DRM technology includes encryption and other content controls that limit how users may make and distribute copies of digital files and physical media (e.g., CDs, DVDs) they may have purchased. While critics fear the loss of consumer uses due to DRM,^[9]they often fail to consider the effect of mitigating market forces. That is, economic analysis informs us that content providers who heedlessly hinder customer control actually reduce the value of the product that they are selling in the market. Doing so will reduce market demand, prices, and profits.^[10]

The ability of content owners to restrict reuse of their works may lead to a greater number of specialized or personalized options and a wider range of consumer choices. With DRM, content owners may offer different rights by designing menus of diverse services and charging a different price for each. For example, the ability to download, burn, and lend a legally accessed movie would be priced differently than the ability simply to view the work without making further transmissions or reproductions. The ability to design different services enables producers to price discriminate with regard to buyer tastes, potentially enabling greater revenue recovery.^[11]

The concept of versioning is not new in market economies.^[12] Magazine publishers make printed content available both by subscription and as single copies, and studios make film available in first-run theaters, video stores, and television and cable programs. Versioning allows consumers to choose among a number of service options instead of being confined to any one. The prospective use of different versions and prices is particularly appropriate for content industries, where vast production costs are sunk up-front. Those investments must be recovered from the subsequent sale of subsequent product.

That said, resale or arbitrage between low- and high-end markets needs to be avoided if versioning is to operate effectively. For example, if magazine subscribers could resell copies at higher prices on neighborhood newsstands, subscription prices would necessarily increase to reflect the value of likely resale. That would clearly harm readers who did not resell magazines. Therefore, DRM protections that stop the resale or redistribution of content from one market segment to another enable producers to develop more versions and enhance consumer choice.

The effect of versioning on individual users is bifurcated. Smaller users generally gain, as producers and distributors lower prices for no frills services to basic customers without worrying about revenue loss from high-end users. Content distributors may also use personalization techniques to identify prospective first-time customers and extend to them free previews, time-limited rentals, and low-price introductory offers.

By contrast, the more intense and devoted users of any product generally pay more under versioning; producers charge higher prices for enhanced service features without worrying about attrition at the lower end. Despite the higher prices, those high-end customers may be better off, as suppliers now have greater incentives to develop innovative features and to take other steps to expand the capabilities of the network.  

The Music Services

Nowhere is the market potential of versioning more evident than in the evolving market for digital music services. Since Apple first launched its iTunes Music Store in April 2003, the constellation of suppliers and services has reordered considerably. Specifically, the market for digital music content has moved well beyond first-generation business models of the major label services.

The two original major label services (MusicNet and pressplay),^[13] which were launched in December 2001, allowed full library access through streams and downloads but ended a buyers access to previously downloaded music when he or she terminated the service (although pressplay did come to permit a limited number of burns for an additional fee). The services also attempted to divide the customer spectrum by offering alternative service versions thatdepended on contract duration or usage level, or both.^[14] Four major alternative service versions came to market in 2003.

Downloads Plus Hardware

In April 2003 Apple Computer launched an innovative Internet Music Store, called iTunes, which sold more than 125 million downloads in the next 18 months and claimed 75 percent of the download market.^[15] Individual songs at the Music Store, which are encoded with the MPEG-4 Advanced Audio Coding compression technology, cost 99 cents apiece. With Apples proprietary networking technology, Rendezvous, several Mac users on a wireless network can share collections through streaming.^[16] The Music Store has no subscription fee; it does not enable full track streaming, but 30-second samples are available for free.^[17] The average iTunes user appears to download an album per month; the typical teenage shopper in a record store buys one CD every two months. Nearly half (45 percent) of purchased songs on iTunes were purchased as part of an album.^[18]

The key innovation of Apple is its light-handed DRM system, called FairPlay, which allows buyers to transfer tunes to Apple iPod players, burn unlimited numbers of CDs, and transmit downloaded songs to three other hard drives.^[19] The next generation of Apples Music Store also contains a number of new features, including iMix, which is a new way for users to publish and comment on playlists recommended by fellow fans.

Downloads Plus Software

MusicMatch, a service that competes with iTunes, provides downloads to complement its popular music management jukebox that is now installed on more than 60 million PCs.^[20] With jukebox software that can be paid for by user fees, advertising, and data resale, basic users of MusicMatch may buy 99-cent downloads, while deluxe users can pay $19.99 per month for an upgraded service with faster burn speeds and no advertisements.^[21]

MusicMatch also offers a complete personalization service (which Apple now lacks) that tracks an individuals selected downloads in order to make subsequent recommendations.^[22] In addition, MusicMatch fully tracks user preferences to compose interactive radio stations with personalized content.^[23] Moreover, MusicMatch now offers a subscription service (250,000 subscribers) that permits on-demand streaming and playlist sharing of recommended compositions with friends (described below). The prospective fortunes of the MusicMatch platform may increase considerably as the result of a prospective merger with the complementary search platforms of Yahoo!, which also owns the leading Internet radio service Launch.^[24]

Downloads Plus Interactive Radio

Napster, which was relaunched as a copyright-respecting service (using the pressplay infrastructure) in October 2003, features a different combination of downloading and streaming services.^[25] For 99 cents a track, Napster users may download and burn individual songs; an all you can eat subscription service is available at $9.99 per month.^[26] That fee includes on-demand streaming of music from Napsters library and commercial-free music from 50 interactive online radio stations.^[27] Complementary services for all Napster users include music videos, 30-second samples, online articles, Billboard charts, interuser e-mail, and playlist browsing.^[28]

Interactive Streaming Plus Burning

The leading subscription service (550,000 subscribers), RealNetworks Rhapsody, offers an alternative model to downloading ` la carte.^[29] Its key competitive feature is all you can eat on-demand streaming, which is made available for a subscription fee of $9.95 per month, and its present compatibility with Apples iPod, made possible by reverse engineering that may yet be legally contested.^[30] Individual burns are generally available at 79 cents but were sold for as little as 49 cents during an August promotion.^[31] The Rhapsody service also offers access to 50 commercial-free stations.^[32]

As of April 2004, 3 percent of Internet users and 17 percent of music downloaders used paid music services.^[33] The percentage of U.S. downloaders who actually paid for a song at one point or another increased from 8 percent to 22 percent in the first 12 months after the launch of iTunes.^[34] Moreover, 30 percent of those downloads were from independent labels not owned by the five major music companies, in contrast to 20 percent in offline markets .^[35]

To summarize, a number of competitive music services that incorporate digital rights management emerged in 2003 and early 2004. Each has some interesting features that are attracting the interest of a segment of the buying public. When applied in any of those services, DRM stops users from copying content in a manner that would displace market demand. Those protections help preserve some commitment to avoiding expropriation of investments in content and distribution services.

Notes

^[9] See, for example, Mike Godwin, What Every Citizen Should Know about DRM (Washington: Public Knowledge and New America Foundation, 2004), http://www.publicknowledge.org/content/overviews/citizens-guide-to-drm/attachment (retrieved August 13, 2004).

^[10] David Friedman, In Defense of Private Orderings: Comments on Julie Cohens Copyrights and the Jurisprudence of Self-Help, Berkeley Technology Law Journal 13 (1998): 1151.

^[11] Wendy Gordon, Intellectual Property as Price Discrimination: Implications for Contract, Chicago-Kent Law Review 73 (1998): 1367.

^[12]Carl Shapiro and Hal R. Varian, Information Rules (Boston: Harvard Business School Press, 1999), pp. 5382.

^[13] MusicNet was originally owned by Warner Brothers, EMI, BMG, and RealNetworks, and pressplay was owned by Universal and Sony. MusicNet made available to service retailers wholesale service, including content packaging, distribution, and e-commerce services, and pressplay provided both the latter services and the user interface.

^[14] For example, pressplay users chose among Basic ($9.95 for 300 streams and 30 downloads), Silver ($14.95 for 500 streams, 50 downloads, and 10 burns), Gold ($19.95 for 750 streams, 75 downloads, and 15 burns), and Platinum services ($24.95 for 1,000 streams, 100 downloads, and 20 burns). John Borland, Pressplay to Offer Unlimited Downloads, CNet News.com, July 31, 2002. Basiclisteners of MusicNet services purchased through RealNetworks paid a monthly fee of $4.95 to stream 100 songs and download 100 more, $9.95 for a combined package with additional Net radio services, and $19.95 for a GoldPass subscription with sports, entertainment, and news programming. By contrast, AOL offered basic MusicNet service (20 streams, 20 downloads) for $3.95 per month, unlimited streams and downloads for $8.95, and 10 additional burns for $17.95. Borland, NetMusic Gets AOL Audition, CNet News.com, February 26, 2003.

^[15] John Borland, Apple Unveils Music Store, CNet News.com, April 28, 2003; and iTunes Sells 1.5 Million Songs during Past Week: Five Times Napsters First Week Downloads, Yahoo!Finance, November 6, 2003.

^[16] Ibid.

^[17] Ibid.

^[18]John Borland, How Much Is Digital Music Worth? CNet News.com, December 8, 2003.

^[19] John Borland, Apples Music: Evolution, Not Revolution.

^[20] Forrester Research, Commentary: Facing the Music, CNet News.com, October 20, 2003; and MusicMatch 8.1, Tech News, CNet Reviews.

^[21] Ibid.

^[22] Ibid.

^[23] Ibid.

^[24] John Borland and Jim Hu, Yahoos Long and Winding Music Road, CNet News.com, September 14, 2004.

^[25] John Borland, Napster Launches: Minus the Revolution, CNet News.com, October 9, 2003.

^[26] John Borland, Napster: 5 Million Songs Sold, CNet News.com, February 23. 2004.

^[27] Ibid.

^[28]Roxio, which purchased the Napster brand assets in 2003, divested itself of its legacy CD burning and editing software products in order to focus entirely on the online music service. John Borland, Betting It All on Napster, Tech News, CNet News.com, September 1, 2004.

^[29] Peter Cohen, Apple and RealNetworksThe Real Story, Yahoo!News, April 16, 2004 (retrieved April 29, 2004). Real Networks purchased Rhapsody in 2003 from Listen.com, which originally conceived the service as an all-streaming subscription service.

^[30] Real Pushes Harmony with Aggressive Price Cut, Digital Music News, August 17, 2004, http:www.digitalmusicnews.com/yesterday/august2004 (retrieved August 17, 2004).

^[31] Ibid.

^[32]Cohen.

^[33] Pew Internet and Daily Life Project, at http://www.pewinternet.org/reports (retrieved April 29, 2004); see also Frank Barnako, CNET Launches Free Music Downloads, CBSMarketWatch.com, April 26, 2004 (retrieved April 29, 2004).

^[34] At http://www.ipsos-na.com/news/pressrelease.cfm?Id=2100 (retrieved April 10, 2004).

^[35] Independent Record Labels Eye New Group, MSNBC.com, http://msnbc.msn.com/id4631891 (retrieved April 10, 2004).

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