April 15, 2007

iTunes and the Downloading Industry

AS Media New Media Technologies : Second Essay

Essay Title

The Financial Times suggests that Apple's investment in iTunes has allowed it to dictate terms to the industry. How far do you think this is true. Would you expect to see iTunes lose its dominance soon? How might the music companies deal with the future of music via the
Internet? Explain your thinking on this.

The success of the iPod:

CUPERTINO, California—April 9, 2007—Apple® today announced that the 100 millionth iPod® has been sold, making the iPod the fastest selling music player in history.

iTunes and the Music industry

One media consultancy, Enders Analysis, predicted this week that global music sales would fall to $23bn in 2009, down 16 per cent from last year.(My emphasis from FT Published: April 12 2007 22:05)

Steve Jobs CEO (Chief Executive Office) of Apple had distributed an open letter online challenging the big four music companies to allow Apple to distribute their music free of digital rights management. 

Some interesting extracts to get you thinking 

To begin, it is useful to remember that all iPods play music that is free of any DRM and encoded in “open” licensable formats such as MP3 and AAC. iPod users can and do acquire their music from many sources, including CDs they own.

Universal, Sony BMG, Warner and EMI. These four companies control the distribution of over 70% of the world’s music. When Apple approached these companies to license their music to distribute legally over the Internet, they were extremely cautious and required Apple to protect their music from being illegally copied. The solution was to create a DRM system, which envelopes each song purchased from the iTunes store in special and secret software so that it cannot be played on unauthorized devices.

users to play their DRM protected music on up to 5 computers and on an unlimited number of iPods. Obtaining such rights from the music companies was unprecedented at the time, and even today is unmatched by most other digital music services. However, a key provision of our agreements with the music companies is that if our DRM system is compromised and their music becomes playable on unauthorized devices, we have only a small number of weeks to fix the problem or they can withdraw their entire music catalog from our iTunes store.

Steve Jobs then moves on to consider three different options for the future of downloadable music on the internet:

First option

The first alternative is to continue on the current course, with each manufacturer competing freely with their own “top to bottom” proprietary systems for selling, playing and protecting music. It is a very competitive market, with major global companies making large investments to develop new music players and online music stores. Apple, Microsoft and Sony all compete with proprietary systems. Music purchased from Microsoft’s Zune store will only play on Zune players; music purchased from Sony’s Connect store will only play on Sony’s players; and music purchased from Apple’s iTunes store will only play on iPods. This is the current state of affairs in the industry, and customers are being well served with a continuing stream of innovative products and a wide variety of choices.

Let’s look at the data for iPods and the iTunes store – they are the industry’s most popular products and we have accurate data for them. Through the end of 2006, customers purchased a total of 90 million iPods and 2 billion songs from the iTunes store. On average, that’s 22 songs purchased from the iTunes store for each iPod ever sold. (My emphasis. If you are going to answer a question using downloading as a case study you must have up to date figures. 

Today’s most popular iPod holds 1000 songs, and research tells us that the average iPod is nearly full.  This means that only 22 out of 1000 songs, or under 3% of the music on the average iPod, is purchased from the iTunes store and protected with a DRM. The remaining 97% of the music is unprotected and playable on any player that can play the open formats.  It’s hard to believe that just 3% of the music on the average iPod is enough to lock users into buying only iPods in the future.  And since 97% of the music on the average iPod was not purchased from the iTunes store, iPod users are clearly not locked into the iTunes store to acquire their music.(My emphasis)

Second Option 

The second alternative is for Apple to license its FairPlay DRM technology to current and future competitors with the goal of achieving interoperability between different company’s players and music stores. On the surface, this seems like a good idea since it might offer customers increased choice now and in the future. And Apple might benefit by charging a small licensing fee for its FairPlay DRM.

Jobs points out that clever hackers are always trying to break into systems with predictable results: 

Such leaks can rapidly result in software programs available as free downloads on the Internet which will disable the DRM protection so that formerly protected songs can be played on unauthorized players.

A related problem is how to:

quickly repair the damage caused by such a leak... It is near impossible if multiple companies control separate pieces of the puzzle, and all of them must quickly act in concert to repair the damage from a leak.

Jobs has therefore developed the following policy: 

Apple has concluded that if it licenses FairPlay to others, it can no longer guarantee to protect the music it licenses from the big four music companies. Perhaps this same conclusion contributed to Microsoft’s recent decision to switch their emphasis from an “open” model of licensing their DRM to others to a “closed” model of offering a proprietary music store, proprietary jukebox software and proprietary players.

Option 3: 

Jobs continues: 

The third alternative is to abolish DRMs entirely. Imagine a world where every online store sells DRM-free music encoded in open licensable formats. In such a world, any player can play music purchased from any store, and any store can sell music which is playable on all players. This is clearly the best alternative for consumers, and Apple would embrace it in a heartbeat. If the big four music companies would license Apple their music without the requirement that it be protected with a DRM, we would switch to selling only DRM-free music on our iTunes store. Every iPod ever made will play this DRM-free music.

Now we come to the central challenge of Jobs' argument:  

Why would the big four music companies agree to let Apple and others distribute their music without using DRM systems to protect it? The simplest answer is because DRMs haven’t worked, and may never work, to halt music piracy. Though the big four music companies require that all their music sold online be protected with DRMs, these same music companies continue to sell billions of CDs a year which contain completely unprotected music. That’s right! No DRM system was ever developed for the CD, so all the music distributed on CDs can be easily uploaded to the Internet, then (illegally) downloaded and played on any computer or player.

In 2006, under 2 billion DRM-protected songs were sold worldwide by online stores, while over 20 billion songs were sold completely DRM-free and unprotected on CDs by the music companies themselves. (My emphasis)

Much of the concern over DRM systems has arisen in European countries.  Perhaps those unhappy with the current situation should redirect their energies towards persuading the music companies to sell their music DRM-free.  For Europeans, two and a half of the big four music companies are located right in their backyard.  The largest, Universal, is 100% owned by Vivendi, a French company.  EMI is a British company, and Sony BMG is 50% owned by Bertelsmann, a German company.  Convincing them to license their music to Apple and others DRM-free will create a truly interoperable music marketplace.  Apple will embrace this wholeheartedly.

Music Companies Strategy

Interestingly EMI have decided to start to sell music via iTunes free of DRM

EMI, the UK music group, announced that it would offer music downloads free of digital rights management, or digital “locks”, on Apple’s iTunes next month. (Financial Times).

EMI will be the first of the four large record “majors” to remove DRM from its catalogue, although independent labels have always sold their songs without it.

The Financial Times notes that in April 2007 

The world’s biggest music companies are expected to ask Apple to introduce a music subscription service to its iTunes digital media store as part of negotiations to renew their agreements with the computer company

Executives at Universal and other labels believe a subscription service could prove more lucrative for them than iTunes’ prevailing model of charging consumers 99 cents per track because it would increase consumption of music. It would also entitle the labels to a share of monthly payments, in addition to small licensing fees each time their songs are played.

Warner Music's response to the Apple challenge:

Edgar Bronfman, Warner Music’s chief executive, on Thursday slapped down Steve Jobs’s suggestion that record companies do away with copyright protections for digital music in order to spur the market’s growth.

Mr Bronfman expressed hope that the two sides could cooperate, but added: “Frankly, manifestos in advance of those discussions are counter-productive.”

Watch this space over the next couple of weeks, there will be some interesting outcomes and you will be right up to date for your exam. They will also effect your day to day practices in terms of gaining access to music.  

CDs and the lack of digital rights management

Steve Jobs makes an important point although one need not necessarily agree with his conclusions. When the CD was launched by Sony/Philips as a joint development venture the prospect of them being copied was almost inconceivable. CD players were very expensive initially with even the cheapest of them worth more than many people's playback systems. They were aimed at a well off market conscious of new technologies which promised better sounding playback without the deterioration associated with Vinyl (LPs). A single scratch could easily wreck a whole album and dust was an ever present issue. Delicate cartridges were another issue. Personal computers barely existed then an the concept of the internet was unimaginable for most of the World. We are only talking of the early 1980s here!

As a result the CD didn't have any anti-copying devices in them. The first CD copiers were very expensive and the record companies insisted that they had DRM built in. The breakdown in the sytem came through computing. The invention of programmes which could 'rip' music from the CD to mass produce CDs as pirate copies took off. Then the internet added to the woes of the record companies.

SACD Copy Protection 

in 2000 Sony and Philips brought out SACD which is an enhanced sound quality multitracked disc which is far superior to CD in its potential.  Naturally these companies both of whom have been employed in producing music cpntent in the past were actutly aware of the problems of piracy. SACD is copyprotected according to the Wikipedia entry:

SACD includes various copy protection measures of which the most prominent is Pit Signal Processing (PSP), a physical watermarking feature that contains a digital watermark modulated in the width of pits on the disc (data is stored in the pit length). The optical pickup must contain special circuitry to read the PSP watermark, which is then compared to information on the disc to make sure it's legitimate.

The problem here for music companies is that unlike CD there is an alternative format DVD-Audio (DVD-A). This is making buyers reluctant to buy equipment which is limited to only one format. At the same time the audio industry has developed a technique called upsampling which improves the quality of CD playback and is available on more upmarket CD players which appeal to an audience who are more discriminateing and better off. This is the market which previously might have bought SACDs and the equipment to play them on. 

Can Blueray Save the Music Companies?

The music companies are therefore unable to bring new music out in a different standard format. Ironically it is the development of the new games machine the Sony Playstation 3 which might change the balance. If sony can establish a large base of Blueray players via the games market it should also be able to make  an audio only version for the  music playback market which offers very high quality along with encryption. Sony are already working on this according to the May 2007 edition of Gramophone magazine aimed at classical music lovers which is a big global market. The younger market will also be able to use Blueray discs in their own audio systems via audio output which will create a much larger user base than SACD and DVD-A.

If this enlarged new user base can be established and music released on blueray discs then for the forseeable future the piracy issue will drop away. The music download will be fat inferior as there won't be the multitracking information available. For the long term the message is don't spend too much money in iTunes because the ground may shift yet again. Watch this space!

If you think this is a far fetched idea look at the remarkable success of the Sony PS3 after its release in Europe. The Chief Executive of Sony quoted in the Financial Times proudly announces the following:

Sir Howard said Sony was close to selling 800,000 units in Europe. “I think [in] the first two days in the UK, £100m ($199m) revenue changed hands and that’s probably the largest consumer electronics sale in history.” My emphasis).



The Financial Times on the power of iTunes over the music industry

Financial Times on EMI going DRM free in a limited way 

Financial Times on possible music subscription via iTunes

Financial Times of the Warner response to Steve Jobs

BBC: On EMI taking DRM lock off music tracks

BBC Video on this:

EMI's Eric Nicoli and Apple CEO Steve Jobs outline the deal

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