By Rick Wash
Piracy of digital goods has become a large problem on the Internet due to its ability to distribute large quantities of content to large quantities of people at very low cost. As a result, many digital content producers have turned to technology to insure their revenue stream. These technologies, collectively known as Digital Rights Management (DRM) technologies, use encryption and other security technologies to artificiallyrestrict the uses of a digital good.
I develop a idea that was first observed by Acquisti (2004). In that paper, Acquisti develops a model of platform adoption in the presence of network effects. The DRM technology makes transferring between two networks (open and DRM networks) possible, but one direction is costless (open -> DRM) and the other costly (DRM -> open). In addition to other results, Acquisti derives a result that popular content is more likely than niche content to be transferred to the open platform if it is initially only available on the DRM platform. He therefore concludes that the success of a DRM platform depends on `user-generated’ content (as opposed to `widely-popular vendor-generated’ content.
I use this idea as a basis for studying incentives for innovation in a content industry that uses DRM technologies. I study the situation where there is a negative network effect in the costs of `breaking’ the DRM, or transferring the content from the DRM platform to the open platform. As content becomes more popular, the average cost of breaking decreases since the content will more likely fall into the hands of people capable of breaking it, hackers will be more interested in breaking it because it can be shared farther, or there exist returns to scale to breaking DRM technologies. In this situation, I hypothesize that content producers will prefer high-value `niche’ content over low-value `mass-market’ content when using DRM. Here I studythe implications of such a preference.
Rick Wash. “Content Provision and Digital Rights Management.” Working Paper, December 2005.
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