Thursday, April 23, 2009

iPhones, Kindles, and Digital Rights Management -- When the Sale of Things are not the only things that matter

So I have been thinking of how to talk about (shamelessly plug) my recent work on Apple's iPhone warranty. The article argues that Apple might be better off not litigating its intellectual property rights against consumers and instead using their warranties as a bait to convince consumers to act with good behavior to the iPhone (i.e. not hack it and therefore avoid the service arrangement Apple receives comensation through with AT&T). Last week I wrote a column for the Los Angeles Daily Review in which I said that gateway sales were possibly more important to certain vendors of high end consumer products than the thing itself:
In the high-tech consumer arena, device sales often are the gateway to other profits beyond the sale. Apple receives monthly compensation from AT&T for every iPhone that reaches the AT&T network. X-Box, Sony, and Nintendo reap profits from pay-to-play online gamer services like X-Box Live, Nintendo DSi, and Playstation Network, in addition to the stand alone games they sell in stores. Sony Blueray sells DVD Players -- but is far more interested in selling consumers DVD's from the Sony library. And the recent Amazon Kindle is poised to make a significant dent in the book seller market. Post-sale profits have become such a large factor that some manufacturers value those profits more than those made on the device itself. If those post-sale profits don't materialize, the potential loss for companies like Apple is enourmous -- conservatively between $3 million and $18 million per month for iPhones that never reach the AT&T network.

So how do you entice consumers to act better with their products. One means of doing so has been to "brick" the device so that the cnsumer has no more functional use (or desired use from the product). Hackers use the term brick because to them, the device obtains the value of a brick. Microsoft has been successful in "bricking" users from their x-Box Live accounts for invalid use, by banning user accounts for 7992 years (or until 12/31/9999). And Amazon, most recently terminated a user account for "frequent returns" effectively blocking the user from using his Kindle. Amazon ultimately relented, but the warning was served.

The problem with "bricking" is that it is only a temporary solution until consumers (or another third party) catch up technologically to offer a better use. In fact, the reality is that there are consumers that actually do buy the product to have the product. Consumers that have been bricked will eventually grow weary of paying for new accounts, buying new devices or whatever means the manufacturer has used to keep the user out. Then, those bricks will eventually form cities/ communities of disgruntled dwellers that have the technological knowledge and incentive to find alternative uses for their product, particularly in ways that do not benefit the manufacturer.

The solution I have offered, in both the Duke Law and Technology piece and the L.A. Daily Review, is that manufacturers should reevaluate how they approach these consumers. Indeed, Manufacturers may find better profits by approaching consumers on a negotiated terms basis utilizing things like warranties as enticements. By enticing the consumer to be better stewards of the product, they can probably avoid most hackers (except for those that do so for the pure sport of it).

Over the next few weeks I will say more about the longer piece including the Behavioral Economics Aspect of the article and some other commercial solutions for a not entirely commercial problem.

Marc (MLR)

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