DRM stands for "digital restrictions management". (Those who are in the business of peddling it as something positive will tell you it's "digital rights management," but the former is really a better descriptive name.) It is software that prevents you from using some other software or digital files on your computer unless you meet certain criteria.
DRM has actually been with us for a long time. Back in the 1980's, games and other software you could buy for your Apple II or Commodore 64 came with "copy protection." These were tricks that the software publishers would use to make it difficult to copy the disks. The computers hadn't been designed to support this, so typically copy protection relied on writing key bits of data to parts of the disk that the hardware wasn't documented to be able to read, or by putting disk errors that had to be there for the software to run. Sometimes these things would break if new versions of the software came out, and sometimes they would actually damage the disk drives or, at least, cause more wear than the same amount of normal use would. This also meant you couldn't back up the software you've purchased. The result: lots and lots of "backup" and "archival" programs were written to facilitate copying of these programs. Copy protection was a hassle for legitimate users, but did not really stop software piracy at all. Eventually, it more or less fell out of favor.
Nowadays its back, and it's still causing headaches and problems for legitimate users.
A few years ago, a much-ballyhooed new online store for roleplaying games, Drive-Thru RPG opened up amidst a storm of controversy. The controversy? They were selling Adobe PDFs using Adobe's DRM scheme. This meant that you had to register the computer you were going to read the PDFs on with an Adobe server, and it wouldn't be possible (without somebody cracking the the DRM scheme) to read them on unregistered computers. You would only be allowed to read them on a finite number (five, if memory serves) of computers. Many of us, myself included, raised a huge hue and cry. DRM would be cracked, because it always is. Meanwhile, those who didn't look for the cracks were being at best inconvenienced, and at worst throwing their money away for a product that would inevitably be broken.
The counter-argument was that publishers were too nervous to release their publications as PDFs without some sort of assurance that they were protected from the wholesale copying that digital files makes easy. What's more, people said that the alarmists like me who were proclaiming that DRM was evil were chicken littles, trying to scare people with unrealistic fears. Sure, they said, if they had to register with DTRPG, perhaps that was scary because it was a new and small outfit. But the DRM was registered with Adobe, and big companies like that (or like, say, Pan Am) never go out of business and will always be around.
Oh, and those of us on OSes that didn't have a client that supported the DRM scheme, or who merely wanted to use PDF readers other than the one that supported the DRM, weren't worth consideration.
What happened? Well, the next version of Adobe's Acrobat Reader didn't support Adobe's own DRM! DTRPG quietly moved to a "watermarking" scheme and removed technical restrictions on copying their files. The sky did fall in exactly the way we were all predicting; fortunately, DTRPG didn't screw over their customers.
DRM simply doesn't work. Every technical restriction that companies have come up with has been worked around, and often at far lower cost than it cost to develop the DRM in the first place. And, it does cause a lot of the problems its detractors claim it will cause. Several other examples.
Commercial DVDs are almost all encrypted with a scheme called CSS; only licensed DVD players (which does not include any open source software such as that used by Linux users like myself) are allowed to implement decoding of this. That is, until a kid in Norway figured out how to crack DVDCSS with an algorithm short enough to be, among other things, printed on a T-shirt. Thanks to an evil law in the USA known as the "DMCA", it is illegal for Linux users to "traffic in" (including download) the dvdcss software that lets them watch legally purchased DVDs that they legitimately own on their own computer systems. What's more, this dvdcss software is not needed to copy DVDs! All it does is prevent watching them, even watching legitimate DVDs! And it doesn't even do that effectively. It's a pain in the butt and a law that makes many folks like me criminals for something that there's no benefit in preventing anyway, and which also wasn't even effective.
(Indeed, the mere fact that there are tracks— the "FBI" warning and sometimes previews— on DVDs that you can't skip is nuts. "Operation prevented by disc" or some such is something you see if you try to skip to the menu or fastforward through the front matter on many DVDs. Is this reasonable? You own a DVD, and every time you watch it you have to sit through the same old crap. Why shouldn't your DVD player do what you tell it to? Well, when I run on Linux, it does, because the Linux players aren't licensed and thus don't have to obey the restrictions that the disk asks them to. Notice how the open-source community-produced software is more functional than the high-end DVD players blessed by the movie industry....)
Showing that they are incapable of learning from past rectal defilade, the movie industry is working on DRM schemes for next-generation DVD formats. Unsurprisingly, they are losing this arms race long before most of us have HD-DVD or Blu-Ray players. But the rhetoric abouts "protecting intellectual property" continues.
There was a hue and cry among the techno-nerds who play attention when Google ("Don't Be Evil" -- oops) decided to use DRM with Google Video. "But," others will say, "surely users should know they have to compromise with the needs of content producers?" My answer: no more than my need to have my nose unbroken should be compromised with your need to stamp on my face. What's more, it's clear that DRM doesn't practically do anything for content producers. And, guess what: here, too, the sky fell. Those videos that people were able to "download to own" will shortly no longer work thanks to Google stopping licensing server support for their DRM. People keep buying the line that DRM is a great thing because without it movie producers would never be able to release their movies at all, and as such we should be so happy that DRM is giving us so much! Isn't it great to be able to download movies? The real question is, why the hell do people pay to download things that they won't actually be able to decide how to use?
This is perhaps the best one of all. People who are using recent versions of Windows may or may not realize that they have to "phone home" to make sure they're legitimate so that they will continue to have full functionality. That's scary enough as it is, but the counter-argument is, well, Microsoft needs to protect their "intellectual property," and they are a big company that won't go anywhere any time soon. Of course, if Microsoft's license servers go down, suddenly everybody's copy of Windows thinks that it is an illegitimate copy, and runs in reduced functionality. This isn't a game, this isn't even your ability to watch DVDs, it isn't a single application, this is the very operating system on which people depend to do everything on their computers. (That is, people think it's their computers; increasingly, they have ceded control of their computers to central authorities.) This would never have been an issue if it hadn't been for Microsoft's "Phone Home" DRM scheme they put in place to "protect" their "intellectual property." The lesson here should be that you really want to be running an open source operating system on as many of your computers as possible, but also that you really shouldn't trust Microsoft if you can at all avoid it.
Want to keep abreast of industry shenanigans regarding DRM? It should be obvious from all the links above that following Boing Boing can help. There's a lot of other stuff on that site, but several of the bloggers there keep a sharp eye out for this stuff, and one (Cory Doctorow) even works (or, at least, has worked) for the Electronic Frontier Foundation.
Don't buy the snake oil. When somebody is out there saying that DRM is "necessary" to protect content, and when they are saying that those who warn of the hassles DRM can bring up are overstating their fears, be aware that they are dead wrong on both counts, and that there is a long track-record (including many things I haven't written here) demonstrating that.