Continuation from my thread a couple years ago, please see what you think and comment, if you can stand the read!

This is quite a complicated and divisive issue. I researched all relevant peer-review material I could and wrote this short literary review about the findings. In brief, DRM that is ineffective at deterring copying is detrimental to the consumer, the firm and society as a whole. DRM that is effective at deterring copying is beneficial to the gamer/consumer as they experience increased product quality, innovation and social welfare.

The 2005 GSP Report commissioned by the Business Software Alliance estimates that 35% of software is copied. Software copying rates are as high as 92% in Vietnam and 90% in China. In the United States, copying rates are estimated to be 21%. The study concludes that software copying is one of the industry’s worst problems. The study did not include the positive network effects of copying, which Hui and Png (2003) did and showed that industry estimates of lost profits because of copying more than doubled the actual losses in such a case. Although since 2011 the BSA has not included economic loss figures, rather a commercial pirated value figure, I object to and ignore such estimations due to the inherent errors involved in calculating them.

According to Jain(2008), “Many industry analysts see copying as one of the key threats to profitability and innovation. They claim that copying leads to higher prices for legitimate users, lower profits for the firms, reduced new product innovation and is generally harmful to society .” The paper continues to examine the impact of illegal copying of software and other similar intellectual properties on firms’ prices, profits, and quality choices, even when there are no network effects and the market is saturated.

Controversially, his paper actually finds a case when copying can increase firms’ profits, lead to better quality products and increase social welfare. The assertion is that there is reduced price competition in mature markets with no network externalities, applicable when, for example, markets of entertainment products mature in developing countries with large income disparities (such as China and India). Else, the converse is true with regard to copying’s effect on the firm’s profits, product quality, and social welfare.

Hill (2007) established the only effective strategic responses copyright holders can adopt to deal with pirating. His approach involved first establishing the causes of copying by prior work done (1) work on moral development (Kohlberg, 1969), (2)equity theory (Adams, 1963; Kabanoff, 1991), and (3) moral intensity (Jones, 1991). Based on the causes and economic consequences, both in a static and dynamic sense, Hill then proceeds to offer the only effective strategic responses that copyright-holders can pursue, of which there are seven. The fourth one is relevant with several games like Anno 2070, which is “offer something extra to consumers who purchase the legal good”. “One solution that can works well for computer software is to offer online services, such as periodic upgrades and security patches, to consumers who register the legal product using a security code that is unique to every legal copy of the product. Since those who purchase pirated copies do not have access to a security code, they cannot get these benefits. This strategy effectively raises the value of the legal product, decreasing the perception of inequity.”

Dinah et al. (2010), in a paper on DRM and music piracy, came to the same controversial conclusions as that of Jain 2008; that there are indeed scenarios where little or no DRM increases profits. However, like with Jain's paper you must consider first what those scenarios are and when they are applicable. In fact, according to Dinah, ‘the model thus illuminates the importance of two parameters: consumers' pirating effort and the perceived difference in value for DRM-free and DRM-protected versions. With an increase of pirating effort, retail prices for both traditional and digital versions of the product increase, piracy volume declines, demand for both traditional and digital versions increases, and, perhaps most important, the profits of both retailers and the record label increase. Increasing pirating effort is not the only leverage that a record label can use to achieve higher profits though. Smaller perceived value differences between DRM-protected and DRM-free versions have a similar effect, such that piracy volume decreases and the record label's profit increases, as does that of the digital retailer’. So DRM is beneficial for the record label (publisher) and the digital retailer (Steam, Uplay, Origin) and only in the case for the traditional retailer in the music industry, is DRM-free found to increase profits, which is likely why big record labels are utilising such tactics (Emi, Sony, Warner).

Another paper that would appear to promote the use of no DRM in the music piracy is Zhang (2013).The main argument by Zhang is that lowering search costs leads to people buying more niche, lower-selling albums, the long-tail. Meaning that she asserts, in the music industry, 'DRM's sharing restrictions likely raise search costs and hinder product discovery, which may decrease sales'. To make this applicable in the PC gaming software, we would first have to have had a significant positive coming from sharing PC games, to the point of that in the music industry. Arguably, this effect is much smaller than in the music industry, as you cannot play a game at a large social gathering i.e. a party and everyone will start asking what is this amazing song and where did you find it. Furthermore, she finds that 'relaxing sharing restrictions disproportionately increases sales of albums in the long tail significantly but does not benefit top-selling albums'. Even if we were to take this at face value, it would mean DRM is beneficial for the top sellers. But the industries in this regard are yet again different, as really digital distribution platforms also now have indie games and lesser-known games and the 'search cost' is minimal to begin with. She acknowledges the differences between the music industry and the video game industry in her own conclusions, 'My analysis is of course subject to limitations such that generalizing to other contexts should be done with caution. Other settings, such as books, movies, and video games, are different from the recorded music industry in many respects. Notably, products in these other industries take a longer time to consume compared to listening to a song'. And her finding is not applicable at all in developing with weak IP laws and enforcement: 'In settings where the legal framework is weakly enforced, it may not be optimal for firms to relax sharing restrictions, and they instead should consider alternative mechanisms to appropriate returns to innovation.'

Another interesting paper on this (Sundararajan, 2004) where an optimal choice of technological deterrence level is found in a market where sellers can influence the degree of piracy by implementing DRM systems. He finds the optimal response in market where the seller can price discriminate, is to offer lower levels of technology-based protection, to the point where the pirated good will always be inferior to the legal product whilst minimising any impact for the legal user. It would appear overly intrusive DRM, as defined previously, has been found to be detrimental to all, regardless of whether we are dealing with the music industry or the PC software industry, yet a low-level intrusive DRM seems to benefit all.

The argument that DRM increases social welfare rests on the argument that piracy results in reducing sales. If you accept that piracy results in reducing sales then the next question becomes - should content creators (and anyone else involved in the production chain such as distribution platforms like Steam) be worried about these reduced sales? Does piracy reduce overall social welfare by reducing the incentives to create content? Then, if by reverse, we argue that piracy reduces overall social welfare, then a smaller piracy level would increase overall social welfare.
The impact that digital piracy has on sales has been researched extensively. Danaher et al. (2013) collect the dozens of papers from both sides of the argument and conclude that "piracy results in a statistically significant reduction in sales, particularly in emerging digital channels". There also appears to be a sizeable market in converting pirates to purchase the good. Danaher et. al (2012) analysed the effect the HADOPI law in France had on music sales, a legislative measure enacted by the government to track torrenting activities of pirates and first warn them and then fine them. Their paper finds that the law in France caused a 20-25% increase in French music sales. Considering these are largely casual pirates, i.e. the 'hardcore' pirates have multiple options to circumvent the law through the usage of VPN, proxies or Bittorent protocol encryption, the case is made for there existing a large market to convert into sales. Another example of there being a substantial amount of casual pirates ready to buy the product given enough incentive, is that of Megaupload and its sister sites. Danaher et Smith (2013) analysed the impact of the sites shutdown on digital motion picture sales and found that a 1% reduction in Megaupload usage within a particular country caused a 2.5%-3.8% increase in digital sales. They calculated "that this increase translates into a 6-10% increase in revenues from digital movie sales and rentals for two major studios in the 18 weeks after the Megaupload shutdown".

Edit: OP continued
...

They also note that "while there are a few academic studies analyzing the broader social impact of piracy, standard economic theory suggests that if piracy reduces revenue to content creators that, ceteris paribus, it will also reduce the incentives to create new high quality content, and that any reduction in the supply of creative content could significantly impact overall social welfare."

The mechanism through which digital piracy does this is explained in the literary review done by Pietz (2010). "A general result that we can expect in such a framework [edit:monopoly] is that piracy limits the monopoly power of the supplier of the original. As a consequence, the availability of digital copies at best leaves the firm's profits unchanged(meaning that piracy is not a real threat) or, more realistically, reduces the firm's profits. This is indeed the conclusion reached in a variety of models (see, for instance, Novos and Waldman, 1984, Johnson, 1985, and Belleamme, 2003). When price is the only strategic variable of the firm, three types of reactions are possible: If piracy is not a real threat (because copies have too low a quality/price ratio), no reaction is necessary (piracy is said to be `blockaded'); otherwise, the firm either reduces its price to make all active consumers prefer the original (a `deterrence'strategy), or it sets a larger price and lets some consumers use the pirated good (an `accommodation' strategy). Inevitably, profits are reduced in both the deterrence and the accommodation strategy." Profits that could have been used to create better support or additional and better quality content.

There are a few cases to consider when determining what the effect on social welfare due to piracy would be:

1) Imagine a music artist who has a vested personal interest in seeing that content creators are compensated for their efforts. Imagine an employee of a movie studio that worries that if piracy diminishes studio profits he may lose his job.

2) On a philosophical level, without Intellectual Property (IP) rights, information goods such as movies, songs and software could easily be replicated and sold by anone, limiting the ability of content creators to profit from their work.

3) If piracy diminishes the ability of content creators to profit from their creative efforts (which appears to be the case), the incentives to bring new quality works to the market will also be diminished resulting in either fewer or lower quality works of creative media such as music, motion pictures and software. This is clearly a potential concern not only for producers but also for consumers and policymakers, because if a product that would have existed in the absence of filesharing is never created due to reduced incentives brought about by filesharing, both producers and consumers lose causing an overall net loss in social welfare.

A necessary argument for all three is that content creator must be motivated by the profits they obtain from their works. Focusing on the third case (the second one is philosophical, the first one largely with no counter-arguments), which is the one where there is reasonable debate whether such an argument exists in the world of artistics goods. Such as that in the presence of large enough profits, the content creator cares little for the loss of some additional profit. Also, there may exist musicians for example who would continue to work in the exact same manner even in the face of diminished profitability. However, this says nothing about the rest of the people involved in the production chain, like sound engineers and label executives to distributors, who are clearly more motivated by profits. Blockbuster movies are a clear exception to this, as they operate on a profit-maximising mantra. If the profits are reduced by piracy significantly, then these studios will have less incentive to invest in the creation of such films. This is particularly true for riskier, more innovative films.

The third case would most effectively be shown to be true or false to what extent, through empirical methods; specifically we are talking about the effect of piracy on the supply of creative content. This has proven almost impossible however. Questions like, what creative works would have been created in the absence of piracy - are pretty impossible to show. Nevermind whether piracy may impact the quality of creative works - a very difficult thing to measure. For example, if the number of songs created were to remain the same when piracy rises but the average quality of these songs were lower, how would we observe this lower quality in order to measure it? Also, even when Mother Nature or the world grants us these experiments naturally, such as when Bittorrent appeared and it was shown to massively increase music piracy, or when Limewire was shutdown and was shown to reduce music piracy, the impact to sales was clear and immediate, but any impact to the supply of creative content (if there is one) would have likely been longer-term as firms slowly respond to the changed environment.

Further effects of piracy on the supply of creative content can be found in anecdotal evidence in countries like Spain, which is generally considered a high piracy country, suggests that firms are reluctant to release legal versions of their products or to invest in marketing and promotion of their products (New York Times, August 20, 2011). If the presence of piracy causes these responses, the outcome will be reduced social welfare to any consumers who would have benefitted from the market availability of these products. Marketing, promotions and other services are also an important component of the product experience and a decision of reduce investments in such activities would also constitute social loss by reducing the information available to consumers about products they might benefit from consuming.

Danaher et al. also mention that '...while current empirical evidence of a connection between piracy and product availability is sparse, given standard economic theory it seems reasonable to assume that some connection will exist. Hypothetically, imagine a world in which the moment a major blockbuster film is produced, piracy prevents the studio that developed it from extracting any revenue from theater ticket sales, DVD sales, or other legitimate channels. In other words, imagine a world where everyone can easily obtain motion picture content for free through piracy channels and as a result no one pays for this content. In this hypothetical world, is seems highly unlikely that studios would invest the large fixed costs necessary to develop blockbuster movies. Indeed, this is the very logic behind the copyright protections afforded to content creators by the U.S. Constitution. And thus we propose that, even in the absence of conclusive proof that piracy reduces the incentives to supply quality content, that there is theoretical rationale for governments to consider the possibility that filesharing may negatively impact social welfare.' Thus, it can be reasonably assumed that piracy reduces overall social welfare, and that reduced piracy due to effective deterrents, increases overall social welfare.

The critical issue is then converting a sub-set of those pirates to buy the game, which ends up translating into a significant amount of money because there is a ridiculous number of pirates. This is even after the fact they consider the cost of implementing and running the DRM, the loss associated with perception of intrusive DRM, any possible product innovation loss and harm to social welfare. Even after considering all these aspects , it is still better to have slightly intrusive DRM according to them. The level of intrusiveness of the DRM is arguably one of the main points and there is certainly a level where it is detrimental to, well everyone. Buying specific DRM hardware, ID checks before playing the game via creditcards, passports, fingerprinting or other biometric scans, regional locks etc. are examples. Most games DRM is fairly non-intrusive (having internet, running out activations in an unlikely event), and ends up being a win-win situation for all on the whole (apart from criminals).

Why pirates pirate? Because they are pirates.
Why I and most of GOG audience don't pirate? Because we like to pay for the hard work put into making the game we enjoy.
The real loss for the industry happens when someone doesn't buy a copy of a product.
Does DRM stop pirates from pirating? Visit any torrent site and see for yourself.
Does DRM stop customers from buying games? Well, why do I refuse to buy Dragon Age? Because of Origin.

I don't even think I could catapult over that. I might have a shot if I aim for the space between posts...


DRM discussions always go nowhere, so, thanks, but no thanks.

*waits for tinyE to add a funny comment*

Thanks OP for an interesting read. But im going to skip this one. *brings out the popcorn and waits for the opposing battle lines to appear*

Interesting read that will require a bit more thorough perusal. Any chance for the DOI numbers so I can grab the papers?

I must have hit a character limit because I've been trying to paste the references for ages now xd.


References:
Adams, J. S. 1963. Toward an understanding of inequity. Journal of Abnormal and Social Psychology, 67:422–436.

Danaher, B., J. Waldfogel. 2012, Reel Piracy: The Effect of Online Movie Piracy on Film Box Office Sales. Working Paper. Wellesley College. Boston, Massachusetts.

Danaher, B., S. Dhanasobhon, M. D. Smith, R. Telang. 2013. Understanding Media Markets in the Digital Age: Economics and Methodology. Working Paper, Carnegie Mellon University, Pittsburgh, PA.

Dinah A., 2010, Digital Music Set Free: The Flip Side of DRM, Duke University, Working paper

Danaher, B., M. D. Smith. 2013. Gone in 60 Seconds: The Impact of the Megaupload Shutdown on Movie Sales. Working Paper, Carnegie Mellon University, Pittsburgh, PA. (Available from http://ssrn.com/abstract=2229349).

Danaher et al 2013, Piracy and Copyright Enforcement Mechanisms, http://www.nber.org/chapters/c12945.pdf

Hill,C. 2007, Digital piracy: Causes, consequences,and strategic responses’, Asia Pacific J Manage (2007) 24:9–25,DOI 10.1007/s10490-006-9025-0

Hui, K., I. Png. 2003. Piracy and the legitimate demand for recorded
music. Contributions Econom. Analysis Policy 2(1).

Jones, T. M. 1991. Ethical decision making by individuals in organizations: An issue contingent model.Academy of Management Review, 16: 366–395.

Jain,S., Digital Piracy: A Competitive Analysis,Marketing Science, Vol. 27, No. 4, July–August 2008, pp. 610–626
issn 0732-2399 _ eissn 1526-548X _ 08 _ 2704 _ 0610

Kabanoff, B. 1991. Equity, equality, power, and conflict. Academy of Management Review, 16: 416–441.

Kohlberg, L. 1969. Stage and sequence: The cognitive development approach to socialization. In Growling,D. (Ed.). Handbook of Socialization Theory and Research. New York: Rand McNally.

Pietz, M. 2010, Digital Piracy:Theory, http://www.ipdigit.eu/2010/10/just-released-digital-piracy-theory/

Sundararajan, 2004: Managing Digital Piracy: Pricing and Protection Information Systems Research 15(3), pp. 287–308

Zhang, 2013, Intellectual Property Strategy and the Long Tail: Evidence from the Recorded Music Industry,Rotman School of Management, University of Toronto, l.zhang08@rotman.utoronto.ca

Hey, thanks for the info. I was affraid I'll get the same deal as with New Vegas (buy disc, get useless disc and Steam key).

Just check the box. I'm not sure if they released newer retail versions that require Origin or not. But I have the Collector's Edition from way back on release day ( as well as Awakening) and it only requires the disc in the drive. DA2 requires Origin (and I assume DA:I will as well), but the original game doesn't.

Indeed, and this is one of the biggest stalling points in the entire debate. On the one hand, if someone pirates a copy of a game then they are no longer a potential customer; it would seem fairly self-evident that this is a hefty opportunity cost. On the other hand, most consumers only have $X of disposal income, and any increase in expenditure must be offset with a decrease in expenditure elsewhere. Maybe DRM can increase the sales of a specific product, but whether that's all a zero-sum game is another matter. This question is even trickier than the last, and I feel that it may be impossible to answer. By what metric do you measure the quality and quantity of creative works? How do you establish a causal relationship between higher incentives and higher quality/quantity of creative works?

I think most of us would agree with the extreme cases: having minimal or no incentive results in few works created, and excessive levels of compensation merely increase profits without any quality/quantity increases. Whether current incentive levels are too low (or too high) would be a rather broad debate. I would disagree with modeling them as a monopoly. In some ways this is true, but in practice different works subject to copyright compete with eachother. Activision may have a monopoly on Call of Duty, but it still must compete with Battlefield. Furthermore, they must both compete with other games and other forms of entertainment. In this way, I do not feel the economic models for a real monopoly are appropriate.

As well, with creative works it's a fallacy to equate higher incentive with necessarily better products. We need only look at big-budget movies and games to see they're just as hit-and-miss as their lower budget counterparts. AS well, highly skilled and experienced creators can only do so much work; J.K. Rowling can only write so many books, Steven Spielburg can only direct so many movies; no amount of additional funding can make them increase their productivity. On the flipside, higher levels of incentive also would fail to bring newcomers to the field; because of the low marginal cost and high up-front cost of creative works, it is very difficult for a new creator to compete with established creators regardless of the quality of their work. There are countless classic books that were utter commercial failures at their original publication, only gaining their celebrated status much later.


All this would make for an interesting argument if there were not a huge problem with DRM: it has unwelcome side-effects above and beyond direct inconvenience to the user. Namely, it allows rightsholders to control consumer and third-party behavior in ways that copyright law would not normally permit, allowing them to veto behaviors, products, and services. This can negatively impact downstream innovators and service providers. As an example, Cable TV probably wouldn't exist today if TV stations had the ability to use DRM to protect their signals. It's difficult to fathom how the course of technology would be changed if Cable TV had never been allowed to exist, but it's overwhelmingly likely we'd all be worse off. Other non-DRM approaches, like litigation or termination of internet service, impose social and legal costs that must be born by others. In my eyes, these harms vastly outweigh its benefits.

Pirates may well be a potential revinue loss, but there is no garentee that they would ever have bothered to buy the game anyway.
I do not like DRM becasue I do not like feeling that something I have paid money for could be taken away without my consent. All but Hitman Absolution in my Steam account have been bought in bundles becasue I would rather write the money off in my head as going to charity then into the pockets of those blocking me from my things.

I think pirating is also a social and ecconomical problem. If all of your friends are doing it then there is a high chance that you will too. Added to which is the price, if the DVD is $17 and the internet a month is the same, you will just pirate the movie to save some cash. When the movie is sold for $5 it might be a little more of a toss-up.

But many times (no idea what percentage, but I know some folks here have done it) pirating DOES lead to a sale, in a try-before-you-buy fashion. This is a wildcard that is likely difficult to track, and it's one that both camps will use in their arguments.

I once read about a developer who used their online leaderboard to gather some stats on attrition. They were unable to find even a single case of a successful pirate having purchased the game at a later date. On the flip-side, almost no one who was stopped by their DRM went on to buy the game either. It was a small sample size and specific to a single title (and - I'm sorry - I can't remember what the game was) but it reinforced the notion that pirates just aren't paying customers.

Don't know what to tell you. Either that dev had a streak of non-buying customers, or a boatload of people have anecdotally lied about purchasing a game after trying it via piracy. Or something in-between.

Either way, I'm part of that stubborn group of folks who won't buy a DRM'd title. Don't know if there's a way to track - beyond anecdotes - that particular lost opportunity...