Steve Jobs and Digital Rights Management Systems
The Digital Rights Management of Music Debate Continues
February 6, 2007
Steve Jobs' Internet article has raised some controversy however it is worth reading to get an industry insider's overview of the situation. An important part of his argument is that CD sales in conventional shops are not sold with digital Rights Management Systems (DRMs) installed - unlike DVDs for example. As a result a CD can easily be bought and uploaded to a downloading site and quickly spread around the world. What stops the industry doing anything is that there are tens of millions of CD players unable to read CDs which are DRM enabled:
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. The music companies sell the vast majority of their music DRM-free, and show no signs of changing this behavior, since the overwhelming majority of their revenues depend on selling CDs which must play in CD players that support no DRM system. (Jobs 06/02/07 my emphasis).
Jobs continues by asking:
So if the music companies are selling over 90 percent of their music DRM-free, what benefits do they get from selling the remaining small percentage of their music encumbered with a DRM system? There appear to be none.
Jobs' iPod still dominates the paid for download market but Apple and the music companies need to make more from this market to ensure that they keep ahead of their rivals.
A Sceptical Take on Jobs by Bill Thompson
Bill Thompson evinces the specticism of a good journalist and comments that for all Jobs' heartbeating antics about how terrible it is that the 'Big Four' of the music industry (Sony / BMG, Warner, Universal and EMI) don't release their hold on DRM Apple do very nicely out of the deal thank you:
I don't believe him. If Apple switched off Fairplay then they would probably sell a lot more songs, on which they make very little money, and a lot fewer iPods, on which they make a lot. I don't buy songs from Apple's store because I don't like DRM. (See full Thompson article)
Thompson plausibly argues that Jobs is an excellent self-publicist who knows how to distract the crowds. Lets face it Vista seemed to get less attention than the much vaunted and very expensive iPhone. Thompson points out that the industry model of digital music is likely to change again. Perhaps with the music companies allowing fans far more freedom with the tracks than previously. Certainly they will need to work out something plausible soon because otherwise there will less and less reason for bands to sign up to them with social networking and alternative revenue models developing all the time:
They are actively exploring alternatives to rigid control of sharing, like flat-rate permissive licensing that would track usage and reimburse artists without limiting what fans can do.
And they are - like EMI - looking to set up their own music stores selling unencumbered tracks direct to fans.
A BBC report produced on 15 / 02 / 07 acouple of days after Thompson's comments notes that:
Almost two-thirds of music industry executives think removing digital locks from downloadable music would make more people buy the tracks, finds a survey.
The Jupiter Research study looked at attitudes to Digital Rights Management (DRM) systems in Europe music firms.
Analyst Mark Mulligan, one of the authors of this report doesn't think that there will be any serious moves away from the DRM model in the near future at least:
"Despite everything that has been happening the record labels are not about to drop DRM," said Mr Mulligan. "Even though all they are doing is making themselves look even less compelling by using it."
Other Business Models?
At times it seems as though the Music industry and the hi-fi industry are ending up shooting themselves in the foot and we can see CD sales from the high street dropping through the floor as EMI gave a shock announcement on the 12th of February:
Blaming weak CD and DVD sales in the US, it said it now expects its profits for the year to 31 March 2007 to be 15% lower than 12 months previously.
This was the second profits warning in recent weeks. Old time invesment experts often say that the first profit warning is usually the prelude to a second one and EMI has not proved to be an exception to this adage. As I indicated in the previous article a week the music industry is being turned upside down. Don't put your pension into EMI whatever you do. If you want to throw money away at least do it for the 'good causes' on the National Lottery. Don't believe me? Just take a look at the share price chart below. This is at a time when the FTSE and the Dow Jones are on highs. Just imagine what it will look like when the markets soften!
EMI share price after second profits warning
What the music industry needs to do is to consolidate fast in agreement with the manufacturers of music replay hardware. This is important because serious music lovers of classical, jazz etc tend to try and spend money on good hi-fi / AV-systems. The SACD / DVD Audio format war has been ridiculous. Nobody is prepared to accept the Betamax / VHS situation again. Now there is a replay with Blu-Ray & DVD-HD. Older people who would like the quality and the surround sound capabilities if music is being designed for this are unlikely to buy in until more all-purpose players are available. The youth market who were once likely to buy CD singles and CDs just aren't.
Can the popularity of artists like Kylie Minogue really save EMI?
Perhap one answer for the music industry to consider is that music targeted at teenagers only comes out through iTunes. If there are album length contributions in shops these should be in the latest high definition format with DRM. This however risks leaving the market wide open to savvy teenagers who are perfectly capable of marketing themselves over the web. Making an alternative downloads service with very cheap downloads is perfectly feasible entirely bypassing iTunes.
One thing is for certain, if the US is currently the cause of EMI's profits problem where DVDs and CDs are so much cheaper than in the UK because people are turning to downloading, there is just enough time to get your pension out of Virgin Music and HMV because they are going to run into real big trouble soon. A danger I predicted for Viacom shareholders a couple of weeks ago. Only the most adaptable and clever of these older media organisations are going to survive. Some forced consolidation in several areas seems to be on the cards. This has been forced upon the EMI-Toshiba joint venture (see below) in Japan last December for example.
There isn't one! Keep watching thing space there are planty of twists and turns to come but if they don't sort it out soon then that most enterprising of companies Google with very deep pockets may well come up with the new killer model. Just think of all the different kinds of music you could access whilst going round Google Earth for example :-).