An economist almost gets a clue

Damien Cave inteveriews Stan Liebowitz on DRM It sounds like he is slowly grasping the truth about digital media - that DRM destroys value, but copying doesn't.

The problem is that the number of downloads appears to be larger than the total number of CDs purchased. Worldwide annual downloads, according to estimates from places like Webnoize, would indicate that the number of downloads -- if you assume there are 10 songs on a CD -- is something like five times the total number of CDs sold in the U.S. in a year, and one-and-a-half times the worldwide sales. That's so large that you have to say: Look, if downloads are substitutes [for CDs] in any significant way, we should see really big declines -- unless there's something else going on. [..]
It may wind up that people just like to purchase because it's the honest thing to do. There's another possible explanation though, which is something that I'm trying to get harder data on. If we had a degree of copying [now] not that different from in the past, and it's just switched from audiotapes to downloads, then we may not notice an impact on CD sales.


Or perhaps the downloading is a substitute for radio listening, and what it is doing is varying the purchases more - shifting the Pareto distribution away from what the record companies are paying to play on air?

Certainly, if they're going to sell music that you can't make copies of, people aren't likely to pay as much for it. I don't know that the record companies really understand that. I think the pricing that they have for these services doesn't make any sense.

Bingo.

DRM, as I see it, is merely the protection in the software, on a CD or whatever, that would allow micro-payments. It doesn't do this yet, but in principle it could. That's what I view as closer to ideal. They can let you do a lot and you pay a higher price, or let you do only a little in which case you'd be paying a lower price. It solves a lot of peculiar economic problems that arise when you're dealing with intellectual property. If it stopped copying, if it was fairly effective -- it will never stop all the hardcore crackers -- then the copyright owners will get a reasonably good deal and users will get a reasonably good deal.

This is missing the point that once it's cracked its cracked. You need economic incentives to operate the right way round, not backwards like this. DRM schemes reduce the value of the content, but are hackable. Thus the only people who can realise the true value are the hackers. You need to reward those who pay, not punish them.

The micro-payments idea has been floating around for years and it's never happened. Why do you think it would work and why hasn't it worked so far?

I have to believe the computer people who think that DRM is viable. The micro-payment part is the harder part because the credit card companies won't accept payments as small as micro-payments would need to be. If someone can come along who is able to accept small micro-payments -- one of the credit-card type companies -- then it could be viable. Right now, that's probably the biggest impediment: There's a fixed cost for using a credit card that's bigger than what a lot of these payments would be.

PayPal accepts payments of 1 cent. But that isn't the problem. The problem is that most people don't like micropayments - the mental cost of keeping track of them is more expensive than they are worth - hence the phrase 'nickled and dimed to death'.

What makes you so sure that DRM won't turn off consumers and make them focus on the rogue file-sharing services?

If it turns off consumers, they'll have to remove it or lower the price. The people selling these things want to make money, which means they want to give people whatever it is that they want to pay the most for. They want to maximize profits and if they change their product and no one wants to buy it, they'll change it back in a heartbeat. That's the beauty of the market. That's why it can't get too far afield. If they get every consumer mad at them, they'll be in big trouble.

What if they don't change their product, but no-one wants to buy it?