[Paul Ohm (guest-blogging), April 12, 2007 at 1:09pm] Trackbacks
The Price of Music and the Analog Hole (1 of 2):

Today, I will switch from the Superuser article to describe a short article I have co-authored entitled The Analog Hole and the Price of Music: An Empirical Study, which will be published imminently in the Journal on Telecommunications and High Technology Law. The citation will be 5 J. on Telecomm. & High Tech. L. 573 (2007).

I talked briefly about the article last month while guesting at Concurring Opinions, and I'll try not to repeat much of what I said over there.

My co-authors — Doug Sicker, Assistant Professor of Computer Science at the University of Colorado, and Shannon Gunaji, a recent graduate of the University's Interdisciplinary Telecommunications Program — conducted a series of experiments and surveys initially designed to test various aspects of the Analog Hole, but which ended up being much broader in scope.

The first result, which appears last in the paper, is based on a survey of people who reported that "most of [their] digital music collection was obtained through illegal file sharing." (Note, the older draft hosted on SSRN contains an inaccurate definition of the class of people in this survey.) We also limited our survey to people who reported not to have purchased music from an online store in the previous six months. I've learned this week to prepare to be called to task for terminology, and I'm sure many of you will let me know why we shouldn't have called these people, "so-called pirates."

Our surveys explore the price of music. Some have complained that 99 cents is too much for a song, especially for students and other people with low incomes. They have argued that given the low costs of online music distribution, music companies should experiment pricing below 99 cents. Swirling around this discussion is the question: would pirates be willing to pay anything for music? Or are we dealing with a subset of people who would rather download music for free than pay anything?

Our 90 survey respondents were asked at what price point they would be willing to pay for music. They split into a bimodal distribution. Twenty percent were not willing to pay anything for music. The remaining 80% were willing to pay from 20 to 40 cents for a legal download, instead of obtaining copies from non-paid sources.

We also gave the respondents space to comment on why they would prefer to purchase instead of pirate. Aggregating these answers, they appear motivated by three things: the desire to own legal content, the convenience of being able more easily to find songs, and the guarantee of a high-quality product. Finally, we asked the survey respondents for their thoughts about DRM. Eighty percent indicated that were they to purchase music, they would want the flexibility to move the music onto different media players or to control and access it in various other ways.

Second, we looked at the analog hole. As I said in the other blog post I have written about this paper:

Point a video camera at a television screen, aim a microphone at a speaker, or run a cable from the "line out" to the "line in" ports on the back of your computer, and you're ready to exploit the so-called analog hole. Just press "play" on one device and "record" on the other, and you can copy a movie, television show, or song, even if the original is supposedly protected by digital rights management technology designed to prevent copying.

This is known as the analog hole, which as I say in the paper, "arises as an inevitable byproduct of the interface between computer technology and human biology." If we humans are to see or hear relatively-easy-to-protect digital content, it must first be converted into harder-to-protect analog signals.

The analog hole comes up in the DRM/DMCA debates in interesting ways. For example, many debate whether the DMCA's prohibitions on DRM circumvention should be amended to add exceptions for the exercise of First Amendment and Fair Use rights. Is the law unconstitutional without such exceptions? Those who oppose new DMCA exceptions for fair use (content owners, mostly) point to the analog hole in response. Don't worry, they say, because you can always exercise these rights by exploiting the analog hole. In litigation, in the face of Constitutional challenges to the DMCA, courts in 321 Studios and Corley accepted similar arguments.

Others have fired back, arguing that the Analog Hole is a poor substitute for DRM-protected content, because it is too complicated or costly to exploit. (See footnotes 17 and 18 of the article for citations to legal scholars who have made this argument.) In other words, exploiting the Analog Hole requires a Superuser.

Our research suggested otherwise. We created analog copies of digital songs in two ways: first, by running a cable from a computer's "line out" jack into the "line in" jack of another computer; second, by placing one computer's high-end speakers next to another computer's high-end microphones. In the latter case, we needed access to expensive hardware, and in both cases, we had to install software that did not come bundled with our computers. Furthermore, both tests were somewhat time consuming. Still, neither case required much technical know-how.

Although this result probably does not surprise any VC readers, we thought it would be helpful to publish our anecdotal, qualitative observations.

Tomorrow, I'll talk about the loss of sound quality which results from exploiting the analog hole. Do consumers notice or care about this loss of quality? Would consumers be willing to buy music with degraded sound quality for less money? I'll also talk about what all of our results may say about the recent EMI/Apple announcement. Here's a teaser. What's the analog hole worth? Exactly twenty-four cents. (of course, the article is short, so you can quickly learn the punch-line today.)

Related Posts (on one page):

  1. The Analog Hole is Worth Twenty-Four Cents (2 of 2):
  2. The Price of Music and the Analog Hole (1 of 2):
[Paul Ohm (guest-blogging), April 13, 2007 at 12:11pm] Trackbacks
The Analog Hole is Worth Twenty-Four Cents (2 of 2):

Recently, Chris Sprigman published an article called the 99 Cent Question in the Journal on Telecommunications and High Technology Law. He asked a simple question: Why are almost all major-label songs sold online for exactly 99 cents? More to the point, why don't music labels price discriminate? They can probably sell higher quality songs at a higher price or intentionally degraded versions for less. They can try charging more for DRM-free music, or they can offer a menu of DRM restrictions; the more restrictions you'll accept, the less you'll pay.

Maybe law professors sometimes can influence decision-making, or at least maybe Professor Sprigman can. With last week's announcements from EMI and Apple, price discrimination is coming to online music in the form of $1.29, DRM-free, higher quality downloads. The songs won't be available for sale for a few more weeks, but many predict that they will sell well.

Unfortunately for economists, Apple decided to alter two variables at the same time -- DRM and audio quality -- so this won't be a pure price discrimination experiment. Even if people show up in droves to pay 30 cents more for these tracks, will they be doing it for the freedom from DRM, the quality, or both?

This brings me back to our paper. We tested whether consumers would be willing to pay different prices for different sound quality. But instead of asking whether higher quality was worth more, as Apple and EMI are asking, we asked whether consumers would pay less for lower quality music. If yes, how much less? We also used this survey to answer some fundamental questions about the analog hole and signal degradation. Before I get to our results, a few words about signal degradation:

Debates about the analog hole inevitably turn to signal degradation. Each trip through an analog-to-digital converter or digital-to-analog converter degrades the signal, as information is lost in the process. For example, ambient noise and distortion can be introduced and stereo information and bass can be lost.

If it is typical for analog hole copies to be significantly degraded, perhaps they are a poor substitute for traditional fair use and First Amendment rights, and maybe the content industry should not worry so much about the analog hole being a "DRM loophole."

In reality, it is hard to say what is "typical" signal degradation. Some analog hole copies are horribly degraded (aim your digital tape recorder out the window in the direction of your neighbor's blaring boombox) and others are near perfect (spend thousands of dollars on professional-grade equipment). We chose to use the "line-out to line-in" and "speaker to microphone" tests I described yesterday, with the understanding that they were just two types of a wide variety.

We generated an online survey, asking respondents to listen to pairs of recordings of songs, and to compare their subjective quality. For each song, there were three different recordings, the digital original, the line-out/line-in copy and the speaker-to-microphone copy. These were played to the respondent in pairs, and each respondent heard and was asked to compare all nine possible pairwise combinations. (In other words, if the three recordings were A, B, and C, each respondent heard AA, AB, AC, BA, BB, BC, CA, CB, CC in some random order during the survey.)

Seventy participants completed the survey. The results suggest first that our listeners could tell the difference between the analog hole copies and the original digital files, but perhaps not on the scale we had anticipated. In side-by-side preference tests, the digital original was picked approximately 51 percent more often than the line-out/line-in copies and 42 percent more often than the speaker-to-microphone copies.

But we didn't stop there. We also randomly assigned hypothetical prices to each song in each pair, and asked our respondents to select based on both quality and price. For example, if A was played alongside B, we would ask "If A cost $0.55 and B cost $0.25, which do you prefer?" In this way, we set up a stated preferences econometric model. This statistical technique allowed us to isolate specific consumer preferences when many factors—utility, cost, and quality—interacted. Read the paper if you want more detail.

The bottom line is the model allowed us to calculate the population's willingness to pay for quality. How much less, if any amount, were listeners willing to pay for signal-degraded, analog hole copies than for their digital originals?

The answer is tantalizingly specific: our respondents found the difference in quality in the analog hole copies to be worth 24 cents (23.9828 cents to more significant digits). In other words, if ordinary digital tracks cost 99 cents, these respondents would be willing to pay 75 cents for a lower-quality copy.

What does this all mean? If it wanted to, the music industry could probably price discriminate in the way we've described. If it offered lower-quality music downloads for less money, it would probably find a market. Although lower-quality tracks are no cheaper to produce than the standard-quality tracks sold today, lower-quality files are usually smaller, resulting in less bandwidth to distribute, leading to possible cost savings. Also, lower-quality tracks may be good enough for an iPod but not for a home audio system, which could possibly spur multiple purchases of the same song by the same consumer.

More likely, the music industry will follow the lead of the EMI/Apple deal, and attempt to price discriminate for higher prices, if at all. It is unclear whether our result is generalizable to that situation.

My stay here is almost up. This weekend, I'll try to post once or twice with some reflections about this week's stimulating discussions.

Related Posts (on one page):

  1. The Analog Hole is Worth Twenty-Four Cents (2 of 2):
  2. The Price of Music and the Analog Hole (1 of 2):