Apple, analysts on the new music service
When Apple Computer Inc. unveiled its online music store on Monday, the company was able to bring together the five largest record labels with millions of Macintosh users that they hope will be willing to part with a few dollars to download songs. While analysts generally agree the service is a good idea, they do disagree on the price and what effect moving the service to the Windows platform will mean for the future online music buying at Apple.
How did they do it?
How was Apple able to get support from the record companies, the RIAA and, judging from the reaction of many users to the announcement today, the buying public? IDC analyst Roger Kay summed it up in two words: Steve Jobs.
"One factor is the Pixar relationship," Kay told MacCentral. "Jobs has some standing with these guys that the Microsoft people don't."
Kay explained that while Microsoft has the financial might, the music and film industries like dealing with their own people -- Jobs has been able to build relationships in the industry and is, in his own way, a "rock star."
"Nobody has ever come up with a proposal for the record companies with the right balance and that is clearly what has been lacking," said Jupiter Research analyst Michael Gartenberg. "Apple brings a lot of credibility to the table -- many of the executives at the record companies are probably using an iPod."
Cost too much?
Apple kicked-off its online music store with 200,000 songs available for download, as well as several exclusive songs and videos from artists like U2, Eminem, Bob Dylan, Fleetwood Mac and others. Unlike other services on the market, Apple opted for a per song/album download fee instead of a monthly subscription.
"Market research we have seen shows that people who have tried the file-sharing or subscription services are willing to pay for something that's of high-quality and greater reliability -- we have brought that solution to the marketplace," said Chris Bell, Product Line Marketing Manager for Music Distribution and Software at Apple. "We believe, as do our partners at the five major record labels, that we have a compelling enough product that people are going to gravitate towards it."
Users are able to download a song for $0.99 each or purchase an entire album, giving them the flexibility to pick and choose their music library. Analysts don't agree that the price per song is low enough to bring Mac users running to sign-up for the service.
"Ninety-nine cents may be too much -- I like $0.15," said Kay. "I would pay $0.15 for a tune that does exactly what they are describing. For $0.99 more people will take their chances with a file-sharing network."
But Jupiter Research analyst Michael Gartenberg, doesn't agree saying the price Apple placed on the individual song purchase "is in most peoples sweet spot."
Piracy is not going away
What the analysts do agree on is that piracy is not going away. Apple's service will appeal to some, but not everyone will choose to pay for a song that they can download for free on a file-sharing service. Apple is counting on the quality of the service and appealing to the conscience of the consumer to win over music buyers.
"We have a very compelling proposition for people that are downloading free music," said Apple's Bell. "First of all, the reliability that we offer in the store is unparalleled; every song in the store is in AAC quality, we offer streaming previews and with one-click buy you can spend so much less time to get a much higher quality file than you ever would on file-sharing. Obviously, free is a very compelling proposition for the customer, but it's stealing."
But Gartenberg doesn't think it's the price of the songs that will keep some Internet users downloading music for free instead of paying, it's more what we've become accustomed to on the Internet.
"At the end of the day Apple is not going to stop music piracy on its own. People that want everything for free and are not willing to pay a penny for their music are not going to go with this service. But they aren't going to go with it at $0.50 a song or $0.10 a song -- there is no sweet spot for those people."
IDC's Kay agrees and says that different segments of the market will react differently to the service.
"If you are asking college students to pay for music, the answer is probably going to be no," said Kay.
Digital Rights Management
Apple has implemented a framework of Digital Rights Management (DRM) in its music service, but it's not something Apple thinks most users will even notice.
"The only restrictions in place are really to prevent blatant piracy where people would try to copy the same CD more than 10 times," said Bell. "Our average Macintosh customer is not even going to see the copyright enforcement we have in place."
Another function of DRM in the music service limits people from sharing the songs they download from Apple. If you download a song and send it to a friend, that person will need to authenticate as you before they will be able to listen to the music. However, if you are listening to the song on up to three Macs, the songs will play fine -- if you want to put it on a fourth computer, you will need to deauthenticate one of the other computers in the iTunes preferences.
The framework for the DRM is included in each AAC song you download, which iPod Product Manager, Danika Cleary explained would be approximately 25 percent less in size than a similarly encoded MP3 file.
"Apple has done a really great job in terms of balancing rights management for users as well as getting big labels on board," said Gartenberg.
Sharing your tunes
Using Rendezvous zero configuration networking, users can now share their music on an internal network with other iTunes 4 computers. A checkmark in the preferences allows all music or certain playlists to be shared with a password if you choose.
You can also connect to other people's playlists over the Internet using iTunes 4. By entering a friend's IP address and the password they assigned to their music library, you can access their entire library of music or individual playlists and stream it to your computer. You cannot, however, download any of their music to your computer.
"There is an advanced feature that's intended for your own personal use that will allow you to type in your IP address so you can listen to your home music library from the office," said Bell. "We designed the feature around personal use in a local network."
Not International or Windows ... yet
For now, Apple's music service is for users in the United States only. The iTunes Music Store requires a valid credit card with a U.S. billing address in order to purchase music.
"It has to do with the way the record industry is structured and our contracts with the record companies -- we have every intension of expanding the service internationally."
The service is also not for Windows users although Bell said that Apple would have a music store for Windows users online by the end of 2003.
Jupiter's Gartenberg believes the online service can be successful as a Mac service, although bringing it over to the Windows platform and the volume associated with that will be a challenge for the company. IDC's Kay believes the service will have limited success without a Windows component.
If you can't beat them, join them
The Recording Industry Association of America (RIAA) has won several huge cases in its battle against online music piracy over the last few years, but the problem has not gone away and users have repeatedly found alternate ways to share music.
In its ongoing litigation the RIAA last week won another battle against Verizon Internet Services Inc. over music piracy. A U.S. federal judge sided with the recording industry in its efforts to subpoena the name of a music downloader, upholding a portion of the Digital Millennium Copyright Act (DMCA) that requires Internet service providers (ISPs) to turn over names of alleged copyright infringers.
But not everything went the RIAA's way last week. Late in the week, a Los Angeles federal judge dismissed a lawsuit against file-sharing services Grokster Ltd. and StreamCast Networks Inc. saying that they can't be held culpable for illegal file trading done over their networks.
The ruling, made by U.S. District Court Judge Stephen Wilson, represents an almost complete turnaround from previous victories the record and motion picture industries have had in cases involving illegal peer-to-peer (P-to-P) file trading.
In his opinion, the judge ruled that the P-to-P networks have substantial noninfringing uses in addition to infringing uses that cannot be dismissed.
The Recording Industry Association of America (RIAA) and the Motion Picture Association of America (MPAA) are expected to appeal the ruling, but perhaps Apple's solution gave the organizations a good middle ground for something they tried for years to get ride of. In Roger Kay's opinion they really didn't have a choice.
"The handwriting was on the wall for the music industry -- they saw the fact that unless they did something they were just going to lose," said Kay.