This morning, I saw a slashdot article, this one, where an indie game developer mentions the free-rider problem in regards to DRM. The problem is, there is a significant misunderstanding of the free-rider problem and how DRM deals with it(hint, it doesn’t).

The free-rider problem is an issue in economics and game theory, where someone is able to get a free-ride off of the effort of others. One example is where you have two trappers. Now, if both trappers work hard on their own traps, they’ll each come out ahead at about three resources each. However, if one trapper decides to poach the other trapper’s lines, then that trapper gets six resources. If they both poach, neither gets anything. Typical self-interest says that it is better to poach than to trap, as there is a possibility of getting more resources, for less effort. However, in terms of the collective interests of both trappers, its better if neither poaches. Because there is a very real risk that if both trappers poach, then neither gets anything, and this is an extremely negative outcome. Usually, people spend the effort, or the cost to get the benefits because of the risks associated with free-riding(like jail-time for theft and fraud).

So in terms of piracy, if everyone free-rides, then everyone loses in the end. This is fairly understandable to all pirates, regardless of reason. However, free-riders exist in any system where there will be a possibility of free-riding. Theft will always exist. Fraud will always exist. The incentives and motivations are too great. The question is, how much do the free-riders cost you, and if everyone that pirates really is a free-rider?

One of the central fallacies used by DRM proponents is that every act of piracy, is a lost sale. This is, frankly, wrong. Its a very complex situation, but it can be broken down. Lets consider a customer and an artist. The artist produces a work that is either good or bad. The artist only profits when someone buys a work. A customer, however, may have money, or may not have money now(student for example). So if a customer has money, and they choose to buy, there is basically two outcomes: where the work is good, and both benefit, or where the work is bad, and only the artist benefits. It can be hard to determine if something is worth buying these days with such varied tastes, and such varied levels of quality. Now, imagine if the customer with money pirates instead. There are three outcomes here. One where if the work is good, the customer will buy it or something else from the artist, and thus, both profit. If the work is bad, the customer will not buy anything, and thus saves their money. And finally, the customer doesn’t care, and doesn’t buy anything from the artist either way. This is where a lost sale happens. Not when the customer pirates, but when it doesn’t matter what the quality of the work is, they will still pirate the work.

There is also the alternate side, where a customer doesn’t have money now. This is what artists should be concerned about. Lets say the poor customer doesn’t pirate. They have no money, so they can’t do a lot of social activities, and so they basically end up bored. There are of course libraries and that, so we’ve changed the behavior of our customer to that of someone that contributes nothing negative or positive to the situation. However, if the poor customer pirates instead, there are four possible outcomes. The first is where the work is good, and the poor customer saves up/earns the money to buy from the artist. Both profit in that instance. Or, the poor customer spreads the word of mouth about the product, and gets others, with money, to buy it. This is potentially a situation where the artist can gather many new customers, because word of mouth is hard to quantify at exactly how much of a benefit the artist will gain. Then there is the instance where the poor customer discovers the product is bad. The poor customer profits, in that they don’t waste theirs or others money on a product not worth the money. And finally, the instance where it doesn’t matter, the poor customer will pirate anyways, and there will be no profit for the artist.

This can all be summed up by a simple picture:

Nash Equilibrium of Piracy

Basically, the artist fails to understand the motivations of the customer, namely that they don’t want to waste money on crappy works. So its to the customer’s benefit to pirate, even if they have the money, as the risks are minimized for them. For the artist, its to their benefit to produce something good, and worthy of the money. So unfortunately, what DRM does is it messes up this equilibrium, where customers end up spending money on products they want to buy, and the artists have a good incentive to produce good works. DRM forces customers to waste money, and the artist has spent a significant amount of money doing this. The costs outweigh the benefits, which to be frank, were dubious in the first place. The artist spends money and effort on a DRM system which is easily circumvented, as long as someone finds it worthwhile to do so.

This is done for a variety of reasons, ranging from the invasiveness of the DRM, to just the technical challenge of doing so. There is also a possibility that the DRM makes the product worse, and the pirates wish to work around this. By placing DRM in the way, the artist creates an incentive to break it. So either the DRM doesn’t get in the way, and works perfectly, or don’t use DRM.

Essentially, the way to deal with piracy isn’t DRM, but in making good stuff. If you make good stuff, and don’t place technical barriers in the way, you create a strong incentive for customers to pay for your work. Even better, instead of letting people evaluate the works via piracy, provide representative samples, that are constantly changed, 100% free, and good quality. An example would be providing two songs from an album, along with short samples of the other songs. This helps the customer see that it is worth the money on the album, especially if buying each song individually is more than buying the album. Or, just sell the songs individually.