New Research Estimates Value of Removing DRM Locks

Note: We’ve been in touch with a group of economists at the University of Glasgow who are investigating the market value on interoperability.  Just in time for “Day Against DRM,” here are some of their initial conclusions.

My co-authors and I at the University of Glasgow are investigating how restrictions on interoperability imposed by Digital Rights Management (DRM) systems might impact the market for goods. We are doing this as part of a larger project to better understand the economics of DRM and to figure out what changes would likely occur if the laws were reformed. Our recent working paper is titled ‘How much do consumers value interoperability: Evidence from the price of DVD players’. [Open Access here]

We use price data scraped from Amazon.com on all consumer DVD players listed since 2010 to analyse whether there is an increase in willingness-to-pay for players that have features related to interoperability. These features of interest include things like the lack of region controls, the ability to play legacy disc formats, and the ability to play new open file formats like Xvid. At first, DVD players might seem like an antiquated technology for such a study, but the product has many advantages: locked and unlocked players coexist side by side in the market and there are hundreds of competing devices on sale with similar capabilities, facilitating statistical analysis.

Why might consumers benefit from interoperability?

Our study is designed to begin to investigate some propositions about why consumers might value interoperability when choosing to purchase devices or content. There are numerous reasons why that might be the case. For example, people might value backwards interoperability between a device and other devices or content they already own. In a famous economics paper, Farrell & Saloner (1986) suggest that there are barriers to adoption of a new standard caused by network effects related to the number of people using the old standard. For example, maybe one’s friends and family use one system and moving to a new system would leave an early adopter out on a limb. Or, maybe a consumer has invested a lot of money in content that is compatible with the old standard but incompatible with the new one. DRM might amplify those effects and result in ‘excess inertia’: that is, an overall loss to society caused by slower than optimal uptake of a new standard.

On the other hand, consumers might not (only) make a purchase decision informed by goods that they or their friends already own. They may be more concerned with what we call forwards interoperability: the capability of a device to interface with future, unknown devices or content. Imagine for example a company pledging not to restrict their format to future innovators, enabling unintended new benefits to consumers as third-party companies supply complementary goods and content. This might interest consumers worried about ‘future-proofing’ their investment, ensuring that new content is likely to be created for their device.

Main findings

Overall we find that interoperability has a significant positive effect on the price that consumers are willing to pay for DVD players. The average price that they are willing to pay increases by $19 USD for players with any interoperability features present. The average price increases by $30 USD for players with the specific ability to play content in open file formats like Xvid. This feature has the strongest impact on price in our study. The lack of region locks also has a moderately significant effect on price. Backwards compatibility with legacy formats live VCD had no significant impact on price in any of our models, likely because VCD is a very legacy format, indeed, having been popular in the late 1990s. Backwards compatibility might have a bigger impact for products that are released at closer time intervals.

Next steps for research

We plan to expand this study, both in terms of global coverage as well as product categories. One of the things we’d like to check is whether the region of the consumer is an important factor in how they value interoperability.

Ultimately, we intend to examine these dynamics across as many product categories as possible, where DRM-locked options coexist in the market alongside unlocked or hackable options. Some possible candidate products include network routers, handheld GPS devices, and even ‘smart’ lightbulbs. As more and more devices come with embedded firmware, the ability of manufacturers to lock out consumers with DRM – or make them interoperable – will have a greater impact on society beyond media devices.