Apple gets to drop DRM, goes variable pricing, and gets OTA rights

Apple finally worked out deals with all the major music labels so they could offer iTunes Music without customer-unfriendly DRM (though their files will still be encoded in Apple's flavor of the unfamiliar AAC codec). In return, Apple agreed to two new price points: 69 cents and $1.29 in addition to 99 cents. The labels have long wanted variable pricing in iTunes.

But the big news here is OTA (Over The Air) rights, which allows music to be sent over cellular networks at the same price as IP/WiFi transmission. That's huge for mobile music! The labels were salivating at the prospect of extending their overpriced ring tone business into overpriced full downloads, and for many years have priced OTA rights out of the market. Luckily for the rest of us, consumers are not that stupid. If you can buy a song on your computer for 99 cents (or steal it for free), why in the world would you buy it on your phone for $2 or $3?

Labels also finally recognized the reality of the use cases around mobile music: if I buy a song on my PC, do I also get it on my phone (or vice versa)? If I buy it on my phone, why can't I move it to my PC?

So unifying full download prices across all delivery methods finally makes some sense.

Now music publishers must recognize reality and allow multiple fulfillments of the same song to the same person. No more 30 cent mechanical license taxes for more copies of the same song delivered to the same person in a different file format, on a different device, or for upgrades from the DRM version to the non-DRM version.

Resnikoff on DRM-Free

Resnikoff's Parting Shot: The Downer on DRM-Free

Paul Resnikoff of Digital Music News spends an amazing amount of time following the digital music business. Where does he get the time!?

In the post linked above, Paul discusses the lack of any sales bump from licensing non-DRM music to Amazon and others, and compares it to Apple's continued dominance, even though most Apple music remains locked up in Fairplay DRM. The complaint seems to be that non-DRM is not moving the needle.

I look at it the other way around: it was DRM that didn't move the needle.

This proves DRM was an unnecessary technology the music labels forced on distributors for years. DRM is inherently anti-consumer, and at the razor-thin margins the labels require (driven by Apple's refusal to budge on the 99 cent price point), no distributor can afford the customer support calls DRM creates.

Even after DRM has been proven a failure, the labels continue to make stupid mistakes even now with restrictive licensing rights and lack of margin to build a business.

Common Licensing Authority

Movie Labels (sic) To Launch New "Open Market" Play Anywhere Scheme As Last Ditch Effort To Save DRM

Here's a link to an idea Sony is pitching to help simplify delivery of DRM-protected rights. It's a media delivery concept that's been kicked around for a while: common licensing authority. The idea is that some transparent, neutral third party is authorized by content owners to supply rights (i.e. DRM licenses) to retailers' customers. The third party would ensure rights are delivered properly, and report to retailers and content owners on the number of licenses delivered. Content owners can then reconcile those numbers with reports from the retailers.

It's a fun idea in theory and similar schemes have been pitched to the music labels with no results, but it will never work for several reasons:

1. DRM is inherently customer unfriendly. Microsoft's disasterous marketing of its DRM and logo program (WM DRM, Janus, "Plays-for-Sure") shows that too much choice is actually a bad thing for the user experience. Unless you implement a seamless vertical like Apple/iTunes/iPod/Fairplay has, DRM ultimately gets in the way. DRM is not easy - not for customers, and not even for distributors. Content owners will continue use DRM as a crutch to remain lazy, anti-consumer, and kill innovative new distribution models.

2. A common licensing authority must be seen as a neutral player. It could be set up as a disinterested industry consortium, but if Sony is seen to be controlling it, distribution will be limited.

3. Licenses must work across platforms or consumer messaging will be prohibitively complex. This is not as easy as it sounds. The DRM must work the same on anything: Windows PCs, Mac PCs, Linux PCs, cable set-top boxes, DVRs, auotomotive entertainment systems, mobile phones and PDAs, portable devices, etc. The complexity matrix is daunting.

4. The DRM market is fractured. Microsoft won't license its DRM for Linux desktops. Apple won't license its DRM to anyone. 3rd party DRMs (like Macrovision's) have some support from the studios, but the market is too fractured. Macrovision is currently the only company positioned to offer a common DRM. Content owners are afraid of Microsoft, and would shy away from declaring its DRM as the standard.

5. Common rights will commoditize distributors who will reject the inability to leverage brand advantage. The alternatives, like charging more for additional rights or granting exclusive rights, will only increase the complexity of consumer messaging.

Napster and Amazon

Here are two Fortune stories on CNN about digital music that show what's wrong with the music labels' expectations, and the only way to survive under the labels' regime.

The first is about Napster's problems as a digital music pure-play trying to survive on the razor-thin margins it makes on music. Napster has never been profitable.

The second is about Amazon's MP3 store and its (and Apple's) successful big box store strategy of using music as a loss leader to get customers through the door, hopefully encouraging shoppers to attach other, higher margin, items to their purchases.

Apple doesn't care that they're not making money on music purchases. They're making tons of money on their iPods, and some more on iPod users who are switching from Microsoft to Apple PCs. Yet, the labels continue to allow Apple to define the market prices for music downloads.

The major music labels insist their content has intrinsic value. Unfortunately, the digital market disagrees - and the customer is always right.