It has been a fascinating few months for digital music. We've seen Apple become the second largest music retailer in the US, and we've also seen all the major labels sign up to sell music digitally, on Amazon, as MP3's, and DRM-free.
I'm worried about the latter development. Yes, the labels see the need to thwart Apple's growing channel power (which stems from their control of the "rendering interface"). If iTunes becomes the de-facto channel for buying digital content, it seems like only a matter of time before Apple starts to get a larger fraction of the revenue (right now, seems like the labels get at least ten times what Apple gets in operating income when you buy an iTunes song). This kind of channel control becomes even more critical as video and books become digital.
But if the music labels give up rights and distribution, they need a new business model. I see why they'd want to stymie Apple's growing channel power, but I'm really not sure this "DRM-free" choice is a good strategic move. I always felt that the pure digitization of music represented an opportunity for the labels to manage digital rights. As one of my student groups pointed out on Monday, 90% of music sold legally is still DRM-free -- all music sold on a CD.
So embracing DRM seems like a good way to sustain control in a digital future. I guess the labels didn't understand that they should have taken control of the DRM and rendering standards as well. They could have if their executives were tech savvy, or if the people who understood technology were the decision makers. But they were not. Giving these standards to Apple resembles the mistake IBM made by giving the operating system to Microsoft back in the early 80's, when PC's were new. Which has led to Microsoft capturing a vast majority of the revenues from PC sales over the decades -- $20 billion in operating income this year alone from Windows and Office.
Stripping DRM is perilous at this point. Owning the DRM standard and the rendering interface are what will define market power and channel c0ntrol in the digital economy. Apple has this to lose -- but they need to share if they want to leverage it over the next decade.
10 comments:
Don't know if you all saw this, but Apple is now the #2 music provider in the US now, second only to WalMart:
http://money.cnn.com/news/newsfeeds/articles/newstex/AFX-0013-23299367.htm
I think though DRM encumbered music was created in preventing piracy, consumers perceive it as a threat to their choices even though the music has been purchased legally, and that labels view every legal consumer as a potential violater!
Creating DRM free music may not really hurt as much as it is imagined. There seems to be ample awareness among different players in the value chain, and with proper responsibility, it could be possible to effectively police piracy. Legal music sites are up from less than 50 to over 500 in the last five years (http://www.ifpi.org/content/section_resources/index.html) . It is shown that there are more tracks available on legal sites than available on illegal sites. Illegal sites seem to have gone down, or being tracked and forced to shut down. Technologies are being developed to track illegal uploading of content. ISPs are asked to help as they have a commercial incentive to stop illegal downloads hogging its bandwidth. Universities have been encouraged to take action against illegal p2p sharing.
Music piracy may have reached critical mass – whatever had to be pirated has been pirated since digital music technology was introduced. Any incremental piracy would seem insignificant to a label’s bottom line. Also, 99 cents is a strong enough incentive to buy the song as opposed to search for a free low quality copy on the net or buying an entire album. Not only it provides instant gratification, but other factors such as security risk, availability, unreliability of downloads could dissuade people from downloading it from unknown sources. Piracy could still be a problem globally, but about 80% of the market share of major labels is from developed markets.
I guess the DRM free move is towards how to better serve users of legal music without encumbering them with DRM. Hopefully this should increase legal music downloads.
Atul Gupta, a student at Prof. Sundararajan's class.
Some students commented that there was nothing to be afraid of a DRM free world, and also commented that CD were basically DRM free too. What I want to point out, in agreement with Prof. Sundararajan's comments that DRM free will hurt the labels most, is the following:
1. Copying of a CD took time, equipment, effort, availability of a friend who would loan the original CD - digital music does not need any such encumbrances.
2. Copied CDs could not be sent over as easily as digital music could be. Ease of transmission would bring network effects to replication.
I agree that it's bad for the music labels to license DRM-free music, but I don't see too many other choices that will allow the labels to increase digital music sales through someone besides Apple. Any competitor's music must be able to be played on an iPod, so DRM-free is the only option right now for a viable competitor.
Assuming the current contracts with Amazon are for a limited amount of time, the labels can use DRM-free music as an interim way to sell more digital music and establish Amazon (and others) as a vendor. In the meantime, the labels can work on a more strategic plan (possibly define a standard DRM that they can license later).
I also see limited downside to the labels selling DRM-free music in the short term. Piracy makes up so much of online music usage right now that selling additional DRM-free music shouldn't reduce overall sales...people who want to pirate music will still pirate music.
In a strategic sense, I agree that it is in the best interest of the music labels to embrace strong DRM standards and regulate their music. In the market they've helped build with Apple as the dominant vendor, however, they have to find other ways to increase sales in the short term.
The problem is that it seems like the music labels may be fighting a loosing battle. I personally think that, at least for the time being, DRM creates a barrier to entry for piracy. By having the DRM it limits piracy to those that are absolutely dedicated to it. We know this because of the time it takes to find and download a good copy of the music. It also takes considerable time to hack into the DRM.
On the other hand, I think if we are DRM-free the market will correct itself. If piracy become rampant, we will see the supply of quality music diminish. I don't think the market would allow for this. In general, I think the market understands that legal versions have to be purchased to keep the system running.
I recall an article mentioned in class where Steve Jobs berated the use of DRM's and thought DRM-free was the way to go. Also, keep in mind that Apple makes the majority of their money on the players, the ever popular iPod. So wouldn't DRM free possibly increase the number of songs out there in the ever growing world of music sharing. What will that require - more storage, and increased frequency of iPod upgrade. iPods are popular no doubt, in fact, in some circles, iPod and MP3 player are used interchangeably. So perhaps increasing the flow via DRM free and song sharing will not have as big of an impact on Apple power as thought - afterall, you need a place to keep the songs - why not the easy-to-use, ever-popular (oh and high-margin) iPod.
In order to research this subject (well not really), I just purchased some music on Amazon. The user interface was easy to use, the recommendation engine was extremely useful (better than iTunes, afterall this is Amazon), the album price was cheaper than iTunes (for the one I bought), and when downloaded from Amazon it automatically updated my iTunes. I don't think I'll ever buy from iTunes store because no DRM is better even with no plans of purchasing non-iPod player, and the recommendation engine works very well with music, as it allows me to explore artisits I never heard but fits my taste. With the Amazon MP3 store being highly compatible with iTunes, Apple is better off because they can continue to tie the users to iTunes while being less reliant on the labels (they lose some zero margin business). It seems like Apple's strategy is to continue to profit from the iPod and this development only supports Apple in this aspect. The labels were able to acheive their motive of relying less on Apple, but it came with a cost of having legal DRM free music, and with prices set even lower, I don't see how the labels will gain more margin. Relying on Apple's DRM technology was not helping the label's supplier power and by losing DRM, the label chose to increase their negotiating power at the expense of increased risk of piracy. The question is how much the spread of DRM free music will increase piracy, and with CD's still around, the short term effect is small. In the long term, with more people migrating to MP3's, piracy may once again become a problem, but from the labels' perspective, this negative effect can be cancelled out with the decreased reliance on Apple, especially assuming Apple's continued dominance of the portable music player market.
With the advantages of Amazon, I feel that people will buy more from Amazon rather than iTunes music store, making DRM free more mainstream. You guys should try Amazon MP3 store. Exploring and trying out new music from the recommendation engine is very addictive and it just consumed three hours of my studying time. This actually makes me think that the labels may actually benefit by getting increased sales on the high quality, long-tail artists.
So far there are two main reasoning streams. Some people believe that i-Tunes music, although helping Apple keep its leading position, has maintained piracy level low and preserve the interests of labels. On the other hand others think that DRM free music, although easier to pirate, can make the market more competitive and encourage consumers to buy more on-line music.
As already pointed out, nowadays DRM-free music is the only option to challenge Apple’s digital music monopoly and this is very limiting. I agree that competition can only benefit all digital music consumers, but in the long run DRM free music can be detrimental to the whole digital music industry.
My solution to the problem would be that one International Music Authority could define only one common standard that would give all retailers the right to sell music playable in any device, while preventing consumers from copying music illegally. This could be in the interest of the whole digital music community, Apple included. The fact that Apple is starting opening its system is a clear sign that Job’s company may be inclined to change.
Basically getting any from of DRM leads to protectionism. The major reason that people embraced file sharing sites like kaaza was that consumers would get otherwise have to buy a high priced DVD with just a couple of songs they wished to hear. This, coupled with the fact that one needed to physically go to a store to purchase it increased the transaction cost and did not make the purchase worthwhile. iTunes gave music lovers the choice to listen to only that music which they wanted to, not the ones that the music companies wanted them to hear.
The fault lies with the music industry which refused to look at new formats for music and offer these to the customer. Had they done that, they would have increased sales and prevented pirates! But, hey, profits count, and who looks at the distant future. After all, we don't learn from the past. The industry fought against cable TV and the VCR, so its no surprise that they are resisting the digital medium
Brilliant move Mr.Jobs! Tough luck industry..you will shortly be reduced to a producer who does not directly distribute! Remember how the supermarkets clout lowered the manufacturers margins and their negotiating power!!!
It is interesting to notice that at least five important crises in copyright impacted the music market since the establishment of the phonographic industry: the first fixation of the songs in phonograph cylinders and gramophones discs; the radio broadcasting; the fixation in tape recorders; the CD and CD-R and finally the actual crisis with the advent of the internet.
At the beginning of the digital era it was very expensive to copy the CD. After the popularity of CD-R burners every music consumer started to be a potential pirate. There was transference of power from the oligopolistic majors directly to the people who immediately began to rip copies of their legitimately bought Cds to their friends. But there is no way to expect the masses act accordingly to the law and the economical reasoning. Hence, it was predictable that the physical piracy would reach high levels.
The majors decided to develop ways to fight against the piracy. There is when DRM appeared to prevent the unauthorized copies of a CD. The problem is that just after, with the offering of broadband Internet connection the source became to be completely immaterial, without physical support. The concept of DRM was quickly introduced in the Internet age.
DRM basically consists on the conjunction between license agreement and technical means to enforce the conditions defined by the copyright owner. Based on this fact there are a sort of possibilities as per example: to deny the access to a specific song to whom eventually didn’t pay the asked price or to deny the copy of the song or both together.
Although several critics can be made for the DRM solution my opinion is on the same direction of Professor Sundararajan's opinion on the sense that DRM technologies are a good way to sustain control in the future. If accordingly used it can help the whole chain of the music market – and not only copyright owners - to develop a new way to earn profits on the digital era.
Finally, it is also interesting to notice that after the WIPO so-called “Internet Treaties” (1996), the breach of a DRM code and (or) device is, per se, considered a crime in most of the countries. Therefore, apart of the fact of the work under DRM protection could be in public domain the breach of its technological protection is against the law.
Regards,
Fabio Malina Losso (Brazil). My Ph.D. thesis title is “Copyright and the music market”.
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