economics of DRM, was Re: Ross's TCPA paper

[Eric Murray]

On Sat, Jul 13, 2002 at 06:34:36PM +1200, Peter Gutmann wrote:
> Eric Murray <ericm at lne.com> writes:
> >On Fri, Jul 12, 2002 at 07:14:55PM +1200, Peter Gutmann wrote:
> >>From a purely economic perspectice, I can't see how this will fly.  I'll pull a
> >>random figure of $5 out of thin air (well, I saw it mentioned somewhere but
> >>can't remember the source) as the additional manufacturing cost for the TCPA
> >>hardware components.  Motherboard manufacturers go through redesigns in order
> >>to save cents in manufacturing costs, and they're expected to add $5 to their
> >>manufacturing cost just to help Microsoft manage its piracy problem?
> >
> >Motherboard makers don't pay for it.  Microsoft pays for it.
> 
> Hmm, I can just see it now, Windows 2005 ships as three CDs, a 400-page EULA, a
> fine-tip soldering iron, a magnifying glass, an EMBASSY chip, and a copy of
> "SMD Soldering for Dummies".


You're probably joking, but just in case you're not, or there's
somone who doesn't get it, here's how it works:


Wave (or someone like them) makes a deal with the motherboard
makers to install EMBASSY chips.  Wave pays the motherboard makers
to do it, so there is no added cost to them.  Wave then sells the rights
to use the EMBASSY to Microsoft, Sony, et. al.   The arrangement
may involve percentages of the fees that users pay (i.e. Wave
gets 50% of $1 that a user pays for a Sony-owned song, and gives half
of that to the motherboard maker), or it might involve up-front
payments.  It can work either way.

The difficulty is to get enough EMBASSY or whatever chips out there to
make a critical mass that's attractive to use, and to distribute the
cost of the DRM hardware and software over enough DRM customers that
it's profitable for each one.  i.e. MS might not want to underwrite $20
worth of DRM by itself, because it doesn't make enough more through
DRM-enforced licensing to make a profit from it.  But if the $20 for
the DRM is split among 20 companies, each paying $1, they can all make
a profit from using it.  TCPA, by standardizing the DRM, makes it easier
to get a critical mass and easier to round up participants.

I think that it is important to understand the economics behind DRM
because that is ultimately what will determine if and how it is deployed.
Microsoft does not do things simply because they enjoy being evil.
They are not so worried about Linux (with its small share of the market)
that they will spend mega-bucks now on a very long term project that might
possibly let them keep it off some PCs in the far future.  They _are_
concerned with getting paid for the 50% of their software that isn't
paid for.  There's a shitload of money there, and if getting at some of
it costs a little, well, its still more profit than they would
have gotten otherwise.

Of course its even better for them if they can convince users that DRM
is an added security feature, or they can get governments to require it
(i.e. V-chip).  Then the users pay for it.  But I don't see either of
those being very likely.  It's more probable that there needs to be
significant profit in it for a number of players to make it go.


Eric