The promise and perils of DRM-free music

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.