NBA 600: Session 15 Darknets and Digital Music 11 March 2003 Daniel Huttenlocher.

NBA 600: Session 15Darknets and Digital Music

11 March 2003

Daniel Huttenlocher

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Announcements

For Thursday’s class (re)read Clemons paper on markets for information goods– Come prepared to make a brief point about

changes in music industry based on• Theory of resource-based competitive advantage• Theory of newly vulnerable markets

Short extension for group assignments– Due Friday at 5pm rather than Thursday before

class• Hand in hardcopy to 346 Sage and email to me

(dph2)

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Today’s Class

Finish discussing music industry– Effects of downloading digital music

Darknets– Illicit content distribution networks– Why they are hard to shut down– How they are likely to evolve

Copy protection schemes– Get in way of legitimate users– Often not effective against illicit copying

• Circumvented by experts

Road to success for digital music

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Forrester Study of Listeners

Survey of 1000 online consumers shows heavy downloaders still buy the most CD’s

Identified several groups– Offline and nonusers: never download or burn– Dabblers: have tried but do infrequently– Learners: download, rip or burn 3-8 times/mo.– Lovers: over 9 times/mo.

Offline and nonuser make up 54% of population but buy only 39% of CD’s

Lovers and learners make up 22% of population and buy 36% of CD’s

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More You Burn More You Buy?

At the moment, more active downloaders also (claim to) buy more CD’s– Difficult to determine the degree to which they

might buy more if they didn’t download• Many report downloading actually increases

their buying

If burning was largely substitute for buying should be larger drop in sales– Sales of blank CD’s 2x that of music CD’s

• If half used to replace music purchases, CD sales should be off much more

E.g., like Encyclopedia Britannica’s dropoff

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Why People Buy Music

Exposure to artists critical– Don’t buy what don’t know and like– Industry knows this, pays a lot for video and

radio promotion

Critical question: when is downloading or copying exposure versus substitue– Music buying cycle not well understood

Convenience of format– Largely why cassettes replaced albums, CD’s

replaced cassettes, downloads replacing CD’s

Value of original over copy, e.g., as gift

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What Music Industry Should Do

Understand buying behavior of customers– Recognize that “hearing for free” has both

positive and negative effects on sales• Try to limit lost sales without damaging positive

aspects of unpaid listening

Recognize what customers want– Forrester study lists “rights” consumers will

demand in exchange for payment• Find music from any label• Control music by burning onto CD’s or copying to

MP3 player• Pay by song or by album not just subscription

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Don’t Fight the Technology

New technologies need to be exploited to generate new kinds of revenue– Fighting a new technology is an uphill battle

• With video recorders lost legal fight• Even strong DMCA laws not stopping copying

Video recorders actually generated more revenue for content providers– Large movie rental market– More television watching through time shifting

Figure out how easier copying can lower costs and create new revenue sources

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Forrester Report Predictions

Paid-for downloading will become so easy that it is a major source of revenue– At right prices people will use industry

download services because• Easy to find content• Guarantees about quality and lack of viruses• Fast downloads

– By 2007 will be $2.1B or 17% of industry revenue

But also different possibility: increasingly difficult-to-use protected content– Leading to accelerating sales drops

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Emerging New Products

Microsoft’s Threedegrees– Creates online social group where people can

chat, share photos, listen to music• Up to ten people at once in a given group

– Comes out of “NetGen” division of MS• Products targeted at 13-24 yr olds

Music is played from a participant’s hard drive rather than being shared– Can be heard by all participants but “belongs”

to one of them– Group can have a playlist of up to 60 songs

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Darknets and Content Distribution

People have always copied things– Even copyright law recognizes that some

copying is not infringing on holder’s rights

Before digital age small-scale copying generally un-economic (“sneaker-net”)– Time and/or money to locate and make copy

Large-scale copying was detectable and stoppable using legal means

With digital goods this picture is changing– Small-scale copying becoming much easier

• Will be hard to prevent, even with new laws

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Idea of Darknet

Three assumptions– Any widely distributed object will be available

to some users in a form that permits copying• Protection systems will “leak” content – e.g., due

to expert users who overcome them– Users will copy objects if it is possible and

interesting to do so– Users are connected by high-bandwidth

channels• Fast enough that copying objects no harder than

obtaining them other ways

Object means any digital content Widely distributed means mass market

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Operation of Darknets

Requires several technologies, similar to those of legal distribution networks– Ability to inject new objects into darknet– Distribution network for carrying copies of

objects to users– Ubiquitous rendering devices which allow

users to experience objects– Search mechanism to enable users to find

objects– Storage that allows objects to be kept in the

darknet• For efficiency of access to objects

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Darknets for Music

File sharing– CD RIPping enables widespread injection of

content– Internet provides distribution network– Systems such as Napster, Gnutella, Kazaa

enable search and retrieval– Media players (HW and SW) render material– Cheap disks allow content to be stored

Challenges to darknets– Technical means for preventing injection of

content– Legal means to attack search and retrieval

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Rise of Music Darknets

Need to be fast enough that copying not harder than other means of access– “Raw” CD music format large

• About 600MB on music CD• Single track (song) 30-50MB

– Long download time even for single track• 5-7 minutes with broadband• 3-4 hours with dialup

MP3 “lossy” compression of music– Discards information – can’t recover original

• Frequencies that people less sensitive to

– About 1/10th of original size

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Perfect Copies and Darknets

Problems of exponential growth– Maybe original illicit copy is not perfect

• E.g., MP3 compression, analog recording

– But all remaining ones have no degradation

Degraded copies provide a natural limit– If 4th generation copy is “worst tolerable”

• Say everyone makes a copy for two friends then only 24=16 copies from one original

• Even if 5 copies then 54=625 copies

– With perfect copies, even only 10 generations• 210 about a thousand• 510 nearly 10 million

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Video Darknets

Video files much larger than music– Video DVD contains 6-7GB

• Already compressed using MPEG Raw digital video is more than 10x larger

• Higher compression causes visible artifacts “Net video” quality

– Can only store about 5-6 DVD movies on a computer hard drive (40GB)

– Slow downloads even with broadband• About 12 hours for one DVD movie

Internet currently less of a threat for movies than for music

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Darknets Resilient

Digital rights management (DRM) intended to prevent or delay content injection – However experts can eventually inject content

• Widespread injection (e.g., RIPping) not needed

– Once available will be rapidly copied if it is desirable material

– DRM protection schemes thus are largely an inconvenience for legitimate users

Peer-to-peer networks particularly hard to challenge – no central entity to go after– P2P simply direct communication between

participants rather than using central server

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DRM Technologies

Provide content (generally encrypted) with specification of how it can be used– DRM system must be “trusted” to obey the

usage specification– Only give key to decrypt content to such

trusted parties– Strength of DRM schemes

• BOBE (break once break everywhere) resistance

Wide variety of use restrictions– DVD CSS enables only “viewing” not “copying”– DivX DVD rental allowed only certain viewing

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Limitations of P2P Darknets

Napster had centralized search engine while content was distributed among users– Legal challenges were effective because central

database of song titles could be shut down

Gnutella and later systems decentralize the search as well– Harder to stop, no central entity to block

However, in practice these new services also end up being fairly centralized– A few hosts in P2P network provide most files

• Free riding – most users download but don’t share for upload

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Watermarking and Darknets

Idea of digital watermark is to identify source of copied content– Evolved from techniques used to prevent

photocopying of sensitive documents– Can allow “tracking” of copies based on which

original they came from• Not very useful for preventing injection of mass

market items into darknets• Coupled with crawler can be used to find illicit

copies

Watermarking can generally be removed– Moreover some techniques degrade quality

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Likely Evolution of Darknets

Large-scale file sharing will be limited– For music, RIAA and labels will identify hosts

that share lots of data• Shut down through legal means

– File sharing will become more subject to viruses and corrupted files• As more mainstream will become larger target

However small-scale sharing hard to stop– Sharing only with friends

• Can’t prohibit without alienating users• Less problem with trusting content

– But harder for users to find new things

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Leaves Room for Online Sales

Make it easy for friends to share music, while still encouraging purchase– Systems such as Threedegrees do this by

enabling shared listening but not copying– Perhaps leading to reduced costs for

radio/video promotion

Supplement with easy means of making online purchases– Many purchasers of music under age 18 and

don’t have credit cards• Could be good for Paypal and other prepaid

payment services

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Large Opportunity

Safe, secure, easy purchase online is viable alternative to illegal downloads– Make easy to find music

• Search, sample, online community, reviews

– Can be provided by industry or retailers– Value more than being easy and safe

• “Tipping point” phenomenon, people willing to pay for perceived value

Not just to avoid other costs such as viruses and corrupted files

Offering wide variety of pricing models– Per song, per “album”, per listen, subscription