Tuesday, February 6, 2007

DRM 2.5 - Apple Strikes Back

Steve Jobs has posted this essay, which appears to be a response to a growing consumer outrage about the pain that is digital rights management, known as FairPlay in the Apple world. He does a very nice spin job of blaming the music industry for Apple's business decision to have a single, proprietary DRM standard (ensuring that iTunes stuff only works on iPods).

His main points about why Apple is such a great company that's just doing it's best to look out for the music industry (as opposed to doing it's best to sell zillions of ipods) are essentially a crock:

SJ: 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. 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.

So, Steve is basically arguing that what amounts to a minimum $30-$35 competitive advantage per unit out of the door is unimportant. Additionally, his figures in all likelihood far underestimate the investment per user, since not all those 90 million iPods ever sold are in service. How many of you are on your first one...

SJ: The most serious problem is that licensing a DRM involves disclosing some of its secrets to many people in many companies, and history tells us that inevitably these secrets will leak.

Steve himself noted, elsewhere, that pirates routinely hack the existing system. What possible additional threat could come from a legitimate company, when the system is far from secure already? A single, centrally managed DRM system would be far more secure than many different systems.

SJ: ...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.

Well. Of course they would switch, because they'd have no choice!! Who would ever shop at iTunes again, if you could buy a non-DRM version of all the same music elsewhere? But to blame this on the record companies is a bald-faced lie. At this moment in time, Apple encrypts ALL music they sell on iTunes, even when the copyright holder does not require it (and, indeed, sells it elsewhere without encryption.) For example: They Might Be Giants, and a number of other non-major-label bands. If Apple is so anxious to embrace the free world, then why DRM stuff that doesn't have to be DRM'd?

Apple has nothing to gain, and a lot to lose, if DRM goes away. This is all PR designed to blame the music industry for their anti-consumer business model and try to come out smelling like roses. But I can't think of a single proprietary standard in history that didn't go the way of the dinosaur before too long, and obviously the backlash is starting to swell.


LeeB said...

Apple's cost-benefit from DRM going away might not be as clear as you think.

Is there a downside for apple - yes, they would lose this entry barrier/switching cost that applies to the people that have bought the ipod. This opens up the market for other players.

But they've got a pretty big lead at this point - most say that their hardware is the best, and the ITMS is pretty good too. And the combo works (almost) flawlessly.

If DRM goes away, I'm betting that ITMS sales go up, rather than down. So while they might lose some people away from the ipod, they're going to gain music sales, and if they maintain their product leadership (which is now backed by huge brand equity), they stand to benefit more as the leader in the field.

Jamie said...

I agree with your basic analysis. But DRM going away will be good for online music sales everywhere, not just iTMS.

iTMS is a pretty small piece of the action for Apple compared to the hardware sales. I don't know what their cut is from the each song sold, but at an average of 22 songs per iPod sold, it's probably not more than 5 or 10 bucks per ipod, not counting whatever overhead it costs them to run the store.

If the demise of DRM costs apple even a 10% market share on hardware, I'd think that would more than outweigh any benefit from increased music sales.

Of course I'm just guessing at the scale here, I could be a factor of 10 off. There's no question DRM limits music sales - i just wonder how much.