Jan 072008

—Caveat: the views below represent my own current personal views and are subject to change—

Apple Inc


It’s wonderful what a bit of competition can do…

For a very long time, the music industry has been dominated by a few labels. Prices hadn’t shifted substantially in favour of consumers for decades.

Then along came the highly effective MP3 compression format, and Napster creator Shawn Fanning.

Suddenly everything is turned on its head. Initially, people are proclaiming the music industry will be ‘defeated’. Later, these projections became more severe, with claims that the industry would die out completely ‘within 5-10 years’.

What was driving this massive shift in perception (and in sales)? Why were people selling their moral values so cheaply and becoming ‘thieves’ (1) so readily? Why is it that the software industry has been coping with digital piracy for years yet when it hits the music industry, it is the end of the world?(2)

The large players in the music industry have been working together ‘cooperatively’ for years. The top 4 mega labels (Universal, SonyBMG, Warner and EMI) dominate the industry with over 70% of the world music market according to IFPI 2005, and 90% of all legal sales are made through these and other members of a single association – the RIAA. Effectively, this has led to complete control of music and its pricing such that it was determined by a handful of organisations. I am not alone in believing that in a scenario remenicent of that in the diamond industry, music has been given artificial value far higher than a competitive market would price it.

From the perspective of quantity (and I would argue quality) of inherent content contained (3) or from the perspective of production costs (4), music is substantially less valuable than video+soundtrack. However buying a DVD of a movie such as Kill Bill Volume 1 on Amazon.com will set you back US$14.99. The (admittedly memorable) soundtrack will set you back US$12.97. So the estimated US$55 million spent on filming Kill Bill added $2 to the unit cost of the content? In the UK it is even worse, with Kill Bill Volume 1 and 2 DVDs retailing on Amazon UK for £4.98 each and Kill Bill Volume 1 and 2 soundtrack CDs retailing for £7.98 each.

Admittedly, the soundtrack contains complete songs and can be played on your CD player, but it is still very difficult to comprehend the premium that even now is being placed on music content without looking at the music industry as one big price-fixing cartel, controlling thousands of ‘mini-monopolies’.

So what impact have changes such as MP3s and online peer to peer filesharing had? Not too long ago, that £7.98 CD would have retailed for substantially more than £7.98. Thanks to these technologies, there is now an alternative (other than just giving up) to paying what the music industry dictates for a song. If a consumer feels they are being ripped off, they can download it.

Apple and Digital Rights Management (DRM)
After MP3 and Mr Fanning, along came the iPod, and then selling DRM-secured music online became one ‘solution’ achieved by the industry. However this was plagued with problems arising from the removal of freedom in the way music can be used (the freedom that DRM is designed to get rid of). Encryption is used so that transferring your files between computers (except where explicitly allowed e.g. home iTunes PC to iPod) is intended to be impossible, which led to all kinds of problems using music you had bought in ways many consumers felt they should be able.

Apple provided the digital platform. They provided a customer base of millions of users (iPod owners) and the iTunes digital download infrastructure so that music could be sold directly to users without the involvement of other retailers.

The ‘problem’ was that the music industry began to be concerned by the amount of power shifting from them to Apple. If they couldn’t find other digital distributers, then Apple would be fully in control of their fast-growing digital customer base.

But how to incentivise customers away from Apple and towards other distributers? There are really only a couple of courses of action available. They could pull their music from Apple’s iTunes, and then sell without DRM from other sellers or sell at reduced prices from other sellers but keep the DRM.

Pulling music from Apple is very difficult to swallow if it is not in combination with one of the other two incentives, in part because Apple has a relatively loyal customer base that will not necessarily use anything else (so customers will be lost) and in part because of the inconvenience to users of having to install further software (to provide an alternative framework for DRM music distribution alongside Apple’s iTunes).

In addition to the ‘corporate-competitive’ reasons discussed above, labels have received immense public pressure to remove DRM, and they are having to compete with DRM-free downloadable music ripped from CDs and distributed online.

The result? One by one the labels have removed DRM from their online offerings. First EMI then Vivendi Universal followed by Warner and now SonyBMG (more here).

Each of the changes considered above that the labels make (to compete both with Apple and with illegal online downloading) are good news for consumers. No wonder abuse/artificial creation of monopoly is illegal in most developed economies…

Finally, there is the question of ‘how can we compete with free?'(5). Actually, while it is difficult, the labels are successfully doing this already, as is the film industry. The software industry has done this for many years. When people don’t feel like they’re being walked all over and prices are reasonable, they prefer to own an original, licenced, paid-for copy. This has been demonstrated in the extreme by Radiohead’s high-profile (and probably highly-profitable relative to regular methods given the lack of middlemen) recent distribution scheme where downloaders are able to choose how much they pay for an album. Given that the average payment was $2.26 ($6.00 excluding non-payers), it is clear that people will pay for music even when there is no incentive other than the ‘feelgood factor’/guilty conscious to work with.

When you combine the ‘feelgood factor’ with ease of location of the music, sound quality, extras etc, I can certainly see that you can ‘compete with free’ as long as you are willing to embrace digital download and provide superior product rather than inferior (DRM’d) product.


Note (1): I am not a lawyer. However, as I understand it, ‘piracy’ is not the same offence as theft. This is clear from two angles: firstly, from a conceptual perspective piracy does not represent an actual physical loss of anything by the ‘victim’ (record label or artist) – just a perceived loss of a potential opportunity to sell something, contrary to copyright lobby advertising campaigns and references to “Copyright Theft”. Traditionally, theft results in the loss of a CD or DVD or whatever other medium you choose – something that cost money to produce and distribute – from a store or other location, where as piracy is more akin to criminal conversion. Secondly, if piracy were theft, the penalties would be much much lower (see Off The Shelf for an excellent, well-cited analysis on TV shows – I believe the contrast is even more extreme for music CDs). Also note that criminal copyright infringement requires that the infringement be for commercial advantage or private financial gain.

Note (2): Of course music, films and other media have been exposed to piracy for years as well – audio cassette tapes and VHS tapes have been easy to copy for decades, and even copy protection such as Macrovision on VHS hardly made things too difficult due to devices such as this or these. However the key difference with digital piracy was that the content could be repeatedly copied without loss of quality.

Note (3): Digital music can be stored ‘losslessly’ (at CD quality) at a rate of just under 10 megabytes per minute (80 minute CD = 700MB). MP3 format songs that represent almost all of the audible data of a song can be stored at (very roughly) a rate of one or two megabytes per minute of music. For comparison, video and soundtrack of a 5mbps MPEG2 2 hour DVD-quality movie requires storage of just under 5 gigabytes or approximately 62 megabytes per minute – compression to ‘widely acceptable’ (as observed on online distribution and Video CD formats popular in Asia) mpeg or divx quality can be acheived with approximately 700 megabytes of space or approximately six megabytes per minute (DVD video example taken from http://www.dvdforum.org/images/Forum_HD_DVD_Universal_24.pdf page 2)

Note (4): Admittedly there are a large number of costs involved in producing an album, not all of which are immediately obvious (the Music Business Calculator lays it out quite well), however the costs involved are usually not even on the same scale as those for films.

Note (5): “Can’t compete with free” has been a factually incorrect ‘battle for hearts and minds’ phrase (alongside “downloading is stealing”) from the very beginning – see here for more detail

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  One Response to “The end of Digital Rights Management (DRM) for music”

  1. […] James R. Scott wrote an interesting post today on The end of Digital Rights Management (DRM) for musicHere’s a quick excerptEach of the changes considered above that the labels make (to compete both with Apple and with illegal online downloading) are good news for consumers. … Traditionally, theft results in the loss of a CD or DVD or whatever other medium you choose – something that cost money to produce and distribute – from a store o… Want to read more? Click here. […]

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