T 1 3+
pUT=
T 1 3+
DRT=
2e2T 1 +2t 2t+ 1 +eM 1+
1 +2eM +t 3 4 1 + 2
T 1 3+
2t +eT 1 4t eM +e2T 1 T 1 3t 1+ +eM
TT DUT=
2e2T 1 +2t eM 1+ +2t
T 2eM 1 t 4 + 3 4 + 2
T 1 3+
DRD=
DUD=
2t +eT 1 4eMt +e2T 1 +eT 1 3t+eM
TT
RL=wRTDRT+wRDDRD
UL=wUTDUT+wUDDUD
Note.Where = 1 and = 1 1 .
Vernik,Purohit,andDesai:MusicDownloadsandtheFlipSideofDRM
MarketingScience,ArticlesinAdvance,pp.1–17,©2011INFORMS
13
eitherindividuallyorasabundle.Itwouldbeinter-estingtoinvestigatethecompetitionandpro timpli-cationsofabundlingstrategyforrecordlabelsthatfacethethreatofpiracy.Second,thismodelsepa-ratesdigitalandtraditionalretailers;infuturework,itwouldbeworthwhiletoalloweachretailertoofferboththedownloadableandtraditionalformats.ThiscannibalizationcanhaveinterestingeffectsontheimpactofDRMprotectiononmusicpricesandprof-its.Third,itwouldbeinterestingtocomparetheroleofcopyprotectionindifferentindustriesandacrossdownloadretailer.Finally,wealso ndthatundercertainconditions,piracyandlabelpro tscanbothincrease.Itisimportanttonotethatthispositiverelationshipbetweenpiracyandlabelpro tsoccurswithoutanynetworkeffectsinthemodel.Thatis,piracydoesnotcontributedirectlytoconsumerutil-ity;instead,ithasapositiveeffectbasedsolelyonhowitaffectspricesofthelegalproductsinthemarket.
AlthoughtheideaofeliminatingDRMisstillananathematosomeinthemusicindustry,theideaofers.The lemaynotbeermissions@.
bpircotsdoingawaywithDRMrestrictionsisbeginningtobyuctakehold.Forexample,thefourmajorrecordlabelssilo(e.g.,Sony,Universal,Warner,andEMI)arecom-optingaroundtotheideaofsellingDRM-freemusicesilbht(Wortham2008).TheideaofeliminatingDRMisalignalsobeingsuggestedinthecomputergameindus-vaiadrtry.Forexample,anindustryjournalrecentlynotedeathatahighlysuccessfulgame,Spore,camewithDRMdgaermrestrictionsthatweresoonerousthat“theDRMssnencouragedthousandstogettheircopyillegally”ioihts(Ernesto2008).AttributingabnormallyhighpiracyciehulevelstoDRMisconsistentwiththeanalysisinourwqpaper.Althoughourmodelisdevelopedwiththe,ynnmusicindustryasitsprincipalbackdrop,itcanbeoaisreadilyextendedtootherinformationgoods(e.g.,rdnveemovies,books)thatcanbedigitizedanddistributedseovertheInternet.
censaTheindustryisclearthatimposingDRMrestric-vaedltionsimposescostsonconsumers;aslongastheseAPcostsarenottooonerous,thenconsumerswillmovene.itiawayfrompiracy.However,itisimportanttobeclearsselabouttheoveralleffectofthesecosts.Iftherecordc’sritorlabelsellsDRM-restrictedmusic,thentherestric-AhtutionsimposedbyDRMlowertheoverallsatisfac-saihtionfromthedownloadedproduct;furthermore,thisteohtcostisbornebyallconsumers,eventhosewhopur-ttgchasethedownloadlegally.Ouranalysisalsosug-hngiidgeststhatrecordlabelsmaybebetteroffiftheyryulpcfocusedonincreasingconsumers’moralcostsofcopy-onicingratherthanincreasingtheirtechnicalcostofse,dticopying.Furthermore,we ndthatremovingDRMloshbeincreasesconsumerwelfareforallsegmentsoftheSwmarket.Inparticular,traditionalconsumersofCDsMrRebene tfromalowerprice;consumersoflegaldown-hOtoloadsgethigherutilitywithaDRM-freeversionevenFNythoughthepriceofthelegalversionmayincrease;Ina:and,interestingly,consumerswhoobtainpiratedver-thngosionsbene tbecauseitiseasiertostealmusicwhenirdthereisnoDRM.
ypetosThepresentmodelalsosuggestsseveralavenuesCopforfurtherresearch.First,wehavetreatedourbasicproductasamusicalbumandabstractedawayfromthebundlingproblem—atraditionalCDissoldasabundleofsongs,whereasdownloadscanbebought
differentapplicableformats.othernotonlyAstomentionedtheearlier,ourmodelisIninformationgoodssuchmusicasindustrybooksandbutmovies.alsotofromtheparativeoneabsenceanother,ofdataweonarehownottheseabletoindustriesdevelopdiffercom-ofstaticsthatcapturethedifferentialimpacttheseDRMestingindustriesacrossindustries.becomeavailable,ButasitmoredataaboutFinally,toDRMitwoulddevelopbefurtherwouldbeinter-interestingindustry-speci cinsights.inginthepresenceofnetworktoconsiderexternalities.theroleExist-ofnalityliteratureonassumesonthatpiracypiracyasvolumeapositivedependsnetworkexter-challengesthedegreeinvestigatethisofassumption,DRMprotection.Becauseourinverselyworkferentexternalities.effectswhetherintheeliminatingfurtherpresenceDRMresearchofpositivemighthaveshouldnetworkdif-Acknowledgments
Authorsarelistedinreversealphabeticalorder.Thispaperispartiallybasedonthe rstauthor’sdoctoraldissertation.Theauthorsthanktheeditor-in-chief,EricBradlow,andthereviewteamfortheircommentsandsuggestions.
AppendixDigitalRetailer
A.OptimalityofIntroducingaInthissectionwederiveconditionsunderwhichintro-ducingsomeformofdigitaldownloadsisoptimalfortherecordlabel.Wederiveandcomparetherecordlabel’sprof-itsinthefollowingcases:(1)therecordlabelsellsthealbumexclusivelyinthetraditionalformat,(2)therecordlabelsellsthealbuminthetraditionalandDRM-restrictedfor-mats,and(3)therecordlabelsellsthealbuminthetradi-tionalandDRM-freedigitalformats.