Apple CEO Steve Jobs dropped a bombshell earlier this week with his memo recommending that digital music be sold and distributed without digital rights management (DRM). The consumer press was aglow over the powerful maker of the iPod taking the side of consumers in wanting free access to their music, but the media press looked at the memo with a more objective eye. Here’s a summary of what may have been behind the memo and what it will mean heading into 2007.Apple CEO Steve Jobs dropped a bombshell earlier this week with his memo recommending that digital music be sold and distributed without digital rights management (DRM). The consumer press was aglow over the powerful maker of the iPod taking the side of consumers in wanting free access to their music, but the media press looked at the memo with a more objective eye. Here’s a summary of what may have been behind the memo and what it will mean heading into 2007.
A Risky Move
There can be no doubt that a future without DRM makes things more difficult for Apple. Apple gained quick momentum and early market share in the digital music space with its seamless integration of digital music and their iPod device. While most people point to the aesthetic appeal of the iPod as driving its growth, no less important was the fact that iTunes was by far the most elegant digital music download and organizational system--and iTunes only worked with the iPod. Similarly, once the iTunes music was downloaded it only worked with one device. A person couldn’t switch to a new device other than an iPod and bring their purchased digital music with them without jumping through annoying hoops (burn songs to a CD, rip them back to the computer into MP3 format). Nick Carr, in his Rough Type tech blog, made a similar point:
“Because DRM has little or no effect on piracy, the only one benefiting from the DRM schemes has been Apple, which with a dominant position in the music player market achieves at least some degree of customer lock-in through the copy protection code embedded in every song sold through the iTunes store.”
So the Fairplay DRM that Apple instituted had the double effect of pushing people to an iPod if they wanted to access digital music easily and then kept them there by making the transition to a new player difficult. It should be noted that the digital music stores like Rhapsody require hardware that supports its DRM (Windows PlayForSure), but that DRM is able to be licensed to multiple hardware manufacturers.
By announcing that it would like a DRM-less future, Apple is tossing aside one of its true competitive advantages, the requirement that people with iTunes music have iPods. If iTunes sold MP3s, consumers could upgrade from an older iPod to a Sansa, for instance, and be able to bring all their music with them.
On the other hand, research and investment firm PiperJaffray points out that the time may be right to give up this advantage thanks to the overwhelming market share of the iPod. PiperJaffray analyst Gene Munster told clients “Consumers choose a device first and a music service second. Apple is confident, justifiably given the iPod’s leading market share, that increasing usage of online music services based on an open platform will sell more devices and most of those devices will be iPods.
”So, while Apple would be losing a competitive advantage, the time may be right for doing so.
Jobs’ Take
Jobs wasn’t quite so positive about his DRM competitive advantage in his memo. On the one hand he pointed out that the amount of music on an iPod that is purchased from iTunes equates to about 22 songs per iPod or about 3% of total capacity. We first pointed this fact out in an article early last year. Our conclusion was that the overwhelming majority of tracks on an iPod were ripped from CDs, and Jobs made that same exact statement in supporting the lack of need for DRM on in iPod.
Further, Jobs pointed out the interesting fact that his company had to constantly update iTunes software and the iPod itself to thwart pirates. Apple had to do this because their deal with the record labels demands that if the DRM is cracked, it had to be fixed within weeks or the labels could withdraw from their agreements. The implication is that DRM is more trouble than its worth for Apple. It should be noted that this DRM liability is why Jobs stated that Apple didn’t license its software to third party vendors. Updating the software for a whole slate of vendors was too much of a nightmare for Apple to consider.
Reading Between The Lines
While Jobs (and we) were correct about the relatively minor role that iTunes songs have on an iPod, to point to the average of 22 songs per iPod is misleading about the iTunes impact on iPod sales. First of all, while the average is 22 songs per iPod, a significant number of iPods have multiples of that in iTunes sales on their iPod. While we don’t have data on how many iPods have more than 200 iTunes songs on them, it is probably significant enough that iTunes does directly influence iPod sales and upgrades. Secondly, Jobs ignores the impact of time. With CD sales plunging and existing CDs already ripped to their iPods, consumers will have only one real option to keep their music fresh: Buy songs via iTunes.
It is interesting that Jobs admits the ease at which pirates have been able to crack the Apple Fairplay DRM, especially as Microsoft’s DRM had been uncracked at all for over a year. Microsoft’s PlayForSure was finally cracked last year, but with Microsoft’s latest update to version 11, the Microsoft DRM crack no longer works. One would think that Apple would have fewer problems with DRM being cracked if their DRM were as robust as Microsoft’s. The bottom line is that it is difficult for Jobs to state that DRM free tracks are needed because they will just get cracked when Microsoft has been relatively successful at maintaining their DRM in the face of worldwide assaults on their code.
So Why Send The Memo?
Since DRM has been a competitive advantage for Apple, and DRM isn’t nearly as vulnerable as Jobs implies (at least if you use the Microsoft version), then why would Jobs send out a memo recommending a world full of free access to music? For most technology writers, the answer lies in Jobs final paragraph:
“Much of the concern over DRM systems has arisen in European countries. Perhaps those unhappy with the current situation should redirect their energies towards persuading the music companies to sell their music DRM-free. For Europeans, two and a half of the big four music companies are located right in their backyard. The largest, Universal, is 100% owned by Vivendi, a French company. EMI is a British company, and Sony BMG is 50% owned by Bertelsmann, a German company. Convincing them to license their music to Apple and others DRM-free will create a truly interoperable music marketplace. Apple will embrace this wholeheartedly.”
Owen Thomas, on the Business 2.0 website, takes aim directly at Apple’s legal problems in Europe as Jobs’ real reason for his memo:
“Jobs may come across as a digital-rights crusader in his ‘Thoughts On Music’ essay, where he calls on the music industry to abandon DRM altogether. But what he’s really trying to change the conversation about whether to regulate iTunes... Jobs himself buries the lead, waiting until the last paragraph to point out that ‘Much of the concern over DRM systems has arisen in European countries.’ He’s not kidding. France, Germany, and Norway are among the countries that are challenging the tight software links that prevent music purchased on the iTunes store from playing on anything but an iPod... Why would Jobs try to minimize the strength of iTunes now? The only reason why Jobs is trying to draw everyone, yet again, into his reality distortion field is to score political points in Europe, where DRM is a hot-button issue.”
Influential blogger Nick Carr was just as pointed in his assessment:
“The reason Jobs has taken this unusual step is, one assumes, because Apple is under increasing pressure from European governments to “open up” its iPod/iTunes system. There have even been threats to ban the system if it remains closed. Over the last few months, the stakes have gone up as antitrust lawsuits have been filed against the company in the US. For Apple, DRM’s strategic costs have simply come to outweigh its benefits.”
Other tech writers took the strategic angle and looked at Apple’s future products for an answer. Brent Schlender wrote in Fortune Online that this was a brilliant play by Jobs to set up the iPhone as the future “web-enabled media player:”
“Could Jobs’ eloquent plea on behalf of consumers all be a gambit to force Apple’s content suppliers to renegotiate their deals and make it possible to download music and video directly onto the iPhone? After all, the iPhone certainly has the wireless capability and the processor smarts to handle such a simple online transaction. And Apple has the iTunes Music Store ready to do business.”
It’s important to point out that the overwhelming sentiment was that Jobs was doing the right thing, regardless of motives. VC blogger Fred Wilson stated simply, “Kudos to Steve Jobs.” The overwhelming consensus was that DRM has to go, and it will be in the best interests for the record labels to abandon it as soon as possible. But will that happen?
The Label Reaction
Illustrating that it understood the competitive advantage that Apple has had with its proprietary DRM while also not backing down from their perception of its importance to their future, the RIAA fired back at Jobs by stating that Apple should just keep the DRM but open it up to other companies. RIAA CEO Mitch Bainwol even took a sarcastic swipe at Apple’s technological expertise.
“We have no doubt that a technology company as sophisticated and smart as Apple could work with the music community to make that happen.”
An interesting take on the label perspective was presented by research and investment firm PiperJaffray via the Apple Insider website. As the site outlined:
“’In posting this letter Jobs is making a statement that Apple does not advocate DRM - it is the music companies that require its use,’ PiperJaffray analyst Gene Munster told clients in a research note on Wednesday. However, the analyst believes there is a ‘less than 25 percent chance’ the music industry will take Jobs up on his calls and license music to online stores without DRM... ‘Record labels have worked hard to protect their product from theft by negotiating DRM requirements, so despite Jobs’ request, DRM free online music services are not likely to be the norm any time soon,’ he wrote.”
No Loss For Apple
In the end, Steven Jobs had nothing to lose by publishing his memo. He looks like a hero to the public, who overwhelmingly support his position that music should be released with open access and use for consumers. He re-positions his company as open to giving up DRM to European regulators, painting the labels as being at fault, and, if DRM-free music is implemented by labels, his massive iPod marketshare puts Apple in the driver’s seat at taking advantage of any increase in sales, both of music and devices.
