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June 18, 2004

DRM Is Bad for Monopolists, Too

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Posted by Wendy Seltzer

Ernie thinks Microsoft will take the wrong lesson from Cory's DRM warning. I disagree.

Whether you like Microsoft or not, you've got to recognize that they haven't gotten to be the richest company in the world through stupidity. DRM is long-term stupid. It's technology designed to make technological products less useful ("Where do you want to frustrate your customers from doing today?"), and it doesn't work as long as there's one determined attacker in the audience.

The DRM moment has been left behind by science. Publishers were looking for pay-per-use and perfect price discrimination; DRM promised it to them. But DRM was backed by bad science. As long as we live in a world where we can still talk to our friends and still tinker with our tools, DRM is doomed to failure. And when it fails at its primary purpose, it succeeds only at driving potential customers to other sources.

In the short term, DRM may help facilitate lock-in to a particular manufacturer's products. Once you buy a few Microsoft media player tracks, it's easier to keep buying Microsoft. But as the format gets less useful, and the media player's requirements become more restrictive, OGG looks more attractive. Sure, it'll take some effort to get your existing tracks back (you might have to convert, re-purchase, or most likely, find clear versions on the Darket), but once you see the gains in flexibility, you're unlikely to look back. Customers jump ship from DRM, with best customers first over the edge. If Microsoft as technology company doesn't see that, it's just ceding its leadership to someone who does.

Comments (8) + TrackBacks (0) | Category: IP Markets and Monopolies


1. Ernest Miller on June 18, 2004 2:22 PM writes...

Man, my ironic speech just hasn't been going over well lately. I wasn't really disagreeing so much as putting a different spin on it. Of course I agree with Cory, long term DRM is bad for business, it stifles innovation, etc.

My spin is two points:

1) In the short term, it can help a company stay on top of an existing industry by raising barriers to entry, particularly if the company fears it can't compete with truly innovative companies. To a certain extent I believe that Microsoft is entering that realm as open source becomes more prominent. In other words, DRM (backed by law) can delay the inevitable, if you are a non-innovative company.

I do believe that Microsoft has used DRM (and similar tactics - such as closed format upgrading) to delay and hold off innovators. Obviously, formats can be reverse engineered (such tactics don't work in the long term), but if you keep changing the formats (they work in the short term), you can consistently keep your competitors at a disadvantage and maintain dominance, particularly if you are smart enough to recognize and copy innovation (though you might not be terribly innovative yourself).

2) Many executives are only in it for and are rewarded for the short term. Why work on a long term timetable when stockholders and your job aren't structured to reward long term action? This might not apply to Microsoft so much, but I believe it applies in many other industries (such as the recording industry). Until the market switches, no one gets fired for trying to maintain the old ways of business. As an executive you just hope you don't get caught with the potato when the music stops.

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2. Ernest Miller on June 18, 2004 9:02 PM writes...

I was thinking an analogy here. The advent of the automobile was a huge boon to business. Not only was there work for auto factories, gas stations, etc., but everyone benefited from higher mobility. It makes no sense to make automobiles illegal.

Unless you are a buggy whip manufacturer who will be unable to adapt to start building electric starters or similar. If you fear true competition, then banning automobiles makes sense. Of course, the smart, able-to-innovate buggy whip manufacturers started building car parts right away. Unfortunately, many of the buggy whip manufactures simply went away because they were unable to adapt.

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3. Brad Hutchings on June 20, 2004 10:07 AM writes...

And yet Apple will go from 0% to 3ish-% of global music sales ($35B annual) in 2 years with FairPlay DRM on all offerings. Go figure.

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4. Dan Simpson on June 20, 2004 11:36 AM writes...

Must be because FairPlay was reverse engineered and is no longer proprietary.

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5. Lucas on June 22, 2004 5:03 PM writes...

I'm not convinced about the business case against DRM, because a big part of the value is keeping confidential memos from leaking. (DRM on small-batch items works pretty well, unlike on big-batch items like songs.)

About oggs, I think they're a strategic mistake. MP3 is free enough, and the advantage to the good guys of owning the installed base is huge.

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6. Ernest Miller on June 22, 2004 5:27 PM writes...

When I talk about the business case against DRM, I'm generally talking about the business case against DRM for consumer media. Obviously, encryption can be useful in a number of contexts. If A & B cooperate to discuss something and prevent C from figuring it out, that can be done. However, if A wants to discuss something with mass numbers of Bs, not all of whom desire to keep the message secret, forget it.

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7. Lucas on June 22, 2004 7:39 PM writes...

The difference in my mind is that what makes DRM so destructive is when it's used in wildly implausible ways. There has to be some basis in reality.

Permalink to Comment

8. lipitor on August 4, 2004 5:44 PM writes...

Four thousand different MAGNATES, MOGULS & NABOBS are romping in my
gothic solarium!!

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