The Analog Hole and the Price of Music: An Empirical Study

Abstract:     
We present the results of a series of surveys of college-aged consumers of music exploring their willingness to pay for digital downloads of music and measuring the impact of the so-called analog hole. The analog hole refers to a perhaps - unavoidable vulnerability of most digital rights management systems. In short, because people cannot consume digital information directly, every device that performs digital content must convert the digital information into an analog signal, which is very difficult to keep from being copied.

Although the analog hole has been widely decried by content providers, surprisingly little is known about fundamental aspects of how it operates. Can average users exploit the analog hole, or is this limited to sophisticated users? Does analog hole copying significantly degrade the quality of music or video? Will people pay for music that isn't a perfect digital copy? Intuitions and guesses abound, but nobody has ever conducted a study to answer these questions. We have. Although our surveys' sample sizes were too small to come to statistically significant conclusions, we did discover several interesting results including one tantalizingly specific result: What's the analog hole worth? Based on our survey, twenty-four cents. That's how much less our respondents were willing to pay for a music track when a perfect digital copy was replaced by an analog hole copy. Although our results need to be replicated on a larger scale, they suggest many conclusions that have never before been proved: people are willing to pay for less-than-perfect analog hole copies of songs; people will pay much more than half the price of a typically-priced digital music file for its degraded alternative; and even self-avowed "pirates" show a willingness to pay for digital music, albeit at prices well below today's market standard of ninety-nine cents a song.

Keywords: analog hole, DRM, copyright, empirical

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