Reverse Psychology? How DRM may increase piracy!

Back in 2004-2005, while doing my MBA at Duke's Fuqua School of Business - which was an excellent experience at a great school - I had the pleasure of studying marketing under Preyas Desai.

A few days ago, Duke, together with Rice University, published press releases announcing research by the same Preyas Desai and his colleague Dinah Vernik at Rice. Their conclusion, which is counter-intuitive to the record labels but, ironically, makes perfect sense to many of us, is that removing DRM may actually reduce piracy. The press releases are at Rice and Duke. Additionally, the full article will be published in the November-December 2011 issue of Informs.

According to the press releases, looking solely at whether or not people can copy music they download is too narrow a view. One needs to look at the entire set of channels by which people can obtain (or choose not to obtain) music - CDs, legal DRM downloads, legal DRM-free downloads, and piracy. The impact of DRM on the consumer and his/her purchasing decisions across all channels need to be considered when understanding the impact of piracy.

While I have no doubt the authors' science will be precise, mathematical, and far more detailed than I could do, I believe their key insights work at a more fundamental, business level. For the overwhelming majority of consumers, two key facts, psychological facts, hold true:

1. They are perfectly happy to pay for something and obtain it legally, if the price is reasonable and the alternative is clearly illegal.
2. They are unlikely to share music, i.e. pirate it, for others to benefit for free when they themselves paid for it.

In other words, given the opportunity to obtain something in a legitimate fashion, they will do so and *not* pirate it.

If so, why do people pirate? There are a few key reasons:

1. DRM: If I pay to download a file, but then cannot use it among my various devices, I am likely to strip the DRM if I am technically savvy, or just download it from a pirated site if I am not. DRM helps create the demand for pirated goods, which in turn increases the number of suppliers.
2. Availability: If I cannot obtain what I want legally with ease, I am likely to get it illegally. This is as true for drug users as it is for music aficionados. I personally believe that the staggered release dates of DVDs worldwide lead directly to increased movie piracy. iTunes' global availability and the simultaneous DVD release dates have reduced the demand for piracy.
3. Bundling: As long as an album that contains two songs that I want out of ten is only available as an album, I have a stronger incentive to download it illegally. Quite simply, a $10 album (which none is anymore, of course) for two good songs is $5/song. If I could get each of them for $1-1.25, I would probably happily do so. But if I cannot, I have a strong incentive to find the two I want online.

At heart, though, I think the strongest indicator is the infamous lawsuits launched a few years back by the RIAA. Suing grandmothers or teenagers for listening to copied music may be bad law and bad for business, but it is a strong indicator of the music industry mindset, which is only beginning to change. Few people would actually pirate if the above three incentives were removed. But those same incentives are profit maximizers for the industry... at the expense of the consumers. Consumers may want what they want, but to music industry executives, these desires were and are threatening to a way of life and business, and thus began to view consumers as "the enemy." Anytime a business or industry sees its source of revenue as the enemy, it is a very bad sign.

Ironically, removing those three could improve the industry's fortunes, possibly exceeding where it was before:

1. Removal of DRM, which means I can share across my devices and back up safely, gives me greater incentive to purchase with comfort, leading to more purchases. Further, sharing my music with my wife and children in the house means others are introduced to a particular artist or style they otherwise would not have heard, and are likely to increase purchases.
2. Availability is fairly straightforward. If I can buy it, I will.
3. Bundling is the most insidious. Quite simply, forcing consumers to buy albums is partially to manage production costs, which are cheaper in bulk, partially to manage channel costs and profits, and partially (probably mostly) to create artificial subsidies for albums that only have a few good tracks. Yet, if I can buy the tracks I want, I will buy those at a higher price. Sure, plenty of people bought an album for just two tracks, but many more chose not to, a type of deadweight loss. This entire underserved market can now be fulfilled using singles purchases online. Additionally, the ability to sell singles profitably -without fixed channel and production costs - allows music labels to profitably sell one-hit or two-hit wonders, without needing to pad the rest.

I am happy to see Preyas, Dinah and their colleagues putting some real science on this. It is my hope that this research will have an impact at the book (Amazon, iBooks), movie (MPAA), and music (RIAA) industries, as well as possibly the software industry as a whole, leading to better consumer choices *and* higher profitability.