Dennis D. McDonald ( consults from Alexandria Virginia. His services include writing & research, proposal development, and project management.

The Cato Institute's "P2P and DRM" Report


Dennis D. McDonald, Ph.D.



I started paying serous attention to DRM incompatibilities a couple of months ago when I read the Sony-BMG announcement of their copy protection scheme’s incompatibility with iPods and some PC’s.

Initially I tried to find out from my online vendors which of their CD’s were using these new copy protection schemes. I wasn’t very successful. And things are definitely going to get worse for legitimate music customers, according to a recent PC World article.

So, after years of happily buying music CD’s from a variety of online vendors, I’ve stopped purchasing music CD’s altogether. If vendors can’t tell me which of their titles I can use, what’s the point of buying them?

I’m not ant-copyright. Copyright owners have a right to do whatever they want with the properties they own and control. But to make a free market operate, there has to be information available about product features that will make products potentially unusable. Sadly, what I see happening is market confusion and a crumbling of the standards that once made it so easy to buy and use recorded music.

The Cato Institute Report

With the proliferation of DRM schemes to prevent unauthorized copying it is becoming increasingly difficult to know in advance whether what you buy now will be usable tomorrow. Some of these themes are addressed in the Cato Institute study published in February 2005 by Michael A. Einhorn and Bill Rosenblatt, “Peer-to-Peer Networking and Digital Rights Management: How Market Tools Can Solve Copyright Problems,” Cato Institute Policy Analysis, February 17, 2005.

The basic premise of this report is that, to address the problem of unauthorized music copying that peer to peer (P2P) networks enable, market forces are preferable to either government technology controls or compulsory licensing. The authors’ primary reason for this preference is to allow for the greatest possible technological innovation in solving the problem of unauthorized copying.

In this Cato Institute report, arguments against both government regulation and compulsory licensing are summarized but not really addressed in any detail. Instead, more attention is paid by the authors to the technical and legal underpinnings of various schemes that could co-exist with peer to peer file exchange systems

The authors provide a good overview of the still-confusing technologies and legal situation that existed at the beginning of 2005.

As the authors present it, the essence of Digital Right s Management (DRM) in the peer to peer environment is the ability it gives to copyright owners to remotely monitor and control (and thus to charge for) the use of copyrighted materials:

“… digital rights management refers to technological tools and capabilities that monitor content use and shield against unauthorized uses or distributions.”

In other words, DRM assumes the “monitoring” of use. And monitoring is one step away from … reporting. And reporting has implications for … privacy.

These “slippery slope” issues are not addressed in any detail in this report, although there is a brief discussion of ISPs and their roles is some schemes.

Granted, monitoring usage does provide certain potential benefits. First, with monitoring can come a more accurate method for charging for use. This has potential fairness advantages. Unlike some compulsory licensing schemes, for example, a monitoring scheme could result in your not being charged for something you don’t use. Second, monitoring also can mean that the type of use you make of a work can be take into account. For example, a copyright owner may determine that certain types of uses (e.g., use of the whole work, use of the work in connection with a not-for-profit as opposed to private use, etc.) may result in differential (or no charges) being made.

Another positive aspect of DRM, according to the Cato Institute authors, is the seemingly contradictory notion that the ability to restrict use will have a stimulating effect on the development of new or ancillary services:

"The ability of content owners to restrict reuse of their works may lead to a greater number of specialized or personalized options and a wider range of consumer choices."

While I agree in principle with this – I’m a strong believer in the rights of the copyright owner – this control aspect in practical terms means that I as an owner will be able to repackage and remix my products as I see fit – into multiple different albums, for different markets, etc.

In other words, some of the same things that some users now want to be able to do on their own -- create their own “albums” or mixes for example without any restriction – could actually be explicitly supported by variations in DRM schema, and potentially, for a price.

One of the best features about this report is its brief discussion of a cost breakdown of what a “typical” music album brings when sold online. The authors point out the obvious fact that the push for lower per album prices may go against the actual costs that the record companies incur in producing and distributing albums. This is related to the point being made by some critcs of DRM schemes, that they are designed to protect an older business model that does not take into account modern technologies and the realities of file sharing.

What I found most interesting in the Cato Institute report was the comment:

“The industry may be better off in the long run with streaming, where profit margins can be made considerably higher through licensing fees that can be adjusted more readily. From the perspective of distributors, streaming appears now to be more profitable.”

Hmm, sounds to me like encrypted satellite radio and podcasting.

Another good point made by the authors is for interoperability:

“Before buying into digital music in any big way, many consumers may need greater assurances that DRM systems will interoperate with one another.”

That’s me in a nutshell, and that’s why I’ve stopped buying music CD’s.

The report also makes points about the complexity of “superdistribution” schemes which would require significantly more complex technology in order to provide some transaction and pricing control over each copy made in a chain of file transfers.


The Cato Institute report is a good overview of the complexity of the file sharing problem and the use of DRM technologies. Much is still relevant despite the advances in technology and changes in the market since early 2005. There are several points that I feel are worth considering in more detail.

First, the slippery slope issue related to usage monitoring and its impact on privacy needs to be taken into account. Just as there is much controversy over ISP’s releasing customer online usage data and public libraries releasing book lending data, so too there are privacy issues to resolve concerning schemes that might result in personal behavior becoming public.

Second, the impacts of different DRM schemes on different markets and user groups need to be examined. This may be related to Chris Anderson’s Long Tail phenomenon. There are some music groups that will always appeal to a very narrow audience. Does it make sense, from a cost-benefit perspective, to treat highly specialized groups’ music using the same DRM schemes as larger well-advertised groups?

This leads me to my third point – interoperability. I wouldn’t care about multiple DRM schemes if they work together and if I know in advance what I am buying. If Sony wants to allow three copies, fine. But let me know in advance, and don’t prevent my using your file on someone else’s hardware. Heck, I remember worrying about whether or not I could play stereo LP’s with a mono stylus, and vice versa. The current situation is worse.

Finally, if what the Cato Institute authors say is true about DRM being all about monitoring and control, I am of the opinion that the simpler the system is, the better. Having been personally involved in a number of drawn out software licensing negotiations, I know there is such a thing as being too detailed and too controlling about what can and cannot be done with a file once it leaves your possession. If you are too draconian and clamp down too much, your market will suffer. I believe that simplicity and transparency are the keys here, as well as perceptions of fairness. Software and hardware manufacturers that make it difficult for me to enjoy my music will not win my trust – or my dollars.


If you want to see how bad things are now, go to this Sony BMG web page  which contains 3,142 words related to copy protection and how to use the copy protected CD's. Remember the good old days when you could just grab a stack of CD's to listen on the airplane and not have to worry about CD's playng on your laptop computer? Those days are gone.

Amazon DOES publish "copy protection" information, after all and copy-protected CD's