How to Compete With "Free"

Pervasive broadband is making it easier to pirate and share music and film files than even just a few years ago. And consumers’ appetites for larger chunks of content across all device types is increasing exponentially almost daily.

If the content you create, broadcast or distribute is available for free, the knee-jerk response might be to lock it down. And many companies do so using ultra-rigorous digital rights management (DRM) technology. They also tend to impose a rigid user experience based on business rules. Logic suggests that the way to “compete with free” is to block the free supply, locking down the content with harsh security measures. It also suggests that you force people to pay as much as you feel is appropriate.

The music industry has been through this pain already. It has learned that attempting to lock down and control content that way can be a big mistake. And we at Accenture tend to agree. There are better ways to increase market share and customer loyalty while reducing the impact piracy can have.

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There are two major factors challenging DRM-backed business models to thrive and gain pervasive market dominance.

First, cost of goods (content) and other supply chain costs (DRM royalties, litigation and fines) may make the business unprofitable. And these may make it attractive only for firms that do not need a short term profit and can afford to invest billions into the marketplace. Further, content creators may not wish to lower their unit costs. They want to avoid undercutting future plans to sell the same content in other formats (HD-DVD, and managed copy service delivery models) at higher prices.

Second, contract terms often require DRM practices to be overt and restrictive. This often results in complex and potentially unpleasant user experiences that slow penetration and adoption.

There may be long-term business value in optimizing the DRM-enabled content distribution value chain. Consumers may even strongly crave DRM-enabled content if companies make it desirable. At a minimum, they should enjoy the user experience. It should be designed and marketed to have a certain “coolness” associated with it, such as the iPod.

Both the content and technology sectors may be seeking more revenue and profit from the value chain than it’s possible to pay them. That essentially means if businesses based on DRM-enabled content distribution cannot profit, the only truly viable entrants are going to have to make profits other ways.

Businesses such as Apple and Microsoft are best suited for the low-or-no profit economics of today’s DRM-enabled content market. They drive their content businesses into a sufficient market penetration and consumer brand loyalty “tipping point.” They may well have the power to dictate better terms upstream, lowering content costs and decreasing license usage strictures. This will lead to a better consumer experience sooner and create a market that is ripe for other, direct profit-oriented content businesses.

For a DRM-based content business to thrive, we recommend taking the following steps:

• Focus on usability, a fair price, and cultivating a cool memespace* rather than enforcement – win your customers, don’t bully or coerce them.
  
  
• Market your product or service through continuous, pervasive marketing campaigns. Apple has set the bar for this approach having invested half a billion dollars in marketing iPod and iTunes while competitors, with better value products and services, have failed to be as widely adopted.
  
  
• Content Creators and other IP holders such as DRM firms – consider lowering your unit prices to allow certain DRM models to thrive early in the game. There may be too many people trying to take too much profit out of this value chain in its infancy and it may slow or damage the market irrevocably.
  
  
• Embrace DRM and drive it – consciously and with an analytic methodology: understand and model your technical requirements and your business requirements – do not base your decisions on perceptions; do not assume that all “Open Standards” solutions are less expensive – they may not be.
  
  
• Select a portfolio of options no matter where you sit in the value chain, as all possible outcomes will be determined by value chain dynamics that co-vary. Gaining market share incrementally with deeper security methods and rigorous enforcement practices, and gaining orders of magnitude of greater market share with a compelling consumer proposition, service and great marketing are not mutually exclusive. Most companies tend to focus on one or the other, high performers adopt a portfolio of strategies.
  
  
• Accept that right now Microsoft DRM fits most studio requirements, and Microsoft may be the only company in the DRM space that is immune from having to pay further fees to DRM IP owners - because it has already paid a US$440 million lawsuit award.

* A meme is unit of cultural transmission, or unit of imitation. Examples of memes are popular tunes, ideas, catch-phrases, and fashions – for example, the way people around the world took to wearing baseball caps backwards is a meme. Overtly using an iPod – and displaying the trademark white headphones – has become a powerful meme as well.

Richard LeVine is Accenture’s Global Rights Management lead.