WEEKEND FEATURE

Dumping DRM: Will iTunes’ Rivals Follow Suit?

This year, the world may see the results of a new experiment in selling online digital music, and major record label EMI is at the center of the testing. Sandwiched between the current market-dominating Apple iTunes music store and the Amazon.com DRM-free digital music store set to launch this fall, EMI is letting the two industry heavyweights sell its music without copy-protection schemes hobbling its songs.

EMI may see its sales spike — or it may see its songs peddled freely around the world as end users enjoy the newfound ease of playing DRM-free EMI songs on multiple devices. Is DRM on the way out? Or do the latest developments reflect a less radical step on the trail of evolution?

Market Forces

Scientific experiments usually get to take place in well-protected laboratories, but marketplace experiments are dynamic. What happens if other online music vendors take Apple’s lead and begin offering DRM-free music, too? What if other big players like Microsoft, Wal-Mart and RealNetworks and their backers jump on the DRM-free dog pile? Is a major industry shift on the way?

First of all, Amazon.com says it already has 12,000 record labels signed up, and with the exception of EMI, the vast majority of them are small players; however, the e-commerce veteran’s stance is extraordinarily clear.

“The Amazon.com digital music store will offer DRM-free MP3 downloads,” Andrew Herdener, a spokesperson for Amazon.com, told TechNewsWorld. “Amazon’s DRM-free MP3s will free customers to play their music on virtually any of their personal devices — including PCs, Macs, iPods, Zunes, Zens — and to burn songs to CDs for personal use.”

For Amazon.com, selling music DRM-free is critical because it creates a wide-open field. Any customer with any device could buy an Amazon.com digital song. Would most online stores rather be tied to specific subset of customers — or every possible online customer?

“Amazon.com is heads-down focused on providing the best experience for our customers in our upcoming digital music store,” Herdener noted.

Because Amazon.com’s existing customers already own a multitude of devices, the ability to sell to all of them is critical to the company’s success. While Apple CEO Steve Jobs says he’s is not a fan of DRM or copy-protection schemes, Apple has a choice in offering EMI’s music without copy protections built in, because Apple currently dominates the market.

For Amazon.com to sell to Zune customers and iPod customers at the same time, copy-protection schemes would likely result in an overly complicated store and a customer service nightmare. Imagine how Amazon.com’s profitability would float away whenever a customer accidentally bought the wrong song for their intended device. For the millions of customers using different devices and platforms, DRM-protected music is no small hurdle to clear.

Those Who Own the Rights (Still) Make the Rules

Most online music store operators would love to get rid of DRM, Mike McGuire, vice president of media research for Gartner, told TechNewsWorld.

“It wasn’t as if they had demanded DRM — it was the rights holders who demanded it,” he said.

Either way, while online stores have found various niches and levels of success relative to Apple’s massive market share, DRM has become the scapegoat for weak sales.

“The technology content industry, especially when it comes to music, has gotten itself wrapped around the axle of DRM. Aside from what Apple has been able to do, it hasn’t lived up to any of the promises it’s made,” McGuire explained.

“There are hundreds of online music services that are doing OK, but they are not even in the same ball park as iTunes. Subscription models like Rhapsody and Napster work for a lot of people, but they pale in comparison to what iTunes generates — somewhere around five million songs a day,” he added.

Power to the People

Despite what online music stores would like to do, they may be hampered by their business plans and customers, so making a bold move may be difficult.

“It isn’t going to be pressure from the online download stores that determines how much DRM-free music will be available,” Peter Eckersley, a staff technologist for the Electronic Frontier Foundation, told TechNewsWorld.

“It will be pressure from music fans who are tired of having DRMed files that won’t play for inexplicable reasons, or that can’t be transferred to the player of their choice, or that need to be burned to a CD and then re-ripped in order to be used sensibly,” he said.

So, fan choices may drive music stores to make a move, which may also drive the major record labels — but then again, the major record labels may be able to run the show, too.

“EMI is the driver here,” Rob Enderle, principal analyst for the Enderle Group, told TechNewsWorld. “If they can showcase that this works, other are likely to follow.”

EMI on the Rise?

“EMI has seen its iTunes sales jump dramatically since it started offering [songs] without obnoxious technical restrictions. If even a fraction of that boost turns out to be sustainable, the other record labels are going to have to choose between their ideological attachment to DRM and the money they could earn by abandoning it,” EFF’s Eckersley said.

“In the past, major record labels have demonstrated that they put dollars ahead of principles,” he added.

EMI, for its part, is signing agreements to sell its DRM-free tunes not only with iTunes and Amazon.com, but also with other online music services. Most notably,Snocap, which is a company that lets people and musicians embed mini storefront code onto Web sites, MySpace pages, or blogs, will now be offering EMI’s easy-to-use tunes, as will PassAlong Networks.

What About the Other Major Labels?

“Right now, we’re only talking EMI,” Mike Paxton, principal analyst of consumer markets for In-Stat, told TechNewsWorld. “We’re not talking Sony BMG, Warner, Universal … and I don’t have any indications that any of the other major recording companies are going to [adopt a] non-copy-protection type of format in the future. They are all sort of watching and waiting to see what happens with this experience with Apple and EMI,” he explained.

The other big record companies are not convinced that following EMI’s move with their own will make a good return on investment, Paxton said.

“They are just getting to the point of having a fairly decent grip on copy-restriction types of DRM and having it integrated into their products,” he noted. “To change the business model at this point in time is probably seen as risky by the recording industry.”

Still, the recording companies are closely watching EMI’s moves. Apple’s iTunes Plus option sells EMI tracks at a higher level of digital quality — and at US$1.29 instead of the usual $.99.

“If you can jack up the price 30 percent on anything by just by tweaking some of the copy restrictions, I think that will be looked at as something positive by most of the recording companies,” Paxton said.

DRM Is Far From Dead

Paxton definitely doesn’t believe that the Apple-EMI announcement heralds the end of DRM.

“Of those EMI tracks that are available, they still have a lot of watermarking information on them,” he explained. “In the traditional sense of a DRM definition, that watermarking is a DRM technology, so even calling them ‘DRM-free’ is not quite accurate.”

For research company Gartner, the EMI-led experiment may be a catalyst that shifts DRM strategies.

“We believe that the notion of encrypted DRM that’s currently used to block and control was never going to really work,” McGuire said.

“The perspective on DRM needs to shift dramatically away from controlling and locking and more toward an accounting mechanism. It’s not simply a matter of people giving up on DRM — we need to see other business and reporting models,” he urged.

Back to Roots

“Content providers have got to reimagine their future and what they are good at and what they can no longer control,” McGuire said.

“If you remember, the railroads used to define themselves as being in the railroad business and not the transportation business — and they got hammered by trucks, planes, etc.,” he explained.

“I think the music industry has to realize that they have lost the ability to control distribution by controlling the physical thing, and they need to focus more on what they used to be really good at, which is finding and developing talent and marketing and promoting. At that point, a reliance on locked-down DRM will be minimized.”

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