DRM technology and policy

Ian Grigg iang at systemics.com
Wed Apr 23 22:30:29 EDT 2003

"John S. Denker" wrote:

>  > Thus, the marginal cost of
> > the product should shrink as it is limited by the
> > cost of distribution and the cost of cracking
> > competing product.
> No, the marginal cost of the product started out
> zero and remains zero.  It does not shrink.
> The presence or absence of competing product
> does not change this.

Not correct, as someone (you?) pointed out earlier.
The cost of a CD manufactured at the factory level
is about 40 cents, add the cost of the packaging,
then the distribution to the store, plus the
marketing blah blah, and you get about $5.  Add
the retailer's markup of 100% and we are at $10.

LPs were similar, as was sheet music.

This is not a "marginal cost of zero."  The cost
is low, but not zero.

Now add in the net + MP3s.  The cost of manufacture
of a perfect substitute (a "stolen" copy) is now
zero.  Zero cents that is, unless we want to count
up the cost of the harddrive, but even that is
really better allocated into fixed/sunk costs.

The cost of distribution is not the $1-2 to get the
CD to the store, but it's what it costs me in real
money to send this email:  Nix, nada, zip.

There is a big shift going on here:  marginal costs
just went to zero.  (Actually, not quite zero, but
they went below the noise or measurement threshold
for a lot of cases, so let's stick to the zero

>  > Both of these are also zero.
> > So any free market would result in the costs of
> > software product shrinking to zero.
> This is getting sloppy.  It blurs "cost" with
> "marginal cost".

Not at all:  Cost includes fixed cost and marginal
cost.  Marginal cost shrinks to zero.  Fixed cost
is still there;  both for the "original" author and
the "derivative" author (a.k.a. cracker).

But, and here's the difficulty:  business models
that support covering fixed costs across zero
marginal costs are very difficult.  It's not just
a matter of a better DRM.  It's a matter of a
different product.  There is no easy bandaid for
the music CD of today.  There is a need for a
real, new product.  (Assuming that there is an
artist out there that wants to be paid...)

> The total cost includes fixed costs.  It
> does not shrink to zero.  The cost per unit
> shrinks toward zero, but does not shrink "to"
> zero unless the market is infinite.  I've
> sold into some small markets and some fairly
> large markets, but I've never sold into an
> infinite market.

No, it's nothing to do with size of market, it's
to do with the marginal cost - the cost of each
fresh copy *after* all fixed costs - shrinking
to zero.

Consider radio.  Once you broadcast, every
additional listener is free.  If you like, a
new product needs to be calculated on that
basis (consider Steve Schear's auction of
single copy paridigm).  But, that's a completely
separate business model;  there's no point in
asking for a DRM for that, until you can define
the business model, and thus the technical

> There also seems to be here the assumption
> that all units must sell for a price equal
> to the marginal cost.  Economics does not
> require this.

That's correct.  Although, marketing does
require a substantial marginal cost in order
to tack on the various other contributions.
I.e., marketing doesn't really work in the
case of "free theft."  Set marginal cost to
zero and we have a problem.

> > It's an economic proof, or theory, if you like.  The
> > real import is that it is practical and borne out
> > by experience:  There is no longer a plausible
> > physical foundation for the sysem of intellectual
> > property that is now in place to protect performances.
> It's not directly a physical foundation.
> Copyright is a legal fiction, and always
> has been.  It eventually becomes physical
> if you violate it, because guys with guns
> will physically haul you into court.

Nah, one of the things about laws is that
they usually have a physical foundation.
That is, it could be considered a bad thing
that Alice says she is going to rob the bank.
But, as the law has a great deal of trouble
in proving the harm *before* any substantial
physical evidence is present, it is not a
crime to think of, or utter, the intention
of robbing a bank.

Same as copyright.  It's purely as a matter
of practicality:  copyright is built on the
marginal cost of copying being != zero.  So
as to give substance to the crime, to give
some way of showing what has happened.  If
we go back through time, copyright has always
had this underlying characteristic.  (Same
with other IP.)

Now, it's lost that.  It really is a paradigm
shift, it's not a matter of building a CD
player with crypto added in.


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