The profitability of DRM

My last entry talked in detail about the legality of DRM as a solution for protecting digital media from piracy. I wrote that article because I often read critics of DRM inaccurately describe it as a violation of our rights or civil liberties. It may be intrusive. It may be inconvenient. But it is not a violation of our civil rights. That being said...

Is DRM is good for business or bad for business?

It’s one thing to be right in a legal sense, it’s quite another to be right in an economic one. The terms put into any contract exact a price from both involved parties. In order for someone to willingly enter into a contract, the perceived cost to them must be less than the perceived benefit of the thing that they receive.

I’ll digress for a moment to note that I wrote “perceived” cost and benefit. The actual cost and benefit won’t be evaluated until AFTER the agreement has been made. Buyer’s Remorse is a good example of reconciling perceived value versus actual value.

A big part of managing perceptions is the result of properly setting consumer expectations. There is actually a whole subset of marketing called Public Relations whose primary role is to manage these types of consumer expectations through the press.

DRM currently carries a pretty nasty stigma with it, so if your product is protected by DRM you are almost assuredly going to take heavy criticism in the press.

In other words, simply by including DRM with your product – you will suffer negative PR that raises the perceived cost of using your product. The actual cost of DRM may be pretty insignificant, but the perception of it being intrusive and inconvenient is going to make it more costly in the mind of your consumer.

On the other hand, you will presumably also be stopping piracy of your product. If you presume that at least some of those pirates will buy it outright, then you will be gaining a customer as a result.

Of course, my experience with piracy has been that one really smart guy cracks the protection and then distributes his cracked version to all the people who aren’t smart enough to crack it. That’s really the way most illegal software is distributed now and I don’t expect that to change anytime soon. I really question whether or not this type of protection would actually convert software pirates to legitimate buyers.

One thing that is interesting is that DRM is not perceived as protection for legitimate buyers. It would stand to reason that a legitimate buyer could gain some peace of mind knowing that he didn’t pay for something that others are getting for free. Of course, if the legitimate buyer believes that it will just be pirated anyway, then they simply see it as an inconvenience to legitimate customers.

So, at a first glance, DRM only seems to be bad for business. However, as I consider how users willingly accept blatant privacy invasions like Warden in World of Warcraft, I am left to believe that if people want to play something – they’ll gladly accept just about anything. My experience has been that the “moral objectors” will protest loudly and buy it anyway. Boycotts are largely considered ineffectual as a tactic. In some cases, the “name recognition” value resulting from the negative press of a boycott can actually improve sales.

Speaking from personal experience, I was barely aware that Spore was even on the horizon. Since all the press and DRM drama has floated around, I am well aware of it and even considering purchasing it for my wife as a game for her to play. So you tell me, is that good business or bad?