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
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.