Steve Job?s calculus: Dealmaking, dollars means DRM is dead

[Barefootsies]

Apple and EMI have found an interesting way to rid the world of digital rights management software for just a little extra pocket change.

Apple will offer DRM-free music from EMI for $1.29 per song (see Techmeme discussion). To entice you to pay a little more for DRM-free music you'll get higher quality 256 kbps AAC encoding.

Music with DRM will cost you 99 cents at the current quality standards. To most folks the extra 30 cents for DRM-free music is probably worth it. But what's interesting in this no-DRM announcement between Apple and EMI is that it really reveals Steve Jobs' secret sauce–dealmaking with media partners to line everyone's pockets.

Jobs, who is as much a media guy (he's on Disney's board) as he is a technology one, built the iPod-iTunes juggernaut by largely dealing with music companies to keep DRM yet make it easier to swallow. Now he cuts a deal (that's likely to be emulated elsewhere) so the music industry gets what it wants–higher pricing and more digital downloads to offset weak CD sales–and Jobs gets what he wants–more iTunes revenue and some good press.

The casualty of all this dealmaking, which was prodded slightly by Jobs anti-DRM open letter–is DRM. No label is going to forgo the revenue of $1.29 a song just to hang onto DRM. Meanwhile, iTunes consumers can upgrade their entire EMI library to DRM-free for an extra 30 cents a song.

Why will the music industry follow EMI's lead? Let's do the math.

Say I have 1,000 songs purchased on iTunes with the DRM. Let's assume all of those songs are EMI tunes. I hate DRM so I'll spend 30 cents a song to ditch DRM for a total of $300. Multiply that by a million customers and you get $300 million.

That won't happen overnight, but you can see the sales adding up for the music industry.

For Apple, the math looks like this: More music downloads. Piper Jaffray analyst Gene Munster estimates that only 5 percent of the songs carried around on an iPod are actually purchased at iTunes. A side benefit is that Apple gets European regulators off its back since iTunes songs will play on any MP3 player now.

The calculus for iPod sales gets a little more complicated notes Munster. With the EMI deal you get two effects that may offset. Munster writes:

"Short term, there will be a perception that this may also have a negative impact on iPod sales, as consumers can now play EMI's iTunes downloads on any digital music player. It is important to note that non-iPod MP3 players will not sync with iTunes the same way iPods do. Our belief is the success of the iPod is not because consumers are locked on the iTunes platform, but its success has been because of the total device and iTunes experience."

Overall though, the risk to iPod sales is minimal. If Apple increases music downloads and saves money by not hiring lawyers to fend off regulators, Apple probably comes out ahead. Apple will really come out ahead when other rivals–Microsoft Zune for instance–go with the higher-price-quality-no-DRM model. Once Apple rivals follow suit that negates any potential impact on iPod sales.

http://blogs.zdnet.com/BTL/?p=4768

[jact]

I hate DRM, it finds its way into so many aspects of our lives now.

[RawAlex]

The sad reality is that 6 months from now, someone will strike a deal that will knock the price back down to 99 cents for non-DRM songs, and the "miracle money" will all be gone.

Jobs is doing this mostly because he wants to avoid the litigation that would come if the super restrictive DRM was kept in place. The current DRM songs are sold at about the same price as buying the CD, but with significant restrictions on personal use (moving them from one player to another, moving them to non-apple players, etc). A class action suit on this isn't far off. Apple would likely win the suit because of "full disclosure" of their terms, but it would muddy their name no end - there is no win.

At the end of it all, there won't be much if any extra money 12 months from now, just consumers being a little more satisfied and less likely to check out other sources.

[woj]

Originally Posted by RawAlex

The sad reality is that 6 months from now, someone will strike a deal that will knock the price back down to 99 cents for non-DRM songs, and the "miracle money" will all be gone.

Jobs is doing this mostly because he wants to avoid the litigation that would come if the super restrictive DRM was kept in place. The current DRM songs are sold at about the same price as buying the CD, but with significant restrictions on personal use (moving them from one player to another, moving them to non-apple players, etc). A class action suit on this isn't far off. Apple would likely win the suit because of "full disclosure" of their terms, but it would muddy their name no end - there is no win.

At the end of it all, there won't be much if any extra money 12 months from now, just consumers being a little more satisfied and less likely to check out other sources.

wow, so those itunes purchased songs can only be played on ipods? You invest $100s perhaps in a music collection, and then apple has you by the balls for many years? You would have to be an idiot to go for a deal like that...

[Brad]

What I don't understand is why people don't just get off their asses and go to the record store? You can rip any cd to your computer anyways, and the price is basically the same assuming people buy a full cd on iTunes.

[drjones]

Originally Posted by Adult Lounge - Brad

What I don't understand is why people don't just get off their asses and go to the record store? You can rip any cd to your computer anyways, and the price is basically the same assuming people buy a full cd on iTunes.

Thats the funny part about this whole thing... every CD sold is all DRM'less music, so its hard to see why the recording industry has such an issue with it.

There have been a few bungled attempts at copy protected CD's, none of which work very well, and some even go so far as to install rootkits and nasty nasty malware on your computer.

[Barefootsies]

With CD sales falling and high levels of pirated music so readily available, it is hardly surprising that the recording industry has pushed for controls to limit the use of digital music available online for download. But it seems that the technology is universally disliked, from the industry that created it, all the way through the value chain to the end consumer. So why have we got it, what exactly is it, and where is it all going?

Why DRM?

Although DRM (Digital Rights Management) as a concept has been around for many years protecting video and some CDs, it has only really surfaced as a major issue recently as the portable MP3 player has emerged.

At the height of the powers of infringing P2P (peer-to-peer) sites, of which an estimated 3.6 billion songs were being downloaded per month by US consumers alone, and 1.2 billion pirated CDs being sold (constituting 34% of all CDs sold worldwide), it was clear that something needed to be done. Then there is the rather embarrassing situation that the all-conquering iPod, certainly in its early pre-iTunes Store days, could only be filled with content from file-sharing P2P sites or ripped CDs.

Hence when the iTunes Store launched, it had its proprietary DRM software deeply embedded into the complete system. The fear was that with digital music easily available online and legitimate, without protection, these songs would start to appear everywhere. So the iTunes store emerged with the Fairplay DRM system that limits the use of purchased songs to the computer registered to it and the iPod registered to that. The other systems do pretty much the same thing with a significant difference, which we'll touch on later.

What exactly is DRM

DRM is there to restrict the use of digital files to protect the interests of the copyright holders, in this case, the record companies and the artists they have to pay royalties to. And it works like this; essentially there is either a wrapper in which the content is encrypted so that only those with the authority to do so can access it; or it is tagged as a signal to a device that the media is copy protected.

These systems can be either closed or open. Fairplay, the Apple system, is closed in that it operates only within the Apple environment and it is not available for license by third parties. Thus once you are committed to iPod/iTunes, you cannot transfer that content between devices as a consumer, or access it digitally as a developer.

On the other hand, Microsoft, while launching the Zune player with a seemingly similar closed system, has always made it clear that the Windows DRM system will be made available to developers, and it does have a good track history of doing exactly this. Indeed, the existing (non-Zune) WMA DRM 9 has been available for developers to use for a long time - it is what people like Napster currently use.

How does it affect the custom install industry?

As with any dominant industry player like Apple, there are profound impacts in related sectors. With the massive penetration of iPod and iTunes, there has been a corresponding interest in integrating this content into the home environment. The frustration is that, while non-DRM content from the iPod and iTunes is accessible for digital integration - and there are a number of elegant solutions currently available to do this, DRM content is only available through the iPod serial interface, licensed and controlled by Apple. This means that developers are completely hamstrung and largely can only replicate the interface and data sets that Apple dictates. That interface is great for the iPod as a personal device, but our customers need more; in the CI world they seek greater richness of information and interfaces that suit the chosen control surface.

The good news however, is that despite Apples claims for the success of the iTunes Store, research indicates that on average only 3% of tracks resident on iPods are purchased from the store as downloads - the rest are ripped legitimately from CDs or acquired by other means. On average, those people purchasing downloaded music from stores purchased three tracks per year as opposed to around seven CDs purchased online during the same period.

Indeed this picture of poor download sales is likely to get worse. Recent research indicates that sales from iTunes are collapsing; an effect felt by all the pay-download services. Yet, with an estimated 65% drop in iTunes revenues over the last year, device sales have quadrupled!

Clearly there is something interesting going on here. Perhaps the consumer is becoming rather unhappy with expensive, poor-quality audio tracks with restricted use, against owning outright a cheaper physical product that they can keep and do what they like with - the CD. Around $14 buys you 19 great Robbie Williams tracks in pure 16-bit 44.1kHz uncompressed music on his Greatest Hits CD. The same tracklist costs $18.81 downloaded in a codec where most of the musical information has been thrown away in the name of compression. As they say, it ain't rocket-science.

Paradoxically, the cost of buying a track on iTunes is too low and simultaneously too high. It is too high to be of practical use in filling up an MP3 player, and it is too low to make anyone any money in the music industry - artists or company.

The future for DRM

Many industry insiders are predicting the demise of DRM within a year, indeed Columbia UK boss Mike Smith predicted this at the recent In The City convention in Manchester. Both Bill Gates and Steve Jobs have come out in public and declared that DRM is not serving the industry or consumer well. They are right, but then they would say that as they want to sell products and have no core interest in being content distributors - they want the lowest hurdles for the consumer to jump over. And actually, this matter might be out of the industry's hands as EU countries such as Norway, France and Germany line up to break the Apple monopoly and force them to offer Fairplay to other manufacturers. But what is there to replace it?


Both Bill Gates and Steve Jobs have come out in public and declared that DRM is not serving the industry or consumer well

We could easily see a situation where a blanket license replaces DRM in the same way that public performance of copyright material on the radio for example, is received with the license/royalty already paid for by the broadcaster. This pot is apportioned to the publisher and the artist by collecting agencies/societies.

A way this might work is a close link between copyright-owners, ISPs and retailers (online and physical) to pass on a flat rate fee for all of those downloading music. Applied across the field, this would be a very small charge and passed on by the infrastructure for delivering digital content - the broadband ISP.

Conclusion

À al carte selection may be great in theory, but consumers invariably won't pay a premium for choice - as graphically emphasised by the research into download sales. This plays into our strengths as an industry as we want minimal barriers to entry for the consumer, so that we can find more intuitive and elegant ways of enhancing their enjoyment of the content they own.

Matthew Simmons is Commercial Director of Digital Fidelity, a manufacturing and software consultancy that supplies flexible, content server platform solutions to audio-visual manufacturers.

www.digitalfidelity.com

http://hiddenwires.co.uk/resourcesar...070402-02.html

[shuki]

Nice!!!!!!!!!!!!!!!!!

[RawAlex]

Originally Posted by Adult Lounge - Brad

What I don't understand is why people don't just get off their asses and go to the record store? You can rip any cd to your computer anyways, and the price is basically the same assuming people buy a full cd on iTunes.

It gets to convenience and cost. You can buy the hot song you like for $0.99 or you can buy the entire CD for $20. More and more people are opting to buy single songs online rather that buying the whole CD, which is often packed with crap nobody would listen to anyway.

You can't go to the record store at 2AM. You can't go an hour before you leave for the airport. You can't go while you are sitting in an airport waiting for your next flight...

Convenience is the reason why "convenience stores" can charge twice as much for a loaf of bed.

[Barefootsies]

Originally Posted by RawAlex

Convenience is the reason why "convenience stores" can charge twice as much for a loaf of bed.

Exactly.