Apple, EMI Promise Another Music Revolution

Apple (Nasdaq: AAPL) and EMI Music have entered a groundbreaking agreement to sell music online without digital rights management (DRM) antipiracy software cobbled to it. While the move makes it easier to steal music or share it with friends, it also lets customers buy songs from Apple's iTunes store and run them on non-iPod digital music players.

"We are going to give iTunes customers a choice -- the current versions of our songs for the same 99 (US) cent price, or new DRM-free versions of the same songs with even higher audio quality and the security of interoperability for just 30 cents more," Apple CEO Steve Jobs said. "We think our customers are going to love this, and we expect to offer more than half of the songs on iTunes in DRM-free versions by the end of this year."

With the 30 percent price hike, consumers will get the songs encoded in AAC (Advanced Audio Coding) at 256 kbps, which is twice the current bit rate of 128 kbps, and it will mean the new versions will sound virtually indistinguishable from the original recordings.

Apple says it will offer a simple, one-click option to let customers upgrade their entire library of previously purchased EMI content to the higher-quality DRM-free format for $.30 per song.

Rock the World

"This is the most significant development for the music industry since the launch of iTunes," Phil Leigh, senior analyst for Inside Digital Media, told MacNewsWorld. "First, it's significant because it really says the future is going to be all DRM-free stuff, and second, it means the other major record labels really have no choice but to come along."

Apple has come under fire for its raging iPod and iTunes success, particularly in Europe, where Norway, France and Germany have cried foul over Apple's DRM system, FairPlay, which limits iTunes purchases to usability only on the company's iPod music players. Will removing its proprietary DRM system hurt Apple?

"Apple's intention here is to grow the whole pie. Today it enjoys at least a 75 percent market share of an approximately $1 billion market for music tracks -- a nice position to be, sure, but not nearly as nice as even a 50 percent share of a $5 billion market," James McQuivey, a principal analyst and vice president of research for Forrester, told MacNewsWorld. "By opening up the music market, Apple is confident it can maintain a significant piece of what will eventually be a huge pie. And with a larger digital download market, they'll be in a great position to sell even more iPods."

Competition to Heat Up

Microsoft's (Nasdaq: MSFT) competing Zune music store and line of digital media players hoped to capitalize on its Windows DRM solution, which allows for music interoperability on a variety of devices, not just Microsoft's own Zune devices.

"It was a hard consumer benefit to understand, but it was a benefit nonetheless," McQuivey said. "In a DRM-free world, they lose that benefit and have to compete head-to-head with Apple on device functionality and brand appeal, which is a very difficult task."

In addition, if the dominant form of music becomes DRM-free, Microsoft's Zune subscription service -- as well as subscription services from other competitors -- faces the challenge of operating in a DRM-free world.

"Subscription services have had a hard time competing already, and today's announcement puts even more pressure on them, even though they have been growing and have had a good value proposition," Leigh explained.

Opening the Price-Hike Door

Apple's Jobs has consistently been adamant over his iTunes $.99 song pricing model. He's faced music industry pressure to raise prices, particularly for popular new singles, but has managed to stand his ground because of Apple's dominant position in the online music market.

EMI's ability to offer online songs sold at $1.29 per song through the world's dominant seller represents a coup for the record label.

"The 30 percent increase in price is significant because, even if it doesn't lead to an increase in sales , it can certainly lead to an increase in profits," Leigh explained. "And that's what the company really cares most about -- and I think it has a good shot at increasing profits." A 30 percent increase in price is a big leap for a product that requires almost no new work to deliver online in a slightly different format.

Consumer Confusion

"From the consumer point of view, I'm disappointed in the premium price because I think there's legitimacy to the argument it can be confusing for the user," Leigh added.

Users already have to choose between song versions -- for example, to buy an edited version of a song or one with explicit lyrics left intact -- and if they make a mistake, there's no remedy. At least with this new two-price model, it looks as if consumers will be able to upgrade their songs if they accidentally buy the lower-fidelity, DRM version.

All EMI music videos will also be available in DRM-free format, but the price will remain the same.