DRM music goldrush is a race for losers - Comments on Robertson's Comments

by Richard Menta, 11/22/03

Andrew Orlowski over at the Register spoke with former MP3.com CEO Michael Robertson to get his two cents on Apple's iTunes service and the rush of other companies to repeat Apple's success in the Windows market before Apple dominates it. Robertson, who failed to get the record industry to let him sell their tunes in digital format way back in pre-Napster 1998, shared with Orlowski a very knowing and blunt opinion. He sees failure.

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"Apple is leading a race of lemmings into the zero-profit business of closed music downloads", said Robertson. "It seems kind of crazy to me, the economics don't make sense. Why are all these guys like Microsoft and Wal-Mart rushing into a business where the industry leader says 'we cannot make money with the contracts that we have'?"

He makes a very strong point.

Robertson also feels that the 15 million tracks Apple has sold so far is not all that much and doesn't necessarily mean success. How success is defined is subjective. I can see his point, but I also saw Apple sell far, far more digital music files than any other entity in the past and in an area wide open for growth. Not just to a US audience as Apple's service is limited today, but worldwide eventually.

Three weeks ago I wrote these comments:

The record industry cries no one will buy music if they can get it for free online. If that were true then why are Apple and Napster successful? There is so much promise here that every week another company tosses its hat into the digital download arena. Most recently MTV announced it would launch a music download service by the middle of next year.

Best of all the record industry makes pure profit in this scenario, because the only thing they have to supply for their cut (and it is a HUGE cut) is permission. There is no risk on their part. Well, there is if they get too unflexible with terms and pricing where most of these new services are set up to eventually fail. Then everyone goes back to the free P2P services.

Jobs convinced the media cartel by giving them a huge chunk of the pie for doing nothing but give their blessing. He did it with money.

Where me and Robertson agree is that if the record industry thinks it is perpetually entitled to seventy five cents to the dollar this whole scene will collapse like a house of cards. Robertson fought for equitable contracts that would help the company he ran reach profitablility. The record industry would settle for nothing but enrichment, but they had to fail miserably in the digital arena themselves before allowing an outside company of to do it for them. That took about 5 years.

Where I disagree with Robertson is that the companies who annouced they were going to enter the market iTunes has brought to life are in a position to push the prices of online tunes down as well as the percentage the record industry will get.

Walmart is one of those companies. It is a company that doesn't like to lose money in its ventures and whose senior executives are every bit as tough as those you find in the record industry. They demand lower prices from all their suppliers. They can get quite vicious when they want to and are not afraid to take drastic action.

For example, Walmart refuses to deal with any unionized labor. When butchers who worked in Walmart's meat section tried to form a union and threatened strike, the company struck first. They fired all the butchers and closed the meat section permanently.

Walmart's leverage against the record industry comes from the fact that they are one of the largest retailers of CDs. If Walmart doesn't get a favorable price from the record industry to be profitable, they will no doubt hold those CDs hostage. They can stop selling CDs in their stores, or worse, sell them significantly below cost as a loss leader to draw foot traffic into their stores. Closing their digital download site would be the least of the record industry's problems.

MTV is another candidate with leverage. The music video station is the most important marketing vehicle for the industry after radio. One way the company can leverage this power is to divide and conquer, making their deals on a label-by-label basis. The labels who bring down their cut to help make the MTV download service succeed will get extra airtime for their artists on MTV's crowded playlist.

And Microsoft's upcoming service? Their goal is to make the WMA format the standard for digital music sales. The codec is found on more portable MP3 players than any other, but that didn't convince users to switch from the MP3 format.

Apple realized that content was the way to get users to use a second codec. Part of iTunes success is that it propelled Apple's proprietary version of the AAC codec past WMA to be the second most used music file format. Most notably is that they did it in the first few weeks iTunes was open for business.

Holding the reins to the standard format in ANY medium is a windfall for the company holding the patent. Microsoft knows this better than anyone else, they built their business on it.

Microsoft can buy all five of of the major record lables in cash. They didn't seem to have any interest in the struggling Vivendi music, who were just sold to NBC, but it could have been an opportunity for them.

Had they bought the company, which alone has 20% of the market, they could change the rules. Vivendi could say that the label will now supply all iTunes-like services - including Apple's - with music already formatted. The kicker is the only format available will the WMA codec. Apple can continue to sell the music it already has in AAC, but they will no longer be given permission to convert new music digitally themselves, only Vivendi will do that now.

That scenario didn't happen (Microsoft's anti-trust problems are one reason), but Microsoft is as tenacious as the other companies we mentioned above and are in this to serve their best interest.

My feeling is the more companies that jump into the digital download arena, the lower prices will eventually become as they will force costs down. Lower priced songs have a better opportunity to compete with the free file trade services, to a point where it is no longer worth the record industry's effort to sue file traders who use them.

But there is one significant point that supports Robertson's opinion that "This is a race where the winner gets shot in the head."

The one constant in the last several years of watching the MP3 soap opera is that the record industry has consistantly made the wrong decisions. Choices that in the end cost them opportunity and money as they never fully got in tune with the Internet and the average consumer who embraced it. Apple had to do it for them and the labels were reluctant then.

Big music has shot itself in the foot so many times already, they can easily do it here.

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Other MP3 stories:
MyTunes Turns iTunes into File Trade Service
Online singles are booming
CDs and the Scarcity Principle

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