DRM Decisions: Analyzing the Business Case / Why I Don’t Use DRM

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January 2012
by Kirk Biglione & Russell Phillips

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When the phone rings in the IBPA offices, it’s often a call from a member who’s perplexed about whether to use DRM on e-books. When the board of a book-business trade association convenes, some of its members insist that DRM is essential and others insist that it does far more harm than good. Contributors to an invitation-only email list that focuses on the digital revolution take strident positions on DRM too, again and again. For a long time, there’s been a lot more heat than light.

It may be too early to say that a consensus is forming. Then again, it may not.

In any event, the articles that follow illuminate DRM issues from two different and powerful perspectives. Read on for lessons from analysis and experience.

And if you’ve gained useful knowledge about DRM, please share it via an email to me (judithappelbaum@aol.com). We’ll aim to cover your discoveries in future issues.

—Judith Appelbaum

 

The publishing industry’s rapid transition from physical to digital products has been accompanied by a host of hotly debated issues. From e-book 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 use of Digital Rights Management (DRM) technology.

Although DRM is the name used for access-control technology designed to restrict the use of digital content, that technology can limit a broad range of uses beyond copying, and it shapes the marketplace for digital content.

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 e-books 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 of publishers, mostly independents, are doing the unthinkable: releasing e-books 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 rights-holders against a legion of invisible pirates. Although the efficacy of DRM technology in thwarting piracy is also debated, the use of DRM is in part 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 are the issues a publisher should consider when determining when and where to use DRM to restrict access to digital content?

This article 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

To 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 selected 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 e-books. 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 e-books would be quite different from the one we have today.

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 two important caveats.

1. There’s an analog hole. The biggest security challenge for e-book publishers is the existence of print books. High-speed scanner prices are dropping rapidly, and optical character recognition (OCR) software is getting better and faster.

It takes only one home-brew e-book 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 bear the expense of printing books on “security paper.”

2. DRM is easily broken. The other limitation that can’t be ignored is that DRM is easily cracked. Tools for stripping all popular forms of DRM are widely available at no cost. This sort of cracking may not be a mainstream activity, but, as with book scanning, it takes only a single cracked e-book file to seed the pirate networks.

The real-world implications 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 Web sites, where rogue digital editions appear right along with current bestsellers that are sold exclusively in DRM-encrypted editions.

Overcoming the analog hole will entail rewriting the laws of physics, and 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 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 Costs 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.

Publishers who plan to sell DRM-restricted e-books directly to consumers must invest in acquiring DRM server technology. In today’s world, that means Adobe Content Server (ACS). Of the three most widely used DRM systems for e-books, 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 e-book 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 ensures 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 offer DRM as part of a comprehensive digital distribution service. Overdrive will even set up a publisher-branded storefront and sell DRM-encrypted e-books directly to consumers on the publisher’s behalf.

The prospect of a publisher going through a distributor to sell e-books directly from its own Web site (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 both 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. But while it is licensed to run on far more devices than any other form of e-book DRM, it has failed to emerge as a de facto standard.

That’s because competing proprietary DRM technologies control most of the e-book marketplace.

Amazon’s e-book market share has been estimated to be anywhere between 61 and 80 percent. Even at the low end of that range, Amazon’s Kindle DRM is clearly the most widely used form of e-book DRM in the U.S. market. And the only way to sell an e-book 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.

Compared to Adobe’s ACS technology, Amazon’s 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.

But, of course, this “free” DRM comes at a cost. In the case of Apple and Amazon, the cost is 30 percent of each sale, access limited to each marketplace, and no information about consumers who purchase books. Publishers who require DRM must 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 not able to sell DRM-restricted e-books to consumers who have adopted the most popular e-reading platforms. While the independent bookstore has long been a fixture of a healthy publishing industry, I wonder what will become of indie booksellers as consumers move to digital reading on proprietary platforms.

 

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, DRM comes with its own risks and complications, so publishers looking to make an informed decision will need to determine if DRM technology prevents enough piracy to offset the risks associated with a marketplace controlled by a small number of very large retailers.

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 challenging. But they will also be a better alternative than committing to a marketplace fragmented by competing technologies without performing some form of risk analysis.

Publishers who choose not to use DRM mitigate the risks associated with the technology. That a growing number of publishers are making this choice seems 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, numerous DRM-related incidents have snowballed into publicity disasters. While most of these episodes have occurred outside the publishing world, e-books have not been immune, as the infamous Kindle 1984 incident attests.

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

As a result of 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 with 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. Books from publishers who insist on copy restriction 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 e-books 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.

Now that the move to digital in general has meant lower prices for consumers, the use of DRM could lead to new services that offer e-books at even lower prices. For example, DRM might be used to effectively offer limited-term access to e-books—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. 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 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 allows consumers to create custom music channels based on their favorite artists and songs. The result is personalized radio stations where consumers can hear old favorites mixed with new discoveries. As with Netflix, Pandora’s DRM is entirely invisible to the consumer.

Steam is a digital marketplace for games as well as a gamer community. The success of Steam is remarkable considering that 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 services 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. Although O’Reilly’s Safari Bookshelf may be closer to a book-rental service than anything from any other major publisher, 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. And 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 a customer’s ability to select text in the browser. The intention is to limit copying, but 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 e-books. How does DRM fit into the big picture of developing new business models and providing value to consumers who 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, 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 Web sites offering premium content and services. Access can be provided on either a time-limited basis or with 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.

Although neither of these alternatives is perfect, they each have 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 e-book series on her Pottermore Web site. Watermarking will allow her to sell direct to her readers while supporting all the major reading platforms.

 

The Path to Informed Decisions

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 that will benefit my company?
  • Are these new business models and uses conceivable without DRM?
  • What impact does DRM have on pricing and consumer perception of the value of my products? 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 for my books? How will these barriers impact traditional trading partners, including independent booksellers?
  • What are the quantified risks associated with selling unrestricted content? How do the quantified risks 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.

 

Kirk Biglione is a digital media professional specializing in Web publishing systems, social and search strategies, and user experience. He speaks frequently on topics related to digital media and is a co-founder of Medialoper.com, and he is currently writing WordPress: The Missing Manual for O’Reilly Media. This article appeared in Book: A Futurist’s Manifesto, published by O’Reilly Media. You can buy the book at shop.oreilly.com/product/0636920020325.do, or read it online for free at book.pressbooks.com.

 

 

 

 

 

 

 

 

 

 

 

One of the books Russell Phillips wants to make it easy for people to enjoy, even if they buy it on a Kindle and then want to read it with an iPad app.

Why I Dont Use DRM

by Russell Phillips

I write and publish books and articles about military history and technology. I make all of them available without DRM. And this won’t change in the foreseeable future. I’m wary of saying that I will never use DRM, because something may happen to change my mind, but right now, I can’t imagine ever using it—for seven reasons.

Please note that I’m discussing DRM only in the context of e-books, and voicing my opinion, nothing more. I’m not trying to tell others that they should make the same choice, only trying to explain why I’ve made it and hoping that will help others make informed choices of their own.

 

Reason #1. DRM Isn’t Effective at Stopping Piracy

Some people will say that it doesn’t matter that DRM can be broken, because many people don’t know how to break it. Before the Web, this was true. Now, however, if only one person breaks a DRM system and posts instructions on the Web, millions of people can do it.

Some people will find the instructions too complicated, but if one person writes a simple program to automate the process, millions more people will be able break the DRM on their files.

The end result is that anyone who wants to can break all the current forms of DRM used on e-books. Some people don’t bother, but if they had a reason (e.g., if they switched to a different e-reader and suddenly found that the books they’d bought didn’t work on the new device), most of them could manage it after a little Web searching. Alternatively, they could simply search for copies of the books they had on their former device that have been put on file-sharing sites with DRM removed.

 

Reason #2. Piracy Isn’t a Big Problem; Obscurity Is

Despite the ease with which e-books can be and are pirated, sales of e-books are increasing rapidly.

I believe this is because most people are fundamentally honest. There will always be some who will download pirated copies instead of buying books, just as there will always be shoplifters. But I suspect most of the people who will download pirated copies of my books wouldn’t buy them. And if the choice is “Read it for free or don’t read it,” rather than “Pay to read it or read it for free,” I’m not losing sales.

Obscurity, on the other hand, is a big problem, as Tim O’Reilly and others have noted. Not many people know about me or my books. I don’t have a reputation to trade on. I’m hoping to make a reputation, but that takes time. Making it more difficult for people to read my books won’t do anything to address the obscurity issue, and may even make it worse.

 

Reason #3. I Want to Make It Easy to Read My Books

Since I want my work to be read, I don’t see the sense in making it more difficult to read. If someone buys one of my books for their Kindle, I want that person to be able to read it on their iPad too, no matter which of the many iPad e-reader apps the reader chooses. If my book had DRM, only the iPad Kindle app could open it.

Similarly, if someone with bad eyesight wants to use the Kindle’s text-to-speech feature, I don’t see why I would want to use DRM to stop them. Even if I made and sold audio versions of my books, the Kindle wouldn’t be a serious threat to audiobook sales because computers are nowhere near as good as human beings when it comes to reading books.

When someone thinks of me and my books, I want them to have good memories of how interesting and informative my books were. I don’t want their memory to be associated with being unable to read my books, or with having to mess around installing an extra app just to be able to read the book that they paid for.

 

Reason #4. Access Can Be Lost

With most forms of DRM, the company that provides the technology must continue to support it, but in several instances, companies have removed support for existing DRM schemes, leaving customers unable to access paid-for content.

 

Reason #5. Restrictions Cannot Be Removed

The rights granted by copyright law are temporary, but the restrictions imposed by DRM are permanent. Copyright law grants rights to the copyright holder for a fixed term. Once that term expires, anyone may make copies for any purpose, perfectly legally. An e-book with DRM can’t be copied even if the copyright term has expired and copying would be legal.

 

Reason #6. DRM Frustrates Reasonable Expectations

The Hargreaves Report on copyright in the United Kingdom, released in 2011, recommends that it be legal for people to make copies for personal use. Although, as I write, it’s illegal for me to buy a CD and rip it to MP3 to play on my MP3 player, most people assume it’s legal and have been doing this sort of thing for years (before CDs, they bought albums and copied them onto tape to play in the car).

In other words, most people (myself included) expect to be able to make copies of media that they have bought, and the expectation seems reasonable. DRM, however, makes this impossible. Making it impossible or difficult for people to do something that they think should be easy doesn’t engender loyalty. Instead, it annoys people and may make them less likely to buy my books in future.

 

Reason #7. I’d Rather Trust My Readers

There is one form of DRM that I dislike less than the others, social DRM. This involves embedding something that identifies the buyer, such as an email address or an order number, in a content file.

Social DRM avoids most DRM problems because the user can make copies, access the content on whatever device they wish, and so on.

Although I find this less objectionable than other forms of DRM, I don’t use it either. I feel that using it implies that the user can’t be trusted and that, if I don’t have some way of checking, the reader would give away copy after copy of my book.

I don’t like implying or assuming that my readers are dishonest. I’d rather assume that they are honest, especially as there is no evidence to the contrary.

Russell Phillips, who writes about military technology and history, has had articles published in Television Magazine, Miniature Wargames, Wargames Illustrated, and the Society of Twentieth Century Wargamers Journal. To learn more, visit russellphillipsbooks.co.uk.

 

 

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