EMI/Apple: How Jobs’ Essay Shook iTunes & Industry | iLounge Article

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EMI/Apple: How Jobs’ Essay Shook iTunes & Industry

Out of nowhere - at least, from the public’s perspective - Apple CEO Steve Jobs in February published an open letter titled “Thoughts on Music,” detailing the company’s past and current views on digital rights management (DRM) technologies. In the letter, Jobs pointed to the music industry’s insistence on DRM as an anti-piracy measure for downloaded music, and the industry’s requirement that Apple safeguard its DRM technology, as the reasons for growing concerns over digital media player format incompatibilities. After proposing possible alternatives, the CEO suggested that DRM wasn’t working, and stated that he was open to dropping its use altogether in the iTunes Store.

At the time, Thoughts on Music was widely interpreted as a public response to European regulators who had hounded Apple over the incompatibility of iTunes Store downloads with other companies’ digital media players, and generated a brief but significant wave of discussion regarding public dissatisfaction with DRM and digital downloads generally. Many people felt that Apple was merely posturing, either attempting to distract attention from the iTunes Store’s continued success, or trying to get ahead of an impending industry-wide movement away from music DRM.

Nearly two months have passed since Thoughts on Music, and it turns out that something huge was happening behind the scenes. Some laughed when Jobs noted three future alternatives for digital music sales: continue with proprietary stores, adopt an industry-unified DRM system, or “abolish DRMs entirely.” The first two options made sense to long-time industry watchers, but the third - best for consumers - seemed the most inconceivable, and possibly disingenuous. Why would the world’s largest digital music vendor willingly give up - actually, advocate - a change that would sever the requirement that iTunes purchases be played on iPods? And why would Apple even claim to welcome “an influx of new companies willing to invest in innovative new stores and players,” as it concluded dropping DRM would invite?

Now that EMI has announced that its music catalog will, starting in May, be sold without DRM protection and at a higher bit rate than before, it’s obvious that Apple’s motivations were more complex than was initially apparent. In no particular order, here are nine factors that might explain not only Thoughts on Music, but Apple’s apparent enthuiasm in supporting EMI’s announcement. Feel free to add your ideas, theories, and other thoughts using the comment submission form below.

(1) DRM-Free Content with Better Quality Can Justify iTunes Song Price Increases: For years, Apple’s been struggling with “greedy” label chiefs who wanted to charge more than 99 cents per track for music that was inferior in quality, and restricted, relative to CD versions. Pairing up the dumping of DRM and enhancement of audio quality narrows the gap between downloads and CDs, justifying the higher prices certain labels have wanted.

(2) More iTunes Revenue, Little Additional Labor: Since Apple doesn’t create its own music, and lets music companies ready their own content for the iTunes Store, offering $1.29 downloads alongside 99-cent tracks is almost certainly a no-lose proposition for Apple. From a labor standpoint, all it needs to do is redesign its page templates to have two types of Buy buttons, then sit back and collect the checks. And basic economic forecasting leads to a simple conclusion: if some people are willing to pay a premium for DRM-free tracks - and those tracks are not pirated at a rate that diminishes Apple’s future sales - Apple wins, as long as it’s actually pocketing as much (or more) per download as it did with 99-cent tracks. If the total number of downloads goes up because more people are willing to buy digital music, Apple does even better.

(3) Greater Potential Non-iPod Marketshare for iTunes: Apple’s share of the digital music download market is already huge. This EMI deal - especially if it’s followed by similar deals with other companies - will enable Apple to sell music to owners of any device with 256kbps AAC support, iPod or not. By breaking the iPod/iTunes download link at a point when both are so dominant, Apple has a good shot at selling iTunes content to even holdouts - and perhaps convincing them to replace their players with iPods.

(4) Could CD Sales Be Next for iTunes? Apple’s decision to sell these high-bitrate AAC files, and increasingly frequent references to the 90% marketshare enjoyed by CDs, might be signs that the company is preparing to sell compact discs through the iTunes Store in addition to digital music. Assuming that its most recent agreement with The Beatles’ company Apple Corps permits such an extension of its business, Apple could rapidly become a retailer of everything from cheap DRMed music to full-priced DRM-less discs, and anything in-between. This would be a way for iTunes to leverage existing relationships, assets, and consumer demand to surpass other music vendors.

(5) Clearing Up the iPod Upgrade Path: What’s the next step for a company that created popular digital music players with enough storage capacity and battery life to satisfy virtually every user? Bigger screens? Simpler controls? More features? Better cases? All of these are obviously options for future iPods, but in the past, Apple’s big selling points have been “smaller,” “better battery life,” and “more storage at the same price.” It’s hard to go smaller than today’s iPods, but higher bitrate files may demand more battery power and more storage, so if you want to fill a device with higher-quality music, you’ll probably want a newer, better iPod to do it. Suddenly, the idea of 2GB iPod shuffles doesn’t seem so crazy - if Apple improves the sound quality to justify higher-bitrate audio.

(6) Turning the Tables on All iPod Competitors at Once: Just like the MP3 format, AAC is an open standard, and not owned by Apple, so almost any iPod competitor can choose to include AAC support if it hasn’t already. But since competing players currently offer a mish-mash of different formats, many without AAC, Apple has just put the onus on its competitors to support a non-proprietary format - or face consumer complaints.

(7) Tossing a Bone to Weak Competition: Even with a potential opening like this one, it’s quite possible that Apple’s competitors - established and new companies alike - don’t have the economies of scale, software, or technologies to effectively compete against the iPod/iTunes juggernaut at this stage. Apple may have postulated that “innovative new stores and players” could be the result of a DRM-less music environment, but if companies such as Microsoft and Sony can’t run viable music stores, or produce popular products at aggressive prices, what hope does anyone else have? The biggest threat to Apple is that the music companies themselves will open stores and sell their own songs at a discount, but if history is any guide, they won’t discount enough to offset the inconvenience factor of having to shop at multiple stores for dimes worth of savings.

(8) But Was Apple Forced By Music Industry? It’s also possible that Apple was forced to jump on board with an existing EMI plan to broadly offer its music at higher prices and bitrates than the iTunes Store had previously allowed. Such has been suggested to be the case by Microsoft, which simultaneously knocked Jobs’ essay and claimed that “the stars were already aligning” in favor of DRM changes. In the same New York Times article, however, it appeared that at least one of the major labels was wholeheartedly opposed to dropping DRM, and that others were unsure. It’s not clear whether Apple felt pressured by EMI or their actions were taken in concert, but the end result is still a positive one.

(9) What About the European Regulators? Though American government officials appeared to be laughing off European regulatory concerns over the ties between iTunes Store music sales, iPod successes, and competitors’ failures, and Apple was gaining rhetorical traction by making subtle references to the CD-burning DRM workaround in iTunes, it was obvious that certain European countries still wanted to make an issue of iTunes’ increasing dominance of digital music sales. By quickly putting its money where its mouth was, and offering a FairPlay DRM-less download option to consumers, Apple puts European regulators in an unenviable position: back off and move along to some more pressing concern, or explain why offering iTunes users the choice between DRM files, non-DRM files, and non-DRM CDs is or was ever really a problem.

When Apple pioneered the paid digital music download business, it didn’t focus on the negative side of DRM; rather, it stated the positives of its approach (“landmark usage rights” for consumers), put the downloads out there, and let consumers decide whether they could live with the pricing, quality, and DRM. Billions of song downloads later, it’s obvious that Apple had a winning formula - a compromise that attempted to accommodate the needs of both industry and consumers in a way that prior offerings did not.

Change is now afoot, and whatever you think of its motives, Apple appears willing to at least roll with it, and quite possibly push for it. The push might have deeper consequences than we already know. When Jobs said in February, “(i)f 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,” most people assumed that it would never happen, and that 99-cent tracks were here to stay. Right now, the future’s uncertain: did Thoughts on Music actually signal that the days of 99-cent music downloads are about to come to an end, so long as the other major labels follow EMI’s lead? Or will $1.29 and 99-cent downloads live together in iTunes (and elsewhere) for the foreseeable future?

Your comments, as always, are appreciated.

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Comments

1

How crazy that in order to get the labels to agree to make their music more appealing to consumers Apple had to agree to price increases. At least the whole album solution remains decently priced, although it seems even at $9.99 the iTS is still often more expensive than having the physical CD shipped from Amazon. It’s funny that we were all so cynical that no one believed Jobs was being sincere. It’s great to see he was serious.

Posted by mrfett in Washington, D.C. on April 2, 2007 at 3:46 PM (PDT)

2

One more note about this scheme to charge customers more money: these files are actually CHEAPER to produce and maintain. Apple no longer has to spend all that energy protecting their secret system. This should mean the files could at least stay the same price, if you allow them a small overhead for increased bandwidth costs (which is IMO being overly generous). This is simply a plan to swindle people, IMO. I’m grateful for the increased quality, but sad that the digital download market still operates with rules at odds with reality/common sense.

Posted by mrfett in Washington, D.C. on April 2, 2007 at 6:33 PM (PDT)

3

Number 4 is interesting since Apple does have a fulfillment operation that can handle physical goods. But I think Apple Lossless is more likely—in 2011 when Apple can get a 500GB hard drive into an iPod—and with a similar upgrade path as that announced today.

It’s worth pointing out that while a technology lock-in may soon no longer exist, a psychological one still does. Many iPod users will continue to shop at iTunes because of brand loyalty, convenience, and familiarity. Likewise, iTunes customers will continue to buy iPods.

I don’t see Apple offering two versions forever. Apple likes simplicity. I think we can expect one format and a permanent price increase. And then another price increase several years from now as noted above when Apple moves to Apple Lossless (its own format incidentally so no licensing costs).

Finally, today’s news makes the subscription model much less attractive—not that it ever gained much traction anyway.

Posted by technolawyer on April 2, 2007 at 6:37 PM (PDT)

4

You keep saying 224kbps AAC, when to my knowledge, Apple has said it is 256kbps (ie 2x current iTS content)!

Posted by lintonmac on April 3, 2007 at 4:25 AM (PDT)

5

The 224kbps typo has been fixed. Thanks for pointing it out.

Posted by Jeremy Horwitz in East Amherst, NY, USA on April 3, 2007 at 7:17 AM (PDT)

6

Thanks for another intelligently written article Jeremy.  It certainly offers food for thought..

Posted by lostkiwi on April 3, 2007 at 9:27 AM (PDT)

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