Umair Haque / Bubblegeneration
umair haque  


Design principles for 21st century companies, markets, and economies. Foreword by Gary Hamel. Coming January 4th. Pre-order at Amazon.

Monday, July 04, 2005

Why Analog Property Rights Are Wrong For a Digital World: DRM vs Plasticity

Ian at Yahoo blogs about my Gartenberg vs DRM post - you should check it out, he has some excellent points.

That said, the argument I've been making about DRM for quite a while now is not that consumers won't accept DRM. It's a little more subtle than that - it's about analog economics being wrong for a digital world.

Let me start at the beginning. Why is DRM such a tricky issue? Why is the mortality rate of DRM-based plays so much higher than the average? I think it's because the assumptions underlying our basic notions of property rights are completely wrong.

OK. Traditionally, we define four kinds of property rights - use, exchange, modification, etc. Now, the economic assumption underpinning traditional property rights law is that you have to pay me if you use/exchange/modify a resource I own, because you impose a cost on me when you do so. Your use of the resource excludes mine. Hence, it's always in my interest to exclude you from use/modification/exchange unless you compensate me.

Now, this is really important. Note the fundamental point: this economics assumes that there's never a net benefit to the rights-holder from the use of his property - there's always a cost: hence, the need for compensation. This equation can never be positive - it's limit is zero.

Now, this holds true in a physical world, where if I use your car, toothbrush, or chemical plant, it imposes a cost on you, which I should compensate you for - otherwise, your incentive to supply the good in question is diluted. The strategic question is: how much does your use/exchange/mod of my good cost me?

But this assumption of no net benefit to the rights holder does not hold true in a digital world. In a digital/networked world, funny things like network externalities, open standards, non-rivalrous consumption (your use of a resource doesn't exclude mine) and strong complementarity begin to happen.

Hence, if I put your song on my playlist, you don't realize a cost - you realize a benefit when I share my playlist. If I add a comment to your blog, the attention benefit is worth more than the cost of the disk space, because blog and comment are strongly complementary. If BoingBoing kicks off a DRM discussion by pasting and linking to this post, the benefits are obviously greater than the costs. Similar dynamics hold across all media.

So the point is that copyright (and DRM) is broken because our notion of analog property rights is totally out of sync with a digital world. In such a world, the strategic question is very different: you have to factor in benefits as well as costs. The question becomes: does your use/exchange/mod of my good cost me more than benefits me?

If the answer is yes, then we're on to rights management. How do I 'manage' your rights? Well, there are two ways - technologically, and economically. Technology imposes overt, explicit limits on the rights consumers have regarding your good, while setting incentives implicitly. Economics, on the other hand, sets incentives explicitly, and establishes limits/rights implicitly.

Why is this important? Because in talking so much about the technology of DRM, I think a lot of folks have forgotten about the incentives DRM creates, which are what govern behavior.

Since most DRM is based on the fundamentally flawed notions of analog property rights discussed above, it can (in the long run) never work in a digital world. Because it assumes there are no benefits to consumption for the rights holder, value creation isn't just minimized, it's crippled. This imposes a huge opportunity cost on users: why shouldn't they hack most DRM, if they can, so they can maximize value creation?

I'm not talking about sharing music with 50 million peers for free - I'm talking about being able to play a CD across all the device you own, hacking the region-encoding on your DVD player, chipping your PlayStation, etc, etc. The point is that because most DRM is based on analog notions of property rights, it sets exactly the wrong incentives for a digital world.

What this means is that in the short-run, consumers might accept your DRM - but when technology shifts, and makes it either easier to hack (the cost drops), or more valuable to hack (the benefits increase), your DRM will be obsolete. The incentive is always there, like a bomb waiting to explode.

And since cheap coordination and production are massively dropping the cost of small-time technical tricks like defeating DRM, you'll get hacked more, and faster.

Now, the other way we can approach DRM is via economics. That means we have to massively distribute the incentive for consumers to maximize the benefits they create for the rights holder, while making sure they don't capture all this value.

How can we do this? Well, one solution is straightforward: reward everyone in a network for sharing. This solution is based around what I call viral revenue streams, and it was the core of the concept licenses I made last year. When you do this, three magical things happen.

First, value creation is maximized, because people reveal private info about what media satisifies their preferences best. Second, everyone in the network now has the incentive to pay at least some amount for the goods that are shared with them, because it's peers who are enforcing the revenue capture mechanism. Third - and most important, I think - you've aligned value capture with value creation.

That is, media is an experience good whose consumption, we all know, is strongly influenced by viral FX. How many movies have you soon based on the recommendation of a friend versus on the basis of a a great review in your local paper? My guess is the former far outnumbers the latter. When consumers recommend media to each other, we are creating significant amounts of value by sharing information. So why shouldn't we be rewarded for it?

Interestingly, this model, which I outlined a looong time ago, is one model that's about to be in serious competition for the dominant design. I think most people who know the industry know about the new share for cash/points/etc models that are in progress. The other model, of course, it the WintelApple total DRM model.

The conclusion of the above argument that the problem with DRM based on analog property rights is not that consumers won't accept it - they might, for a while. It's that it's a brittle solution, which sets huge incentives for it's own disruption.

That means that if you're buying into a WintelApple world of total DRM, you will get disrupted - economics dictates it. History gives us countless examples of gray markets arbitraging away analog property rights for digital/networked goods.

And all the brings us to the real problem with DRM: it's opportunity cost is really, really high. You're busy investing huge amounts in DRM which could be put to far more productive use. Think about the coming WintelApple ecosystem of everything ID'd at the chip level: this, right now, sounds like a killer value prop for everyone involved in the Media 2.0 value chain - content producers, publishers, hardware guys, software guys.

But the incentive to disrupt this ecosystem is absolutely enormous. If I'm making PlayStation mod chips, I can make a huuuge amount selling WintelApple anti-ID mod chips. My market size just expanded by a factor of 100. Clearly, I will invest a huge amount in making such mod chips.

Note, in this scenario, that everything flows from the fact that we haven't really been thinking hard about property rights themselves - that in a digital world, our fundamental assumption of the economics of property rights are wrong. We've simply accepted these assumptions - that's a huge error.

On the other hand, economic solutions which massively distribute incentives to share, by virally redistributing revenues - rewarding people for sharing - set incentives which are in sync with digital property rights, where use/mod/exchange of a rights holders' resource can create significant amounts of new value (not just impost a cost on them). This, in turn, sets an incentive for the network to grow - not to get disrupted.

Long post, no time to edit, so email me if all the geekspeak is making your head spin.

-- umair // 11:23 AM // 5 comments


"When consumers recommend media to each other, we are creating significant amounts of value by sharing information. So why shouldn't we be rewarded for it?"

The problem I see with this whole argument is two fold. 1) There is an assumption here that I think isn't valid. Namely, when you talk about viral licensing, you assume that people will actually pay for their share. Obviously, somebody has to pay otherwise there is no revenue stream back to the original creator or those responsible for the distribution of the good. I just don't see people paying 'out of the goodness of their hearts' until the whole system falls apart, we have no media or software produced, and people realize that in a free market economy, if you want something you have to pay for it.

2) Also, where's the incentive for the creator? At least with controls and rights management systems, companies can extract an income from their IP, for example. You could argue that open source is the solution to this but if I give everything away for free, how am I going to pay my programmers, my management, my bean counters (I guess I wouldn't have to pay my lawyers). Granted open source has its place, but if we have to rely on programmers with extra time on their hands and a passion to see the latest router algorithm come to fruition...we might not run out of innovation, but we will run out the nitty gritty building blocks that allow innovation to occur.
I'm old enough to remember when there was no such thing as napster or other forms of peer to peer sharing. It was not impossible to copy analog media and distribute was just hard for the average consumer. For example, if you tried to copy a commercial movie on video tape, you would have a crappy recording...unless of course you had the equipment to record with colour bars in the background and what not. I think with DRM, 'they' are essentially trying to create the same type of environment. Namely, to make it difficult enough to copy media so that the layman doesn't see an incentive in it. Having said that though, I agree with you that DRM won't work. Why? Because these days, I don't have to walk in to a shady underground store to find the latest illegal copy of some movie; I can just search the net . So I think this is really a question of legal jurisdiction and not technology or social habits. It's a difficult problem and think I'm rambling now...
// Blogger dhd // 8:56 PM

It's remarkable that the abundance of value as a defining characteristic of the net economy is still so poorly understood. In 1998 in A Taxonomy of Internet Commerce

I wrote

"Humans are territorial; status and fitness are measured largely by the ownership of territory and property. Human economic hierarchy is based on this behaviour and the fact that in the real world territory and property are scarce (which leads to competition). For the purposes of this discussion, territory and property should be understood to be any resource that is scarce, anything from agricultural produce to artifacts such as CPU chips. Scarcity underpins the real-world economy. If some object is scarce, it is valuable; if some objects are abundant, then they are relatively less valuable. Money is a measure of the relative scarcity of property. Some property (such as land) is intrinsically scarce and is therefore intrinsically valuable.

Several Internet terms betray our territoriality, such as domains, cyberspace, namespace, e-mail and IP addresses, and Uniform Resource Locator. We have invested a communications network of computers with imaginary territory, space and place. In reality there is no "there" on the Internet except in the physical location of cables and hardware. Our spatial conception of the Internet is pure analogy.

The native Internet culture has adapted to this imaginary Internet space, which is by definition abundant. Information - the predominant property or commodity - is abundant and largely free. So the native Internet economy is based not on scarcity but on abundance, this is the primary difference between the Internet economy and the real-world."

I agree that DRM is doomed. It's a mal-adaption, it won't work. My perspective on this is a an electronic music producer, as well as someone with an interest in internet commerce. I'm putting these ideas into practice with the net label Qualia Recordings. See

Paul Bambury
// Anonymous Anonymous // 10:36 AM

The other huge problem in music is that when it is all easily downloadable it becomes a FULL TIME JOB wading through everything. DJs/selectors/journalists do have an important purpose in media society, and we can put them to work (and pay them).

So here we kill two birds with one stone:

I've thought about this scheme for a while where people get paid (in music) for doing the hugely time consuming work of listening to things and recommending them.

I don't buy individual download tracks, but I would buy into a pool if I found an offering that suited me. The problem (for me) is that the offerings aren't that exciting.

Limewire, soul seek etc. are very touch and go. Its a big lottery depending on whose online. The things that get popular and easy to find are those that can attain some media profile (rappers, personalities, gimmicks, mash-ups).
// Anonymous Anonymous // 12:47 PM


viz your points:

1) If the incentive is distributed through the whole network, then if you don't pay, you stand to lose potential gains beyond music - you lose the present value of your expected viral revenues.

If this is bigger than the gains from NOT paying for one track, then you will always pay. Think about it as a massively multiplayer game, and it will make sense.

2) The incentive for the creator arises from 1.


Thanks for your comment - I tried to deal with the consequences of abundance more deeply in new media economics ppt - briefly, abundant media makes attention scarce, which becomes valuable.


Thanks for the comment - I'll be in touch.
// Blogger umair // 2:35 PM

wish you could see how crappy your web site looks on my monitor. bad color scheme, dude.
// Anonymous Anonymous // 6:39 PM
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