Fragmentation versus Standardization in the Market for Digital Rights Management Solutions: A Case Study of the Online Market for Audio and Video Content

Lubomira Ivanova, LECG, LLC, and Laura Gee, LECG, LLC

10/21/2008
(Original Publish Date: 7/26/2006)

The emergence of digital technologies has facilitated the creation and the distribution of digital content. At the same time a set of new technologies, called Digital Rights Management (DRM) Systems, has been adopted to prevent illegal copying and to control usage rights. These new systems have challenged Intellectual Property rules and have redefined the economic relationships between creators and consumers of copyrighted works. Despite the important implications, the literature on the subject is scarce and at the very early stages. A recent paper by Park and Scotchmer (2004) argues that firms will have a tendency to adopt a shared system for technical protection which will lower the prices of digital copyright protected content. The empirical evidence, however, shows that there is increased competition among different DRM systems and a tendency toward fragmentation of the market for DRM solutions. One explanation for existence of proprietary DRMs is the new possibilities for business that these systems offer. DRMs not only protect content, but have allowed companies to expand their business models, thus providing new sources of revenue. We argue there are various incentives at play in the market for digital protection and DRM systems that counter tendencies for standardization. The goal of this paper is to provide an understanding of DRM solutions and of the market environment in which these systems operate in order to better inform the emerging literature.