News Release

May 15, 2002

Fair Use Not Threatened By Digital Rights Management, Study Finds
DRM could offer 'perfect price discrimination,' legislation to require it misguided

WASHINGTON--As music-industry-backed digital audio subscription services such as Pressplay and EMusic begin to come online, a new study from the Cato Institute finds that the digital rights management (DRM) technology they employ does not affect fair use and is likely to enhance economic efficiency.

In "Policing Pirates in the Networked Age," University of Texas at Dallas economics professor Stan Liebowitz argues that unlike previous copying technologies, "current technologies for distributing pirated material appear capable of destroying the value of copyright." However, he points out that the evidence does not support the idea that Napster had a negative impact on the compact disc industry.

"By crippling Napster," Liebowitz writes, "copyright holders may have strengthened a far more fearsome foe" in the form of Gnutella-like peer-to-peer systems that, unlike Napster, cannot be used to appropriate royalties by copyright holders. Liebowitz proposes that a market-based DRM scheme "can ameliorate copyright harms by making it more difficult to make unauthorized copies."

This alarms many who fear that micropayments and similar DRM tools will give too much power to copyright owners and put an end to fair use, Liebowitz says. But in his economics analysis Liebowitz shows that micropayments would not reduce the consumption of copyrighted goods. The study explains that "by charging for each minor instance of use ... this extreme form of DRM becomes, virtually, an instance of what economists refer to as 'perfect price discrimination,' wherein each user is charged a price strongly related to his willingness to pay."

Although DRM would be a salutary development, Liebowitz says, legislation to require it, such as Sen. Fritz Hollings' (D-S.C.) proposed Security Systems Standards and Certification Act, is misguided. He writes, "There is no need to have the government certify which security technologies are to be used or to force a decision on market participants regarding the choice of which, if any, of these technologies should be used."

"Policing Pirates in the Networked Age,"