their profit on the goods ^[1]. For example, unauthorized digital reproduction and distribution have shattered traditional music industry business models and are on the verge of doing the same to movie industry models. ^[1] Like every other technology, digital media has introduced new drawbacks and perils. One of them is the pervasive expansion of intellectual property piracy. ^[2]

The business models of these kind of industries are based on the goal to sell multiple copies of the copyrighted work at per copy prices that are fraction of the cost of producing those works (or the copies). Uncontrolled copying and redistribution (piracy) destroys this plan because unauthorized digital copies displace sales and performances. Also, piracy prevents IPR owners from changing the price of their works over time in ways they hope will maximize their incomes. ^[1]

DRM has been introduced to constrain resale or redistribution and transfer of intellectual property. It doesn't just stop a purchaser from making copies of a purchased item, but usually it also prevents any kind of transfer at all. ^[3]

Types of Business models on DRM

Price discrimination

Ideally, copyright owners should charge higher prices to those customers who value the sellers' goods and are best able to afford higher prices. Similarly, owners should charge lower prices to customers who do not value their goods as much or are less able to afford them. Economists refer to this as "price discrimination". ^[1] DRM provides tools to implement this approach ^[3].

Price discrimination can be found e.g in today's airline ticketing. Considerable price discrimination exists also in the software industry in the form of product bundling, educational discounts, corporate seat licenses, etc. The same could apply in selling any products based on intellectual property. ^[3]

A successful business model should not force copyright owners to charge the same price to all buyers because the owners will lose the ability to maximize profits through price discrimination. ^[1] A distributor could sell the same content to consumers e.g. through different channels with different pricing or even through the same channels at tailored pricing per customer. This gives the opportunity to use various and imaginative ways of bundling, creating special offers, etc.^[3]

In the Internet environment the ability and willingness to price discriminate is growing ^[4]. The more DRM is used in retailing, the more opportunity there will be for variable pricing. Still, Internet sales have gone in the other direction. For example iTunes charges the same for every track, whereas traditional CDs had different prices depending on the artists performing. ^{[3] [3]} It's easier and safer all around to stick with fairly fixed prices. ^[3]

In digital retailing, the volume has a key position in business models. Because reproducing digital copies of any digital work produces perfect quality with zero costs, maximizing the volumes sold is a major goal. At the same time maximizing the price per copy is also desirable and it could be achieved by price discrimination. ^{[5] [1] [3]}

Consumers resent discrimination based on them as individuals, but surprisingly, they don't resent individualized pricing associated with a difference in the product, even a fairly minor one. If done wrong, price discrimination would risk bad public relations. This is why music industry hasn't done it in the web. ^[3]

From the consumers point of view, price discrimination would provide some items at lower prices and increase the total amount of material for sale ^[3].

In this model as well as in other implementations, DRM normally tracks who has purchased each item. It lets the seller collect huge amounts of information about what each purchaser might want. This could be a big privacy issue, but still people don't seem to complain much that e.g. Amazon collects information about their purchases in order to recommend books or DVDs to them. A vendor might use the same data to figure out if a user has bought expensive products earlier, and derived from that information, quote a higher price for that individual user. ^[3]

Business plans for the marketing of copyrighted works are based on the ability to do sequential but separate releases of those works. In entertainment businesses, the sequence of releases for successful works spans a long time. Copyright owners seek control over the use of their works because uncontrolled copying and redistribution of works interferes with the success of long-term sequential release. Hardcover books come out before and cost more than paperback reprints Full-featured versions of computer software cost more than "ite" versions; and "lite" versions cost more than "trial" versions. Buying a DVD costs more than renting one ^[1]

"Anticopyright" Model

The anticopyright model would eliminate copyright entirely in the online digital domain. Compensation for the content would be provided by "tipping" the creators of the content. No one seems to have suggested that eliminating copyright and replacing it with tips would actually succeed in providing a living wage for anyone, and for example the current online tip-systems have so far given musicians only modest compensation. ^[1]

"Beyond-Copyright" Models

One "beyond-copyright" model would allow publishers to use DRM to control access to works, even those in the public domain, to prevent their unauthorized copying and distribution. The technology needed for this model seems to exist already. For example, passwords would control access to works, and encryption and watermarks would prevent unauthorized uses. ^[1]

Circumvention would be a punishable offense, but everyone would be free to digitize and distribute their own versions of works in the public domain, at their own expense, without liability. It would be prevented from anyone other than the publisher from copying existing digital versions. ^[1]

If this seems too far, another model would use DRM to control access to public domain materials, but would not control copying or redistribution of these works. ^[1]

Copyright-Based Models

Statutory License Models

Two statutory license models have been introduced. Both of these would require changes in the current legislation.

The first model permits noncommercial copying, distribution, performance, and adaptation of copyrighted works in return for levies paid by the providers of products and services whose value is enhanced by file swapping. A statutory license would allocate these collected levies among the categories of copyright owners (record companies, movie producers, book publishers, and so forth), and then among individual copyright owners within each category. Those entitled to levies would receive them in proportion to how often their works were used.^[1]

In the second version, the government would tax ISP access and any technology used to perform music, including MP3 players, hard drives, and computers. The collected revenues would be distributed to copyright owners in proportion to how often their works are accessed.^[1]

DRM would be used in both of these models for monitoring the frequency of access to the copyrighted works. ^[1]

Models Giving Copyright Owners Discretion and Control

These models are used now. They give copyright owners discretion over licensing terms and control over unauthorized uses of their works. The extent of control implemented by DRM varies very much from access controlling to access restriction for special software or hardware. ^[1]

Digital retailers model

A model was introduced where Internet service providers (ISPs) could work as digital retailers for their customers on behalf of the content copyright owners. For digital content containing copyrighted works, the owners of the copyrights would have the right to digitally identify each work, its owner, and the wholesale royalty price to be paid by ISPs for its transmission to users. DRM technologies such as watermarking and fingerprinting would be used for identification of the transmitted goods. ^[1]

ISPs would log transmissions of goods and bill users' accounts monthly for the content they received, at retail royalty rates set by ISPs, using the same billing methods by which ISPs now charge users for Internet access. The ISPs would gain retailing profits and the content owners would have a secure distribution channel for their goods. ^[1]

This model would work for all kinds of content including music, movies, television programs, photographs, books, periodicals, and software. Consumers would embrace this model because it gives them the choice and convenience they crave despite making them pay for digital works. Moreover, website operators, peer-to-peer (P2P) networks, Internet search engines, online radio and television stations, etc. could serve as promoters and distributors without fear of direct, contributory, or vicarious copyright liability. ^[1]

Relevance to software business

DRM can have importance for software business in various ways. It can be used traditionally for just protecting the goods or it can be used more sophisticatedly to control license terms such as expiring licenses, number of "seats" or users per license and so on. The fine print on many software purchases explains that you aren't buying software, you're buying an individual and nontransferable license to use the software ^[3].

Theoretical approaches

Links to related articles

• Intellectual Property Legislation
• Business models on DRM
• Cost effectiveness of DRM
• Digital rights management
• Intellectual property rights

See also

References

1. ↑ ^{1.00 1.01 1.02 1.03 1.04 1.05 1.06 1.07 1.08 1.09 1.10 1.11 1.12 1.13 1.14 1.15 1.16 1.17 1.18 1.19} L. Sobel, DRM as an Enabler of Business Models: ISPs as Digital Retailers, Berkeley Technology Law Journal, 2003
2. ↑ Z. Lifshitz, Digital Rights Management - a zero-sum game?, EUROCON, 2003
3. ↑ ^{3.00 3.01 3.02 3.03 3.04 3.05 3.06 3.07 3.08 3.09 3.10 3.11} M. Lesk, Digital Rights Management and Individualized Pricing, IEEE Security & Privacy, 2008
4. ↑ Odlyzko, Privacy, Economics, and Price Discrimination on the Internet, Social Sciences Research Network, 2003
5. ↑ L. Davis, Profiting from innovations in digital information goods: the role of intellectual property rights, Portland International Conference on Management of Engineering and Technology, 2001