A year after iTunes Plus, Apple faces stepped-up competition

A year ago, if you wanted to purchase and download music without digital rights management—aka DRM, the protection scheme that controls what you can do with your digital media—your choices were few and far between. Some small outfits, such as eMusic, sold DRM-free music, though not usually from the major labels. And while other services, such as Yahoo Music, had toyed with DRM-free releases, it was only for limited promotions. But the vast majority of digital music available online, from vendors like Apple, Microsoft, and Napster, used some form of DRM to protect its content.

Then, in February 2007, Apple CEO Steve Jobs wrote a lengthy and seemingly unprovoked essay on the subject of DRM, entitled “Thoughts on Music.” In the piece, Jobs said that Apple would adopt an entirely DRM-free catalog “in a heartbeat,” presuming the four major record labels—Universal, Warner Music, Sony BMG, and EMI—would let Apple do so.

Jobs argued that DRM had never been effective at combatting piracy, given the fact that all music sold on CDs was essentially unprotected, and even those digital schemes that did exist had loopholes: Apple itself had for years allowed its iTunes customers to strip the DRM from their purchased music by burning files to CD and then re-importing them.

The world Jobs laid out, where all music sold by online stores would be completely interoperable and DRM-free, seemed to many to be a future seen through rose-colored glasses. Six weeks later, however, it went from fiction to fact when Apple announced a deal with EMI to distribute DRM-free tracks on the iTunes Store.

The initiative, dubbed iTunes Plus, would see EMI’s entire catalog made available on the iTunes Store without DRM, in a higher-quality audio format for a premium of 30 cents more than the usual 99-cent track price. The ever-ambitious Jobs predicted that by the end of 2007, half of iTunes’ catalog would be available without DRM, a move that would necessitate deals with the other major record labels.

Apple never reached that milestone, however. So what happened?

Share and share alike

In order for Apple to pass that vaunted halfway point, it would have needed to get one of the other big music companies on the DRM-free train. The labels, however, had long been uncomfortable with the amount of power Apple wielded, such as insisting on the flat 99-cent price per song. And with Apple as the runaway leader in the digital download market—and increasingly in the music market as a whole—the labels had little in the way to use as leverage.

“Steve Jobs was getting pushback from the labels,” says Phil Leigh, president of Inside Digital Media, which analyzes the digital-media industry. “The labels really have had a rocky relationship with Apple, particularly because they are concerned that Apple has too much power.”

In late 2006, Universal had maneuvered a deal with Microsoft to take a cut of sales on its Zune music player, with the rationale that the devices would likely be full of pirated content. Getting a slice of iPod sales would have been the holy grail for the labels, but that was a term that Apple was never going to agree to. So when Universal’s contract expired in July of last year, the music company announced that it would not renew its long-term blanket deal, and would instead market its music “at will.”

Meanwhile, competing music stores had been engaged in an uphill battle against iTunes. Much of that success can be attributed to iTunes’s close ties to the iPod, which remains to date the most popular digital music player on the market; as of December 2007, it held a 67 percent market share. Of course, iPod owners have never been limited to getting their music from the iTunes Store—CD ripping has always been possible—but all of iTunes’ rivals used DRM schemes that were incompatible with Apple’s portable player.

The labels saw an opportunity with DRM-free music, which they thought would allow them to tip the balance of power back into their favor by freeing them from Apple’s stranglehold on the digital download market. Since DRM-free music can be played on the iPod without any sort of technological tomfoolery, providing those tracks to other providers would open up Apple to competition—and the record labels were in a position to make that happen. In August 2007, Wal-Mart and Real Networks announced support for DRM-free music, both prominently featuring DRM-free tracks from Universal Music Group.

“The reality is there are some out there who would like to see more competition for Apple, and DRM-free is one potential lever to create that,” says Russ Crupnick, vice president and senior industry analyst for the market-research firm NPD Group. “The record labels feel that DRM-free is in their interest.”

Inside Digital Media’s Leigh agrees, saying that while Jobs “correctly inferred that the labels were going to have to shift to a DRM-free format, he miscalculated that they would shift towards his competitors.”

Amazon MP3
Amazon MP3 offers DRM-free tracks from all the major labels.

The cannonball into the pool of the digital music download market came in September 2007 when retail giant Amazon launched its own long-awaited music download service, featuring an entire DRM-free music catalog from both EMI and Universal Music Group, as well as a number of smaller independent labels. By leveraging its enormous existing customer database, distributing a free program that tied into Apple’s iTunes music software, and undercutting the pricing on iTunes’s DRM-free offerings, Amazon positioned itself as the first major competitor to iTunes.

Apple responded the next month by dropping the 30-cent premium on its DRM-free tracks—they would cost 99 cents just like protected songs—and announcing that it had struck deals with independent labels to bring an additional two million tracks of DRM-free music to iTunes. That brought iTunes’ total of DRM-free tracks close to half of its 6 million song catalog. (It’s impossible to know for sure since Apple has not released exact numbers and declined to offer more detail.)

Meanwhile, iTunes rivals have picked up momentum on the DRM-free front. Earlier this year, Amazon picked up the other two big record companies, Sony BMG and Warner Music Group, making it the first digital music site to boast DRM-free tracks from all the major labels and boosting its total catalog to 5.2 million songs. Just this past week, former music-sharing site Napster reinvented itself by launching an all DRM-free service and claiming the crown of largest MP3 catalog around with over six million songs. And in April 2008, Sony, Universal, and Warner also announced deals to distribute DRM-free tracks on News Corp.’s popular social-networking site, MySpace.

But for all that they appear to have embraced DRM-free music, Sony, Universal, and Warner continue to withhold the unencumbered tracks from Apple, choosing instead to back iTunes’s rivals. It would seem that Steve Jobs’s proposed future of DRM-free music has quickly become a reality—if not in quite the way he envisioned.

Does DRM matter?

iPod classic

But for all of the noise about Digital Rights Management, the broad availability of DRM-free music has done little to change the overall digital downloads market; people clamoring for it appear to be a vocal minority. Despite iTunes’ meager selection of DRM-free music compared to Amazon and Napster, customers are still buying tracks from iTunes in droves. According to NPD’s Crupnick, Apple continues to hold around three-quarters of the digital download market, with Amazon in second place, trailing at “a huge gap.” Apple’s even risen to become the top seller of music in the U.S., beating out brick-and-mortar stores Wal-Mart and Best Buy.

“There’s been no real substantive change in market share for iTunes and for the iPod,” says Crupnick. “If you’re in that environment, DRM-free doesn’t impact you.”

Phil Leigh agrees: “The amount that it hurts Apple is almost unnoticeable. Most people that have MP3 players have iPods. And the vast majority of iPod owners are unaware or [disinclined] to use other services.”

And the number of those services on the market is narrowing, too. In the past year, several download sites backed by prominent companies have closed their doors, including Sony’s Connect store and Yahoo Music.

Music services shutting down may let DRM finally shows its teeth. If a brick-and-mortar music retailer goes out of business, all of the CDs you bought there continue to work just fine. But the matter is not so straightforward in the online music world. While many of the closing services operated on a subscription basis that offered unlimited music as long as you paid a regular fee, some also let users download songs to their computer for an additional fee. What happens to those tracks when the service closes?

Phil Leigh thinks issues like this could prompt more awareness of DRM in the future, as digital media becomes even more a part of our lives. “When people buy new computers and try to move their libraries, it’s not straightforward. There’s going to be some foul-ups, disillusioned consumers.”

Microsoft is one company that’s recently had to deal with just this sort of problem. The company’s MSN Music venture stopped selling music in 2006, but only recently announced its intention to shut down the servers that let users continue to play purchased music at the end of this summer. Past that point, those users will only be able to play their music as long as they keep using the same computer and operating system. But if they upgrade either hardware or software, they’re out of luck.

For all of that, though, most users haven’t yet found themselves on the business end of DRM. “It’s not an issue for the average consumer,” says Crupnick. “The average consumer is an Apple consumer and they don’t run into DRM issues except for very rarely.” It seems that as far as most people are concerned DRM is not a major factor when buying media online. At least, not yet.

The future

In the long run, music isn’t the only form of media DRM is concerned with either. In the five years since its inception, the iTunes Store has steadily expanded, adding audiobooks, podcasts, TV shows, movies, and even games for the iPod. In June 2008, Apple will also launch its AppStore, which will let iPhone and iPod touch users download software directly to their devices. And nearly all of this media is or will be protected by DRM too.

As the former CEO of Pixar and now a board member at Disney, Steve Jobs clearly has a vested interest in video. When asked about the topic at Apple’s joint press conference with EMI first announcing the DRM-free initiative, Jobs said that video was different from music: you can’t go out and buy DRM-free video, even on a physical medium like a DVD. To some that might seem like a rationalization, but if nothing else it’s an indication that the movie and television industry are eager to avoid the mistakes of their cousins, the record labels.

“You’ll continue to see DRM on video,” says Russ Crupnick.”The video people look at the way music is acquired and go ‘we don’t want to wind up like that.’ It’s killing the business.”

Inside Digital Media’s Phil Leigh concurs: “The natural instincts of the people that control the studios is to try and control [the media] as much as possible.”

Leigh foresees a two-prong model for video, where companies will offer their content in both ad-supported and for-pay formats. But he thinks consumers will be more forgiving of DRM on video, too, because it’s consumed differently. “The problem with music is you want to move it one from device to the next; with movies you just want to watch it once.”

But both Crupnick and Leigh agree that the march toward DRM-free music will continue. “In the long term, the reality is we are going to a situation where we’re going to be DRM-free for individual downloads,” says Crupnick. Leigh points out that the record industry’s sales have been in decline over the last several years, and says that he would be unsurprised to see them drop even more.

“It puts more pressure on the labels than on Apple.” The relationship between Apple and the labels will change over time, Leigh says. “The question is: who has more time?”

[Associate editor Dan Moren blogs about Apple at MacUser.]

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