Saturday, February 23, 2008

Setting a consistent DRM policy

Consumers hate many aspects of Digital Rights Management (aka copy-protection). Some hate clunky interfaces, or services that require an Internet to use DRM-controlled content. Some hate the risk that the service (or service provider) will go away, rendering the content worthless. And some just hate DRM, period.

DRM is on its way out for music, and (by extension) its future for movies has been questioned. However, DRM remains (and is increasing) in the e-Book market.

I was reminded of this by spending the entire afternoon Thursday researching the past decade of the e-Book industry, as I downloaded and skimmed more than 100 articles from 1998 to the present. This is in preparation for a class visit next week by entrepreneur Doug Klein, who for my students’ benefit will be reliving his days creating the Rocket eBook and critiquing successors like the Kindle.

There were a lot of foolishly optimistic predictions about the future of the e-Book, including by Steven Levy of Newsweek and Dick Brass, a vice president of Microsoft. Despite such optimism, E-books are not outselling paper books today, nor are they likely to do so any time soon.

Then there is the October 2000 prediction of Klein’s buyer, Gemstar CEO Henry Yuen, who USA Today reported “ gleefully forecasts that by 2002 the reader units will be so inexpensive to produce that they ‘could literally be given away.’ ” By that standard, the Kindle or the Sony Reader is overpriced by $400.

One thing that was remarkably prescient was a 2000 report in the Christian Science Manager from the annual Seybold conference. The four major problems were

  1. incompatible standards
  2. not enough content
  3. poor display readability
  4. “ineffective copyright protection,” i.e. weak DRM

Is the lingering use of DRM thus predicted by these earlier concerns? Or is it DRM that’s normal for information goods — with DRM-free MP3 format a legacy of unintended substitutes (with Napster and converting personal CDs) that the media companies don’t face in the book industry.

Consistent with this, another thread that has held up over the past decade is the publisher’s greed. In some cases, the e-books of a decade ago were more expensive than the hardback. Today it’s not so clear.

Lacking a representative book title — and with Harry Potter not available in the Kindle edition — I decided to check some of the self-help books by finance guru Suze Orman. Anyone within a range of a PBS TV station has heard Orman offering personal finance advice to the educated but economically illiterate.

I checked prices on two of her books, both of which had a Kindle price of $10. For The Road to Wealth, the hardback listed for $30 and the paperback for $18 — but the Amazon discounted price was $20 and $12 respectively. For The Courage to Be Rich, the prices are $25 (net $16.50) and $15 ($10), respectively.

So with lower COGS and distribution costs, we’d expect the list price of the electronic book to be half that of the physical book. (In this case it’s 67% and 56%, respectively). More seriously, (as with the Saturn cars) for the Kindle there is no haggling and thus no price competition. This is the dirty little secret of DRM — vendors blame media moguls for requiring it, but it creates lock-in and switching costs that reduce price competition and forestall commoditization.

The other unresolved problem for information goods is the lack of a secondary market. The dead tree Suze Orman books are available from many sources for 1¢ each (plus shipping). Right now, there’s no way to sell (or buy) a used information good, and it seems as though the publishers would like to keep it that way. That increases sales, but of course means that buyers of information goods never “own” those goods.

E-books also face their own unique problem: as Doug will attest, the demand for reading books is neither large nor growing. Movies aren’t going away anytime soon, but botching the transition away from dead trees could leave book publishers in the same spot as newspaper publishers.

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