It’s often assumed that putting secret codes in music files to protect them from being copied is a way to prevent copyright infringement. But it’s not really about that at all. At heart, digital rights management (DRM) is a business strategy, not a police action. And that strategy may be reaching the end of its natural life.
The Wall Street Journal reports today that one of the major record companies, EMI, has launched an experiment in selling songs in unprotected MP3 format through Yahoo. The first songs are by popular balladeer Norah Jones and the Christian pop band Relient K. Senior EMI execs resisted the idea at first but “were ultimately persuaded there was a need to try fresh approaches to digital sales.”
And why were they persuaded? Because digital music sales, after growing strongly for a couple of years, appear to be losing steam this year. That, more than the particular EMI experiment, is the big news here. As the Journal reports, “The MP3 releases are coming as digital-music sales have stalled for the first time since Apple launched its iTunes Store in 2003. Digital track sales held steady at 137 million songs in the second and third quarters of this year, according to Nielsen SoundScan. That’s a slight drop from the 144 million sold in the first quarter.” Sales may jump up again in the current quarter, with holiday buying, but the writing’s on the wall: The existing model of digital music sales is losing momentum.
The existing model is, of course, the iTunes model. Apple’s iTunes store, which sells songs in a proprietary format that works only with iTunes software and iPod devices, is responsible for the vast majority of legal music downloads. Because it has the dominant music player, Apple has been able to call the shots up to now. It was the only company with the leverage to get people to start buying digital songs online, and to get that business going the record companies played along. They had little choice. But if sales of songs through iTunes stop growing, as seems to be happening, Apple loses a lot of its leverage.
The obvious alternative for music companies is to start selling songs as unprotected files, with MP3 being by far the most popular of the available formats. Selling them with other DRM protections would prevent them from being played on iPods, and if a song doesn’t play on an iPod its commercial prospects are, for the foreseeable future, limited.
But won’t selling songs as unprotected MP3s lead to rampant illegal copying? No. Because there’s already rampant illegal copying. Most unauthorized copying is done either through online file-sharing networks or by burning CDs for friends. DRM schemes have little effect on either of those. All new songs are immediately available on file-sharing networks, DRM or not. In fact, the Journal quotes one source as saying that the “pirate market … command[s] better than 90% of the online marketplace.” People buy through iTunes because they either don’t want to engage in illegal trading or can’t be bothered with the geeky aspects of illegal trading. It’s not because iTunes has removed the option of illegal trading. As for burning CDs to share, that remains easy even with DRM-protected songs.
No, DRM is about controlling the business model for selling online music. And if it looks like there won’t be much additional sales growth through iTunes, then music companies are going to start selling unprotected MP3s. In an iPod world, they have little choice.
Unless, of course, Apple starts allowing other kinds of DRM-protected song files to play on iPods. But even that unlikely event might not matter much. It would seem that the best business strategy for record companies at this point is to open the floodgates for online music retailing, which would almost certainly bring a burst of innovation in packaging and pricing.
UPDATE: Here’s more evidence that iTunes sales growth may have peaked.
Good post. Unasailable logic. From your mouth to RIAA’s ears! (Although I’ll miss the poignant suing of the children.)
Mickeleh,
Actually, suing people, unlike DRMing song files, probably does have some effect in convincing people to buy through stores rather than trade through file-sharing networks. So I’m not sure any of this would mean an end to the poignant suing of children.
Nick
But what of subscription services like Napster to Go and Rhapsody? Without DRM tethering the songs to the subscription service, one could sign up for one month at $14.95, download all of the 2 million songs one is interested in, then cancel. Hardly a good business model for artists or labels. Perhaps these services should go away, but I’m not ready to give mine up.
Patrick,
You’re right that DRM seems essential to the subscription model, but the subscription model has been a flop so far. (You’re an exceptional guy.) Maybe it’ll take off at some point, but right now the music industry has to find ways to sell more songs and albums.
Nick
The subscription model will get a kick start once WIMAX gets traction and provides constant connectivity to the digital music player.
With this ocasion, storing music files locally (i.e. on hardisk or flash) becomes obsolete as the access to the music library is always ON.
Music players will become more navigational tools in the music library helping the user to manage song lists (personally created or shared by others) or providing a radio experinece when running in shuffle mode on the whole library.
No. You just don’t get it, Dragos — people don’t want to depend on a connection to have their stuff. That is why music subscription services do not work. People don’t want something as personal as music to be suddenly unavailable because they didn’t pay their rental fee, or in your case, because they hit a dead zone or missed their payment for that month. No-one wants this, guys! Do you folks work for the music industry or something?
Funny, how everyone gets that if you don’t pay your phone bill, ISV, or electric bill they shut you down. If you don’t pay your car payments or mortgage, you lose “posession.”
How come music stubbornly refuses to fall into a pay-for-service category? (Well, there’s Muzak, Sirius, and XM.)
Maybe it’s a generational thing. Collecting records, CDs, mp3s is ingrained into the codger cadre. Maybe newer arrivals to our planet will think of music like water, electricity, gas, and cable.
An interesting awakening at the labels, though they could have picked a better format. The one good thing that came out of the Apple pioneering effort is that I can buy only the tracks I like instead of paying for a bunch of second rate stuff.
To Mickeleh, leaving aside the next generation example, if good music becomes a commodity AND it becomes a necessity then I might rent it.
Nick: “Most unauthorized copying is done either through online file-sharing networks or by burning CDs for friends.”
I beg to disagree. While as phrased you are technically correct, but since you later make reference to “pirate market” I take issue with these words since file sharing is pretty well dwarfed world wide by unauthorized commercial duplication of CDs and DVDs.
The RIAA/MPAA cant do much about this problem for political reasons, the best they can do for real piracy like this is to either bust small vendors or shipments at port. Since the sources of most unauthorized copies are factories in Asia owned by the Chinese army, its politically problematic to actually do anything about commercial piracy.
The RIAA/MPAA know this and have latched on to casual sharing and Internet sharing as the bete noir of the problems with their album oriented business model.
Mickeleh,
Interesting assumption, however is there any evidence to support this idea?
Chris, Yes, you’re right, I wasn’t taking into account the duplication of physical media by professional media pirates. Nick
There are other companies doing this as well. Digital Bazaar has put out a product called Bitmunk which does DRM free trading of files on a peer to peer network. It’s legal, copyright aware, and all kinds of stuff. They use watermarking which, as I understand it, is actually transparent to the player, to make the purchaser of a given track responsible for what happens to it.
Writeup available here: http://killfile.newsvine.com/_news/2006/11/29/462123-bitmunk-an-end-to-digital-rights-management
Mickeleh makes a good point about ownership, but doesn’t consider the entire picture. If my mortgage company treated the ownership of my house the way the music companies treat ownership of my music then I would lose ownership of my house if I left the state, or we shifted to daylight savings time, or some other arbitrary nonsense.
If EMI and its friends could guarantee that when I purchased music (or media) I would have ownership of one perpetual, transferable license for it, then I think the culture of piracy would cease to exist very quickly. Most people are willing to pay for things as long as they are priced fairly and treated with respect.
It certainly will be interesting to see what happens with the media behemoths. Their entire business model has been based on fear and the ability to control the medium on distribution, and it has been a profitable way to do business.
However, once that no longer applies then the market will dictate that the industry will have to come up with a new way of operating, one that ACTUALLY PROVIDES VALUE TO THE CUSTOMER. While it isn’t perfect, iTMS is at least a step in that direction, DRM and all.
Great post. I have some thoughts on how this affects wireless operators who are trying to compete with Apple, and I also think that commercial-scale duplication of CDS – the problem that Chris_B mentions – may go away. I blogged about this here.
Jason
Hmmm, I’m confused. I was under the impression that Apple added DRM at the insistance of the music/movie industry. If those industries want to sell non-DRM’ed product, Apple, w/ the leading store and leading usability product in the iPod, will probably be more than happy to go along w/ them.
@ Mickeleh: I can eventually own my own home and car, which I can then resell, trade, give away, or loan to others.
The music industry wants to LICENSE music to me for a short term, but ONLY ME and takes away all my rights of ownership and transfer.
The book industry is no better. I buy a book and read it, then finish it and give it to a friend or the library or whatever. Now they want to sell me an eBook that only I can read, can’t give away, can’t trade, can’t loan, can’t view on any device I want to (I suspect a lot of these services will be Vista-only and lock out Linux/Mac users due to DRM in Vista).
@ shadesOgray: What the music industry now wants is to break the effective monopoly that Apple has on legal digital music sales. So they are trying other things in other places.
Can anyone actually provide a link to where I can buy this MP3? Their site doesn’t make it easy to find, that’s for sure.
Quibbling over DRM protection schemes and corporate control over distribution networks is like arguing about who gets the best stateroom on the Titanic.
Jason Devitt,
OK I looked at your post, but I’ll respond here. As an FYI, the pressing plants I referenced above are happy to duplicate sofware CDs, Audio CDs, DVDs, VCDs, any disk that there is a market for. The injured parties for non software products are not exclusively American conent producers either. Local popular media gets pirated as well. At the risk of repeating myself, I dont see this problem going away due to the exteme political sensitivity of the ownership of those factories.
Nick,
Ever thought about how DRM is about “distribution rights management” which is all that copyright boils down to anyway? I think the same is true of region coding on DVDs. Both work under the red herring of anti-piracy but its really about who is contractually enabled to reproduce the content.
“…high-tech and music-industry executives are becoming increasingly concerned about Apple’s growing clout in the music business.”
Despite the concern, selling non-DRM tracks may help iTMS growth rather than hinder it. Apple has little investment in maintaining DRM; it goes against the grain of the Apple experience, and for consumers, DRM simply means losing convenience and control.
“For music executives, allowing Apple to gain increasing control over digital music sales — [snip] — is shaping up as the latest in a long series of strategic blunders that have helped create powerful new gatekeepers between them and their customers.”
(How ironic – the extraordinarily powerful gatekeepers standing between musicians and fans are concerned about having to deal with gatekeepers.)
I don’t think music execs have made any strategic blunders regarding Apple. The situation for them is far more dire. Apple is unassailable because they have a completely different business model. Apple is a hardware company. iTMS doesn’t need to make money selling music and they don’t need to sell DRMed music. All they need to do is sell iPods. Just because DRM is relevant to the music corps business model, does not make it an asset to a hardware company. In fact, it’s a liability. It restricts the usefulness, control, convenience and enjoyment of hardware, and reduces interoperability by making all file formats – even iTMS’s open, industry standard Mpeg4 audio – proprietary.
When the day comes for dancing on the graves of music corps, I expect Apple will be at the front of the mamba line.
Despite the concern, selling non-DRM tracks may help iTMS growth rather than hinder it … Just because DRM is relevant to the music corps business model, does not make it an asset to a hardware company. In fact, it’s a liability.
I agree with the first part, but I’m not so sure about the second. The proprietary media format is a pretty powerful way to lock people into the iPod hardware. Even if you’ve only purchased a relatively small amount of songs/videos through iTMS, it reduces the odds you’ll switch to a different player (no one likes to render previous purchases useless). I think a good case could be made that DRM is a bigger asset to a dominant hardware maker than to record companies.
Chris B
“The pressing plants … are happy to duplicate sofware CDs, Audio CDs, DVDs, VCDs, any disk that there is a market for.”
All these physical media are going away; audio CDs are just first. The digital market for software should pass the market for boxed software in 2007. DVDs will take longer because of the size of the files, but clearly movie studios expect it to happen.
Two further points that I did not mention in my post:
(1) The pressing plants count as a bigger problem than file-sharing only when you reckon the losses as [estimated number of copies] x RRP, where that price is often the same as it is in London or New York. If the labels sold CDs in Brazil at a price that most locals could afford, the pirate market would be much smaller – and what was left of it would look smaller still because of the lower price point. But then the labels would have to deal with gray market imports of their own CDs back to the US; and that’s the reason they don’t do it. They may whine about phantom lost sales in Mexico, but it’s the US and Europe and Japan that they care about. And in those markets what matters is file-sharing.
(2) Commercial duplication of software benefits Microsoft. All over South-East Asia I saw only one store selling Macs and only one Internet cafe running Linux. They may not have paid for Windows, but they are locked into it, and when their economies mature and they start to enforce IP laws, Microsoft will have a huge built-in advantage. Although people don’t get ‘locked in’ to music, Western acts derive some of the same marketing benefits from commercial piracy. If Madonna ever sells out a concert in Bangkok, it will not be because the crowd paid for her music.
Jason
DRM isn’t going to go away entirely. You’re 100% correct that it’s totally inappropriate for track and album purchases because it does nothing to combat piracy. It’s a sham defense, and is far more harm then good.
That said, DRM can be effective in curbing misuse of other payment/delivery models, like subscription services, especially those with mobile options. If you gave someone an MP3 through a subscription service, they would likely quit after downloading massive amounts.
All that said, there is no reason to inflict DRM upon what right now is the prevailing customer preference of outright purchases.