Economic Effect of DRM

in the Digital Music

Market
from a New Paradigm

Society of Ewha Economic Discussion -1 -

 Synopsis

Introduction
•Introduction
•Body 1
ØDRM?

DRM
•Second -
Intro hand

y
Market

d
ØMod

Bo
First - hand el
Market Analy
Body
3
ØModel Analysis sis

2 Conclusi
on S o cie ty o f E w h a E co n o m ic D iscu ssio n -2-
Preface
Intro

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1 . Introduction

Contents

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 Q. What does DRM mean ?

1 . Dreaded Royalty Manipulatio

2.
3 . Digital Roaming Marketing
4.
5 . Digital
Digital Rights
Rights Management
Management
6.
7 . All three

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 1 . 1 Backgrounds of study
- IT & Digital Music Market , Copyright Law in
Korea

I Music?
T •
•Intangible goods
•Marginal Production Cost = 0
•
Unlimited piracy ↑
→ Need Copyright
Offline Digital Law
Massive
IT CD Digital ♬ Music
Revolution • Market
•

Society of Ewha Economic Discussion -6-

 Sales of Disc vs . Digital
music in Korea

3200
3500 3000 3000 Digital
3000 2500 2700
2500
2000 1800
1800 1500
1500 1300
1000 1000
800
500 500
0 Disc

2002 2003 2004 2005 2006 2007

Source : Society of Ewha Economic Discussion -7-

1 . 1 Backgrounds of study
- Speed of development of IT vs . Law
Korea ’ s Peculiarity

Speedy Development of IT
IT

Retarded Copyright law

Law

Result .. ?
Piracy still remains

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 We need DRM

DRM Technology
by means of Law

Copyright Law only can ’ t protect creato

creat

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 1 . 2 Purpose of the study

•Suggest New Paradigm

Existing Studies
: focused on DRM Tech . focus on
Digital Music
Market ’ s
Shortage of
Economic Analysis Distribution
Structure
with DRM
By theoretical Model

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 1 . 3 New Paradigm
DRM - free
Physical Digital
Music Market Music Market
DRM

3
Stakehold
Consumer ers
Distributor Producer

Do they increase
Get utility
benefit in the digital music
market?
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 1 . 3 New Paradigm
Simplify Distribution structure
• 3 stakeholders
: Creators , Distributors , Consumers

First - hand market : Creators , Distributors

Monopoly
Analysis how creator can act as price setter
and protect own profit with DRM

Second - hand market : Distributors , Consumers

Oligopoly
Price differentiation to consumer ’ s elasticity

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 About1
Body DRM

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2 . Body 1 : DRM Synopsis

Contents

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2 . 2 Definition of DRM
Created

DBy
igitalE ncoding
E ncodin HOW?
R ightsNot permitted
Mtechnology
anagement
g
→ Licen
user
can ’ t download
se & share

Protect creator ’ s right

directly
& Increase profit
Society of Ewha Economic Discussion -15-
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 Function of DRM
- flexible protection of copyright

Limited by
creator
The number of
playing times

Available period
Creator of music Consumer
Copy of music

Price

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 Function of DRM
- value chain support

We will
First - hand discuss ..Second - hand
market market

Packager

Creator Distributor Consumer

Licenser

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2 . 6 Assumptions for Body
DRM Level

1 st Closed
Hig → Hig
h h
market → Opened
Low Low
1 . Stakeholders
nd Determined
2
of each market 2 . The by
level
Price of DRM
market

CD -> Digital
constant
3 . the
In Disregard
long run 4 . Consumers
Consumers ’ gain
black market market
of black disappear always benefit

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 Now ..

We will comparing

not Black market vs. Legal digital Music

Let
market ’ s analysis
economic effect of
DRM
but
Physical Music market
in Digital Music Market !

Vs . Digital music market

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 First
Body -2hand
Market
Creator Distributor Consumer

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3 . Body 2 : The Firsthand Market
& DRM effect

Contents

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 Main Question

Does the DRM

if the application of DRM
is strictly used ,

increase the
the original producers will be
return to the producers?able to
make informed decision for
setting price .

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 3 . 1 Assumptions
BDU
niqueness
RM - Function
lack of first - hand market
market

B
First-hand
Diminishing size of ‘ black
lack market Market
the market
(≠ Second-hand
Track down & Control market) ’
is composed of only
the number in the long run
of downloads
DRM - Function

P roducer Producer
• Education (original Creator)
& Punishment by Government
• Application of DRM
& Distributors
Distributors •

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 3 . 1 Assumptions
A.
P roducer
B.
A .Monopoly
C.

A.Created Entering Limited pool

Barrier
B. Goods
C.
By copyright demanding
D. Unique distributors

E.
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 3 . 1 Assumptions
A.
B.
P roducer
C.
B .U - Shaped MC
B.
MC
Productivi
Cost ( C ) = f (resources : energy,
creativity, ideas..)
ty Productivity of producer MC
: max at T*

inverse
relationship

Productivity

Learning Limited
effect resource

T 0 = career start T T R = retire Time

*
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 3 . 1 Assumptions
P roducer
C . Production decision
Profit = P - MC

Profit > 0 →
Produce
1)
Profit < 0
→ Retire •
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 3 . 1 Assumptions
A.
BP. roducer
C.
D. Lagged Popularity
Productivit
y
Popularity

Popularity
Productivity

T0 T* T *p Time
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 3 . 2 Variables
•
•T = Time
•T P * = max popularity
•T * =maximum productivity
• P = Price of ‘music utilization and distribution right’

•Productivity
•Popularity

•D = the number of download distribution

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3 . 3 Pricing Strategies

4 likely scenarios
for pricing
by producers

Without & With DRM

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Without DRM
1 ) No Price - Discrimination :
Constant unit - price
MC
P
MC

Revenue
at T w

P* P

T 0 : Career Start
T * : Max
Productivity
T R : Retire

T0 Tw T* TR Time

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Without DRM
2 ) Popularity - driven
Flexible Price
MC
P
MC

Revenue
at T w

Price

T 0 : Career Start
T * : Max Productivity
T * p : Max Popularity
T R : Retire

T0 Tw T * T *p TR Time

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With DRM
1 ) Quota for number downloaded ,
with percentage revenue per extra
unit downloaded
MC
P
MC

Revenue
at T w

P* P

T 0 : Career Start
T * : Max Productivity
T * p : Max Popularity
T R : Retire

T0 TA Tw T * T *p TB TR Time

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 With DRM
2)
Block pricing
MC
P
MC

Revenue
at T w

P* P

T 0 : Career Start
T * : Max Productivity
T * p : Max Popularity
T R : Retire

T0 TA Tw T * T *p TB TR Time

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 3 . 4 Comparison of producer
returns
MC MC Strate Strate Strate
P P gy 4 gy 3 gy 4

MC MC
P2
Fixe Fixe
Revenue d d
at T w
Pric Pric
P1 e e
P* P*

T0 Tw T T*p TR Time T0 TA Tw T *A T* T *p T *B TB TR Time

*

Without With DRM

DRM
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3 . 4 Comparison of producer
returns
Strate Strate Strate
MC gy 4 gy 3 gy 4 With DRM
P
MC

Fix Fix
Revenue ed ed
at T w Pri Pri
ce ce
P*

T0 TA Tw T *A T * T *p T *B TB TR Time

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 3 . 5 Conclusion
- By using of DRM ..
• Evaluate
• actual value of creation
•

D iffe re n tia te
•

•
th e p ricin g stra te g y
•

•
In ce n tiv e
•
to p ro d u ce b e tte r q u a lity o f
M u sic
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 Second
Body -3hand
Market

Creator Distributor Consumer

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4 . Body 3 : The Second - hand Market &
DRM effect

Contents

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 4 . 1 Assumptions
Uniqueness of second - hand market
. Oligopoly
B lack market
Second - hand Market ( ≠ first -
hand market )
Distributors
is composed of only

Price
Distributor &
discrimination Consumers
s

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 4 . 1 Assumptions
Uniqueness of second - hand market
. Oligopoly
Cartel ’ s
Why?
characteristic
Few stakeholders
Strict
-→No Collusion
leading
stability ( don ’ t separation )
business

Distributors
& Consumers
Form
Cartel
Oligopoly

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 4 . 1 Assumptions
BUniqueness of second - hand market
lack market

ice to producers
ssumptions like first -( in first
hand - hand market
market , )
Same P rice

‘ black market ’
in the long run
Distributors
Producers
↑ Monopoly
will be diminished
•
.

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 4 . 1 Assumptions
Distributors
Goods Price Cost Strategy
Price
only by level of Discrimina
TC = FC
digital DRM
music tion
( VC =0)
( like
High
Level ; P ↑ monopoly )
Low Level
; P↓
Strict collusion
Monopolistic
Enterprise
Oligopol Cartel
y ( stable )

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 Act like monopolistic
enterprise
P

-TC = FC
→ Diminishing AC

P* -MC = 0
Profit -
-MR = MC
→ Q uantity level Q *
AC → Max Profit

D
MR MC
Q* Q

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 4 . 1 Assumptions
PBrice discrimination
•
•

•Distributers Predict
•

2 types of consumer
•

Third
degree
•

Inelastic Elastic
•

Price
•

With DRM Discriminat

Resale is impossible ion

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 4 . 2 Second - hand market
with DRM
Market A Market B
P Elastic consumer P Inelastic consumer

P*
P*
D
AC AC

MR a MC
MR b D MC
Q* Q Q* Q

Condition
•High DRM level -> D of profit•Low maximization
DRM level -> D
MRat
MR = MC : Bigger supply
a = MR b = MC
Q * •MR = MC : Smaller supply at Q *
•Low price •High price
• •
• Society of Ewha Economic Discussion -45-
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 4 . 3 Conclusion – without
DRM
• without DRM…
• Crisis (the illegal downloads)

p rice = 0 & profitof digital

so u n d = 0
d istrib u to rs ’ R e v e n u e ;
a d v e rtise m e n t, …
• Society of Ewha Economic Discussion -46-
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4 . 3 Conclusion – By using of
DRM ..

• As the introduction of DRM,

•
D istrib u to rs ca n m a ke a
p ro fit
th ro u g h d ig ita lso u n d so u rce
&
Po ssib ility
o f th re e d e g re e p rice
d iscrim in a tio n
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 4
Collective
Conclusion

Creator Distributor Consumer

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 Conclusion
- Our New Paradigm

DRM-free
Physical Digital
Music Market Music Market
DRM

3
Stakeholder
Consumer s
Distributor Producer

Do they increase
Get utility
benefit in the digital music
market?
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 Collective Conclusion
If DRM is applied ,
We can analyze whether they increase utility

The Producer The Distributor

In the first – hand market , In the second - hand market ,

theProducer ’ s right the Distributor can use

can be protected the price discrimination
by using DRM
The distributor
The producer ’ s utility goes up ’ s profit is protected → utili

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Collective Conclusion
Consume
r

Distribu Produce
tors r
Utili
ty

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Thank you for listening

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Q & A

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 Conclusion
Consume
r

Distribu Produce
tors r
Utili
ty

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