Bargaining: The myth of “secure” distribution

Aram

May 4, 2012

¶ 1 Leave a comment on paragraph 1 0 The third stage of grief, according to Kübler-Ross, is bargaining, which, she argues, is “really an attempt to postpone” the inevitable.[1] Following its long period of denial and its initial outburst of litigious anger, the music industry plunged headlong into the process of trying to negotiate a halt, or at least a deceleration, of the changes brought about by digital music technologies. It pursued this goal on a number of fronts, including bargaining with consumers about what they could and couldn’t do with their music using digital rights management (DRM) technology, and bargaining with music sellers in order to reaffirm the dominance of the traditional wholesale/retail economic model. While these tactics did little to halt the advance of new digital music behaviors and technologies, they certainly slowed down the economic development of digital music as an industry, and, by extension, undermined the financial wellbeing of the traditional music industry during a pivotal moment of transition.

¶ 2 Leave a comment on paragraph 2 0 Digital rights management, a technology that creates a kind of digital padlock around a file such as a song, movie, or game, seemed to many rights holders like a promising technology in the web’s early years. As I myself proposed in a report I authored as an industry analyst for Jupiter Research in 1999, “DRM is absolutely integral to protecting copyrights online . . . . The only way to track and prevent misuse of online intellectual property is through a proactive solution that includes both watermarking and secure distribution technology.”[2] Although I tempered this message with the cautionary addendum that such a strategy would only work if the technology were also used to improve the consumer experience and develop new business models that moved beyond retail transactions, the overall vision was flawed. This is because it was based on the erroneous belief that control over online content distribution was still a viable option for the media industry.

¶ 3 Leave a comment on paragraph 3 0 The same month in which my DRM report was published, a college student named Shawn Fanning launched a new peer-to-peer file-sharing service called Napster, and within weeks it had spread like wildfire. By the end of the year, millions of people were swapping their entire MP3 libraries, making hundreds of millions of files available to one another. Prior to this, industry estimates had placed the total number of MP3s on the web at somewhere near half a million, so this was an explosion in the range of three orders of magnitude. I rapidly came to realize that my vision had been wrong, and started to advocate for “post-Napster product formats”[3] that acknowledged the inevitability of free distribution and attempted to improve upon, rather than control, the P2P experience. Unfortunately, my clientele in the recording industry were more receptive to the earlier vision, and spent most of the next decade using DRM and other forms of “secure” distribution technology on virtually every song, album and video they released, to disastrous effect.

¶ 4 Leave a comment on paragraph 4 0 The primary problem with DRM, of course, is that it doesn’t work. Even if a million copies of a song are all locked down, preventing unlicensed users from listening to or sharing it, a single unfettered copy (such as one ripped from a CD) can be reproduced ad infinitum online. But its strategic problems run even deeper than this. For one thing, the restraints on “fair use” (a legal concept that allows us to copy songs to portable devices, or transfer them to CDs) presented by DRM undermine consumer trust and patience – to say nothing of musical culture – and make unlicensed music from P2P networks or elsewhere seem even better by comparison. For another thing, DRM is prone to technical malfunction, and tends to be used heavy-handedly, with content owners erring on the side of overprotection; even ostensibly permitted uses are often difficult for consumers to accomplish, and there is a frustrating propensity for “server error” messages.

¶ 5 Leave a comment on paragraph 5 0 In practice, DRM also presented many unforeseen strategic difficulties for retailers, and forced them to violate their customers’ trust. For instance, when high-profile digital music sellers like Yahoo! and MSN decided to shut down their stores for financial reasons, they were forced to choose between maintaining their DRM servers indefinitely and at significant cost (which would allow consumers to continue listening to the songs they’d purchased), and shutting them down (which would cause all the music they’d sold over the years to become non-functional). In both cases, the companies chose the latter course, and consumers and artists lost out, with a significant blow to goodwill for both the retailers and the record labels. The opening sentence of a 2008 Wired article on the Yahoo! shutdown put it succinctly: “If you bought DRMed, copy-protected music, you are an idiot.”[4]

¶ 6 Leave a comment on paragraph 6 0 As a final indignity, DRM actually ended up undermining the market power of the labels that used it, by increasing the leverage enjoyed by Apple, which used the technology to erect a “walled garden” around its iPod hardware, its iTunes software, and its digital music retail business, excluding third party retailers and manufacturers from the process and creating a near-monopoly (I’ll discuss this a bit more in Chapter 7). The industry, as it turns out, was stuck within a walled garden of its own. Once it had committed to DRM, it became increasingly difficult to disentangle its business model from the technology.

¶ 7 Leave a comment on paragraph 7 0 This was exacerbated by another, related form of bargaining on the part of the labels. If DRM functioned as a cybernetic straitjacket to lock consumers into an obsolete, pre-digital mode of consumption, it also helped to bolster the industry’s obsolete, pre-digital economic models. Since the days of Edison’s wax cylinders, record labels had made their money as a wholesale business, shipping products to retailers, who then marked them up and sold them to consumers. According to classical economics, this model is premised on a scarce, physically-distributed commodity; each individual “unit” that is shipped and sold has a price determined by the intersection of supply and demand, and profitability is based on the ability of each party to eke out a margin on a per-unit basis.

¶ 8 Leave a comment on paragraph 8 0 Clearly, in the case of digital goods, which can be reproduced infinitely at any stage in the value chain at little or no incremental cost, the markup pricing model makes no sense for either party. Record labels can forego expensive manufacturing and distribution costs and focus their energies on developing and marketing music, while retailers, flush with an unlimited supply of product, can experiment with a wide range of price points and product formats, finding “sweet spots” that bring in the greatest consumer expenditures at the lowest cost of goods. Together, they can share in the benefits that accrue. For a variety of reasons ranging from cautious skepticism to willful ignorance to entrenched power relations, the music industry failed to embrace this new range of opportunities, opting instead to artificially prolong the life of the traditional music wholesale model by using copyright (in lieu of physical control over distribution) as a mode of enforcement.

¶ 9 Leave a comment on paragraph 9 0 Nearly every digital music store (including some operated by the major labels themselves) crashed and burned under this model, hampering the growth of the digital music industry and undermining sales overall. While it’s true that the exception, Apple, sold billions of dollars worth of digital “singles,” it is also widely acknowledged that the company has done so by selling music at zero profit margin, recognizing its upside from the sale of iPods and other high-cost devices whose value to consumers is increased by the availability of the digital music in the iTunes store. This, in turn, has exerted downward pressure on the ability of rival music sellers to sell at a higher rate, reducing the overall value of the industry and undermining competition across the board.

¶ 10 Leave a comment on paragraph 10 0 In 2007 (as the major labels began to discontinue the use of DRM for digital downloads) Edgar Bronfman Jr., then CEO of Warner Music Group, conceded during a speech at a business conference that the industry’s attempts to stall digital music through these methods of bargaining had failed, and even backfired. In his own words:

¶ 11 Leave a comment on paragraph 11 0 We used to fool ourselves . . . We used to think our content was perfect just exactly as it was. We expected our business would remain blissfully unaffected even as the world of interactivity, constant connection and file sharing was exploding. And of course we were wrong. How were we wrong? By standing still or moving at a glacial pace, we inadvertently went to war with consumers by denying them what they wanted and could otherwise find and as a result of course, consumers won.[5]

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