5 Analyzing the Business Case for DRM (Kirk Biglione)

Kirk Biglione is a seasoned digital media professional specializing in web publishing systems, social and search strategies, and user experience. Kirk frequently speaks on topics related to digital media and is a cofounder of Medialoper. You can find Kirk on Twitter at: @kirkbiglione.

The publishing industry’s rapid transition from physical to digital products has been accompanied by a host of hotly debated issues. From ebook pricing to author royalties to release windows, it seems that every aspect of the publishing business is being reconsidered and reinvented in the digital era.

No issue has been more contentious than the debate surrounding the use of Digital Rights Management (DRM)[1] technology. The discussion surrounding DRM has been dominated by emotional and hyperbolic rhetoric on both sides of the debate. On one hand, publishers insist they can’t release ebooks without some form of copy protection. On the other hand, consumers are said to hate any form of restriction on legitimately purchased media.

Meanwhile, a growing number[2] of mostly independent publishers are doing the unthinkable: releasing ebooks without any form of copy restriction. Are these publishers completely oblivious to the obvious problem of digital piracy? Or are they taking a calculated risk that will ultimately benefit their business?

Traditionally the issues of DRM and copy restriction have been framed as a moral debate pitting IP rightsholders against a legion of invisible pirates. Although the efficacy of DRM technology in thwarting piracy is also debated, the use of DRM is also a business decision — one that will have a substantial impact on how consumers acquire and read books in the digital era.

Given the rapid shift in book sales from print to digital formats, it’s time to move beyond the moral debate and take a serious look at the business impact of DRM.  What is the business case for DRM, or DRM-free for that matter?  What, exactly, are the issues a publisher should consider when determining when and where to use DRM to restrict access to digital content?

This chapter seeks answers to these questions and provides guidance to publishers who wish to have a deeper understanding of DRM and its impact on the emerging marketplace for digital content.

The Promise of DRM

Before we can perform a business analysis of DRM, it helps to have a better understanding of what DRM is supposed to accomplish. What, exactly, does DRM promise publishers?

The promise: DRM protects a copyright holder’s investment in content by controlling access to and usage of digital content. Content owners may impose any number of restrictions, including limits on copying, sharing, selecting text, copying text, use of content in text-to-speech applications, and more.

Arguably, publishers’ belief in this promise has paved the way for the creation of a healthy and growing market for ebooks. Without some form of content control, none of the so-called “Big Six” trade publishers would permit digital editions of their books to be sold, and the market for ebooks would be quite different from the one we have today.

A Couple of Caveats

To publishers accustomed to the physical limitations of the print world, DRM’s promise must sound like a good deal. But the promise of DRM comes with a few important caveats.

  1. The Analog Hole. The biggest security challenge for ebook publishers is the existence of print books. High-speed scanner prices are dropping rapidly and optical character recognition[3] (OCR) software is getting better and faster. It only takes one home-brew ebook to seed the pirate networks. As long as print editions exist, there will always be pirated digital editions. No amount of DRM will stop that, though I’m sure there are some who would try to convince publishers to brook the expense of printing books on security paper.[4]
  2. DRM is easily broken. The other limitation that simply can’t be ignored is that DRM is easily cracked. Tools for stripping all popular forms of DRM are widely available at no cost. While this sort of cracking may not be a mainstream activity, as with book scanning, it only takes a single cracked ebook file to seed the pirate networks.

The real-world implication of these caveats can be seen in the widespread availability of pirated digital media products. Books that have never been released in a digital format are widely available on pirate websites. Those rogue digital editions occupy server space with the latest bestseller—books that are sold exclusively in DRM-encrypted editions.

Publishers who hope to overcome the limitations of DRM face some stiff odds. Overcoming the analog hole will entail rewriting the laws of physics, while developing an unbreakable DRM system might prove to be just as challenging.

The game industry has invested heavily in pursuit of the perfect DRM scheme, and yet piracy persists. In 2008, Electronic Arts released the widely anticipated game Spore with extremely restrictive DRM. The result? Spore went on to become the most pirated[5] game in history.

Any business analysis of DRM needs to take into consideration the fact that DRM fails to live up to its promise in some fairly substantial ways.

Calculating the Cost of DRM

One of the first questions publishers should ask when assessing the business case for DRM is, “How much will it cost?”

Unfortunately, there’s no clear-cut answer to this question. The cost of DRM depends on a number of factors. These factors include the kind and complexity of DRM, the markets where digital books will be sold, the required level of interoperability, and the level of consumer support that will be provided.

Investing in DRM

Publishers who plan to sell DRM-restricted ebooks directly to consumers must acquire DRM server technology. In today’s world, that means Adobe Content Server[6] (ACS). Of the three most widely used DRM systems for ebooks, Adobe’s is the only one that is available for publishers to license.

A publisher can expect to pay Adobe an initial license fee of $6,500, plus an additional fee of $0.22 per ebook sold. Adobe also collects an annual maintenance fee of $1,500 for the use of ACS.

These numbers don’t include hardware costs, network costs, or professional services. Custom support will add to the expense. The range of platforms, devices, and operating systems ensure that any use of DRM technologies will be accompanied by support issues.

At first glance, it would appear that the economics of DRM favors publishers with extensive resources. However, smaller publishers may apply DRM to their books by working with a distribution partner. Companies like Overdrive[7] offer DRM as part of a comprehensive digital distribution service. Overdrive will even set up a publisher-branded storefront and sell DRM-encrypted ebooks directly to consumers on the publisher’s behalf.

The prospect of a publisher going through a distributor to sell ebooks directly from its own website (the so-called “white label” provider) flies in the face of a belief that digital distribution will help flatten the supply chain.  In practice, DRM may help established and emerging intermediaries consolidate their market power.

It’s important for publishers to understand what they get when they invest in a system like ACS. Adobe’s DRM technology occupies a unique position in the marketplace. While it is licensed to run on far more devices than any other form of ebook DRM, ACS has failed to emerge as a de facto standard. That’s because competing proprietary DRM technologies control a majority of the ebook marketplace.

Amazon’s ebook marketshare has been estimated to be anywhere between 61%[8] and 80%.[9] Even at the low end of that range, Amazon’s Kindle DRM is clearly the most widely used form of ebook DRM in the US market. And the only way to sell an ebook with Kindle DRM is to sell direct through Amazon.

The same is true for Apple. While Apple has adopted the industry standard EPUB format, the company also uses its own proprietary DRM for iBooks.

Meanwhile, DRM-free publishers can sell directly to consumers for use on any device or reading system—Kindle, iBooks, Nook, and future devices yet to be invented. For these publishers, DRM limitations and licensing fees are not a consideration.

The Cost of “Free” DRM

Compared to Adobe’s ACS technology, Amazon and Apple’s DRM might seem like a bargain. There are no licensing costs, no maintenance fees, and no professional service or consumer support overhead.

This may be one of the reasons why we haven’t heard much talk about the cost of DRM. To some publishers, DRM might appear to be free, at least when selling through Amazon or Apple.

Of course, this “free” DRM comes at a cost. In the case of Apple and Amazon, the cost is 30% of each sale, limited access to each marketplace, and no information about consumers who purchase books. Publishers who require DRM accept certain limitations as part of the cost of doing business in these markets.

It’s not just publishers who are limited by proprietary DRM. Independent retailers are incapable of selling DRM-restricted ebooks to consumers who have adopted the most popular ereading platforms. While the independent bookstore has long been a fixture of a healthy publishing industry, one wonders what will become of indie booksellers as consumers move to digital reading on proprietary platforms.

DRM shapes the marketplace for digital content in a very real way.

DRM Risk Factors

Presumably, publishers who use DRM do so in an attempt to mitigate the risk of digital piracy. But, as we’ve seen in the previous sections, DRM comes with its own risks and complications. Publishers looking to make an informed decision about the use of DRM will need to determine if the technology prevents enough piracy to offset the risks associated with a marketplace controlled by a small number of very large retailers.

In order to conduct this sort of risk assessment, publishers will need to perform certain calculations related to both piracy and the effectiveness of DRM. For publishers who haven’t done extensive research on the impact of piracy on sales, these calculations will be quite challenging. And yet it’s hard to imagine publishers committing to a marketplace fragmented by competing technologies without performing some form of risk analysis.

It will be interesting to see the data publishers produce to back up their current positions. I encourage publishers doing this sort of research to share the results in a public forum where the entire industry may benefit.

For publishers who sell DRM-free ebooks, the risk analysis is much different. By avoiding DRM altogether, these publishers have mitigated the risks associated with the technology. The fact that the industry is seeing a growing number of publishers take this position would seem to indicate that it is a viable approach to doing business. We have yet to hear about a single DRM-free publisher being forced out of business due to losses incurred as a result of piracy.

DRM’s Impact on Publicity and Marketing

DRM’s potential impact on publicity and marketing may not be immediately apparent to publishers. However, over the past decade, there have been numerous examples of DRM-related incidents that have snowballed into publicity disasters. While most of these episodes have occurred outside of the publishing world, ebooks have not been immune, as the infamous Kindle 1984[10] incident will attest.  In a similar way, the Sony Rootkit[11] debacle in 2005 showed the limitations inherent in proprietary platforms.

It doesn’t matter that most of these failures occurred outside of the world of publishing. Publishers have no choice but to live with the baggage of DRM’s checkered past. When selling DRM-restricted ebooks, the best a publisher can hope for is that consumers won’t notice. It certainly isn’t something that will be actively marketed as a “feature.”

As a result of these highly publicized DRM failures, consumers are growing more sensitive to any form of content restriction. It’s safe to say that many consumers view DRM with suspicion at best and and outright contempt at worst.  DRM-free, on the other hand, is an offer that resonates with a growing number of consumers who have been burned by DRM in the past.

DRM’s Value Proposition

If DRM presents publishers with a marketing challenge, perhaps it’s time for publishers to reconsider DRM’s value proposition.

While I’ve heard publishers ask how much DRM costs, I have yet to hear a single publisher ask how DRM can be used to provide more value to consumers. It should come as no surprise that consumers view DRM as a barrier that limits the use of legitimately purchased media—and that’s apparently the way most publishers view it as well.

That’s not to say that DRM can’t create value for consumers. There are at least three ways that consumers might actually benefit from DRM:

  1. Access to more content. This is a hidden value proposition that most consumers aren’t aware of. For publishers who insist on copy restriction, their books simply would not be available in a digital format if it weren’t for DRM. Furthermore, greater access is afforded by the availability of DRM-restricted ebooks through libraries.
  2. Lower prices. Because DRM restricts the use of content, books sold with DRM constraints typically cannot be lent, copied, or shared with others.  Behavioral data on what people will pay for DRM-limited media demonstrates that these books are bought at lower prices. I can think of no example where DRM would make a book more valuable. While the move to digital in general has meant lower prices for consumers, the use of DRM could lead to new services that offer ebooks at even lower prices. For example, DRM might be used to effectively offer limited-term access to ebooks—think rental versus purchase.
  3. New uses. Publishers might use DRM as a tool for enabling and evaluating new content uses.  These could include book rental, as suggested previously. With just a bit of imagination, it’s possible to envision a wide range of new business models that use DRM as a control mechanism to facilitate short-term usage, sharing, and a range of social features. Unfortunately, in practice, it seems that DRM is mostly used to replicate and extend old business models.

Some examples of media services that have succeeded by providing consumers with an overwhelming value proposition while simultaneously restricting access via DRM:

  • Netflix[12] provides consumers with instant streaming access to thousands of movies and television shows. Delivery is so seamless that most consumers aren’t aware that the video stream they’re viewing is wrapped in DRM.
  • Pandora[13] allows consumers to create custom music channels based on their favorite artists and songs. The result is a personalized radio station where consumers can hear old favorites mixed with new discoveries. As with Netflix, Pandora’s DRM is entirely transparent to the consumer.
  • Steam[14] is a digital marketplace for games as well as a gamer community. The success of Steam is remarkable considering some of the most avid anti-DRM zealots are hardcore gamers. Yet Steam wins over even the harshest critics by offering features like cross-platform access and the ability to resume saved games from any computer.

These examples succeed because they are low impact and provide high value to consumers. Acquisition of content is far easier than the alternative of acquiring pirated media, which is widely available at no cost.

Unfortunately, we have yet to see a significant movement toward similar models in the publishing world. Perhaps the closest any major publisher has come to offering a book-rental service is O’Reilly’s Safari Bookshelf. It’s worth noting that Safari offers limited access without using DRM. So, even where DRM may enable a new business model, it isn’t necessarily the only way to get the job done.

DRM’s Impact on Innovation

While DRM may be used to enable new business models, it is also commonly used to restrict access to content in ways that limit innovation.

Over the past several years, I’ve heard complaints from numerous innovative startups that publishers demand DRM even when alternate forms of access control are in place. When publishers do allow books to be sold without traditional DRM, they impose arbitrary content restrictions that limit functionality and create unnecessary barriers to delivering an acceptable user experience.

Reading-system developers wishing to offer customers web access to restricted content must go to great lengths to disable the user’s ability to select text in the browser. While the intention is to limit copying, the unintended consequence is that web-based reading systems are frequently unable to provide common services like word lookup and annotation.

Ironically, these limitations make pirated editions seem more valuable by comparison. Unnecessary content restrictions effectively limit the development of new products and services at a time when the publishing industry should be embracing innovative new uses. From a business perspective, publishers need to take a hard look at the opportunity cost imposed by DRM.

Alternatives to Traditional DRM

Given DRM’s limited ability to prevent unauthorized use and its questionable impact on the marketplace, it might be worthwhile to consider alternative approaches to rights management.

Before evaluating new forms of content control, publishers will need to determine what they are hoping to accomplish by requiring DRM on ebooks. How does DRM fit into the big picture of developing new business models and providing value to consumers as they shift their reading preference from print to digital?

If the only goal is to restrict access to digital content, then publishers are focusing too narrowly on a single problem. Instead, publishers should consider a broad range of issues that are equally important. Among other things, these goals might include:

  • Improving the discovery and acquisition process.
  • Providing a superior consumer experience that is equally accessible across a broad range of retail outlets.
  • Allowing access to content while supporting the development of innovative reading systems.

These are goals that will ultimately enable a healthy marketplace for digital content, while supporting the development of new business models that provide value to consumers and new revenue streams to authors and publishers.

With these goals in mind, publishers will be better prepared to evaluate alternative solutions to the challenge of access control.  Currently available alternatives include:

  • Simple user authentication. This most basic form of access control is used widely online to limit access to websites offering premium content and services. Access can be provided on either a time-limited basis or as a purchase for perpetual use, with content being priced accordingly. This method of access control is well suited to web-based reading systems.
  • Watermarking, also known as Social DRM. While not technically an access control technology, watermarking attempts to minimize the sharing of digital content by embedding information about the purchaser in the media file. Each file is uniquely created for a specific consumer. The benefit of this approach is that the control technology does not interfere with interoperability, and the retail environment is not fragmented by proprietary DRM schemes.

While neither of these alternatives is perfect, they do offer the benefit of having a lower impact on consumers and the marketplace while being at least as effective as traditional DRM.

There’s some indication that watermarking is emerging as a viable alternative to more restrictive technical control measures. Author J.K. Rowling will reportedly use watermarking in place of traditional DRM when she launches the Harry Potter ebook series on her Pottermore website. Watermarking allows Rowling to sell direct to her readers while supporting all of the major reading platforms.

Summary: Making Informed Decisions About DRM

The publishing industry has entered a time of unprecedented change. Assumptions that have held true in the past may no longer be relevant. As a result, it’s time for publishers to reconsider default positions and think seriously about DRM’s role in the publishing universe.

Because there are many different kinds of publishers, each one will have to evaluate the need for DRM in light of its own business as well as the needs of its customers.  As publishers develop new products and services, they will need to take a critical look at when and how DRM is used.

At minimum, each publisher should answer the following essential questions:

  • Does DRM enable new business models and uses?
  • Are these new business models and uses conceivable without DRM?
  • What impact does DRM have on pricing and consumer perception of value? Does DRM provide enough value to consumers to overcome associated limitations, or does it limit content in a way that makes pirated works seem more valuable?
  • What barriers does DRM create to an open marketplace? How will these barriers impact traditional trading partners, including independent booksellers?
  • What are the quantified risks associated with selling unrestricted content?  How does this quantified risk compare against the costs and limitations associated with DRM?

Publishers who take the time to answer these questions will be better positioned to make informed decisions about DRM. That can only lead to better products, a healthy digital marketplace, and happy customers. While there is no precise formula for success in the digital era, that’s a pretty good start.

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