By Richard Menta 2/6/07
"Imagine a world where every online store sells DRM-free music encoded in open licensable formats. In such a world, any player can play music purchased from any store, and any store can sell music which is playable on all players". If those words sound like they are coming from some idealistic anti-DRM activist, think again. They were scribed by no other than Apple CEO Steve Jobs. In an open letter released today Jobs made a case for abolishing DRM as a vital strategy for the future growth of online music sales. "If the big four music companies would license Apple their music without the requirement that it be protected with a DRM, we would switch to selling only DRM-free music on our iTunes store," said Jobs. The open-letter goes into an extended analysis supporting Job's reasoning.
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It is curious that Apple is calling for an end to DRM-laden paid downloads. Didn't Apple deftly use its proprietary management system as a tool to lock out competing services from the iPod? Furthermore, didn't discouraging interoperability give Apple an inordinate amount of market power, which included considerable influence over the price of music online?
On the surface DRM appears to be working very well for Apple. But look deeper down and you will find issues - problems the company is keenly aware as shown by the letter. First off the average iTunes shopper may have thousands of tracks on their iPod, but only one or two dozen are actually purchased from the service. The rest are ripped from CDs and downloaded from the P2P applications. This means that iTunes is not really locking the average consumer to an iPod-only future as many pundits have charged. At best it is just an incentive to keep the iPod at the top of the list when it is time to replace a player.
Second, several countries have accused the iPod-iTunes symbiosis on being a form of monopoly and are putting legislative pressure to force the company to open its FairPlay DRM scheme. If iTunes sales are not locking consumers to the platform in the first place, why would Apple want to entertain a fight here?
Third, the restrictions placed on music by DRM only serve to give paid downloads a competitive disadvantage against tracks traded freely on the Internet. Taking DRM away can only help sales on iTunes.
Yes, a DRM-free world would stimulate sales, but by how much? As AllofMP3.com proved lower pricing may be as important, if not more important, than removing the restrictions imposed by digital rights management. Consumers looking for value are quite conscious of the fact that the manufacturing, packaging and distribution costs for digital downloads are much lower than those delivering a physical product. Furthermore, in the technology sector prices come down as a product or service matures. But the record companies are pushing for higher prices, as Ben Wood's commentary on the subject demonstrates.
Overall, there is a lot of conflict that surrounds the pay download market. Conflict for a service that is mostly treated as a loss-leader by Apple. Sure, Apple has generated over a billion dollars from iTunes since its inception, but the margins are thin and the overall profit is relatively modest. That's ok as a business strategy if iTunes were truly feeding the iPod frenzy, but that is not the case. This leads to the conclusion that Apple is rethinking the overall strategy for iTunes. If change is inevitable then it is better for Apple to make the adjustments sooner than later. But they have partners in the record and movie industries so change will not come easy.
That may be why Apple chose to stimulate consumer debate with an open letter, to fire the debate by those record industry execs who feel the current system isn't working.
Other MP3 stories:
The Digital Media Winners of 2006
The Digital Media Losers of 2006
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