Piracy on File-sharing Networks: Strategies for Recording Companies

Abstract

In this article, we study the impact on piracy of selling music as downloadable files and the strategies that recording companies should adopt to increase profits. We find that total music sales and profits of firm (recording company) are higher, and total piracy (demand on file-sharing networks) is lower when the firm sells a downloadable version of a music track. We also look at the firm's optimal level of digital rights management (DRM) protection. We found that revenue decreases with increased protection. It is therefore optimal for the firm not to employ any DRM protection in the absence of network externality (NE). Listening to music or watching videos protected by DRM is cumbersome to users because they have to download license files and there are restrictions on the number of times the file can be copied and on the type of devices that can play the file. As a result, DRM protection is a disutility to the legal consumer and the firm must charge lower prices with more DRM protection. When NE is high and a nominal search cost is above a certain threshold, then non-zero protection becomes optimal.

Keywords:

• digital rights management (DRM)
• file sharing
• peer-to-peer (P2P)
• piracy

Notes

¹ http://www.ecommercetimes.com/story/18212.html

²Online music and video is delivered in a compressed format to decrease download times. As a result, the quality of the recording is not the same as on a CD version. Moreover, the online version lacks printed lyrics and other complementary material usually found on CD jackets.

³ www.walmart.com/catalog/catalog.gsp?cat=164524&path=0%3A5436%3A120160%3A164527%3A164528%3A164524#8

⁴We assume that the recording company and the online pay site are vertically integrated. iTunes, the most popular download site, plans to make its money from the sale of the MP3 player iPod, and hence it may function practically as a vertically integrated distribution channel for the recording companies. Online pay sites have to keep long-term interests in mind in their relationships with the recording companies, and hence, this assumption is not unrealistic.

⁵See, for example, [20].

⁶Sony's much publicized copy protection that was overcome with a felt pen comes to mind. In addition, there are several internet resources that document various successful or partially successful attempts at overcoming DRM for music files. These attempts were not restricted to a specific DRM vendor.

⁷We define a working version as a file for which DRM has been compromised, or which was available from pre-DRM days.

⁸This assumption is actually not crucial and our results do not depend on it. The only difference it would make if we consider is that in the results that follow, the region should be replaced with .

⁹Note that demand for the physical good is constant at 0.5.