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.

DRM's missed opportunity: Digital resales

Here's a story via Digital Music News about a new service, Bopaboo*, that lets people sell their "used" MP3s.

Artists and music labels have long hated used record and CD stores because the labels don't participate in the resale revenue. Part of the DRM strategy was keeping the first sale rights, and preventing any second sale. A few services like the defunct WeedShare and PassAlong attempted to emulate digital redistribution, but weren't true second sale enablers.

But the missed opportunity for the labels and for DRM providers was allowing a service to act as a second sale clearinghouse, where the labels could have participated in a share of the resale revenue. (Though I'm sure their margin demands would have killed any market even if labels welcomed the concept.) This provides an opportunity for the service to benefit from a captive market for second sales since the service holds the secret DRM keys that are needed to revoke the license. No other service could revoke the license.

Through license revocation, DRM can guarantee that a digital track is no longer playable for a seller. A service that made a DRM first sale could revoke the license from the seller, and grant a license to the buyer. Most labels even included a set number of burns for a first sale. The selling service could keep track of how many burns were used, and issue the new license with only the remaining burns available. If no burns were left, a non-burn license could be delivered - the buyer could play the song on his computer or a portable player, but couldn't burn it to CD.

The number of burns remaining would surely affect the market value for the second sale. Imagine a DRM service with a product page similar to Amazon's physical product pages that include a price for "new" from Amazon, or "used" from any number of sellers:

The Cinematics - Race to the City
New: $0.99 (5 burns)
Used: 4 burns left, $0.80 (4 available)
Used: 3 burns left, $0.65 (1 available)
Used: 2 burns left, $0.50 (2 available)
Used: 1 burns left, $0.35 (6 available)
Used: 0 burns left, $0.25 (12 available)

Labels could still participate at some percentage of the second sale value.

The seller could have burnt a song to CD once, then rip it back to her computer to keep. But nothing, even with DRM, is preventing her from doing that now and sharing the copy freely. Why not incent her to make a little of her investment back rather than giving the file to strangers for free? If she gives it away free, she's destroyed her own opportunity to sell it.

Of course all this so far still depends on DRM being more user friendly! And any owner who had lost her download or DRM database couldn't resell the song because revocation would be impossible. But she can't resell a CD she lost either.

Even without DRM, a second sale service could guarantee the destruction of the MP3 file on the seller's computer before delivering it to the buyer. Again, the seller could have made any number of copies elsewhere. Again, nothing's preventing that today, with no option for any second sale revenue to the labels.

* Domain name scarcity is destroying natural language!

DRM is Poisonous

I will admit that I used to think DRM was an enabling technology, especially for unlimited music subscriptions. Without DRM, nobody will let you download an unlimited amount of content. Without an unlimited amount of content for a fixed price, music consumption is bogged down with any number of 99 cent buying decisions. An a la carte permanent download (PDL) world is just not how music should be enjoyed.

Unfortunately, users do not want subscriptions to music. They've never really subscribed to music: radio is free (paid by advertising on a fixed and predictable compulsory license rate structure); and LPs, singles and CDs were purchased a la carte giving the customer a sense of physical ownership. Thankfully, now to the rescue of unlimited consumption comes streaming and an always-connected broadband world. Now DRM doesn't matter - services can still provide an "all you can eat" experience without too much worry that the user will walk away with your entire catalog. To limit or turn off consumption, just turn off streaming access.

So back to the thesis of my headline: DRM is poisonous. Not only was customer support for Microsot's DRM expensive, most companies who have tried a DRM music service are now feeling the pain of what it means to migrate, sell, or shut down their DRM services. MTV's Urge, Microsoft's MSN music store, Yahoo!'s Music Unlimited, and Wal-Mart's a la carte store have all had their customers revolt after attempting to shut off DRM re-licensing for PDLs they sold. This is a brand manager's nightmare.

And those are the DRM service that have already closed. What will happen when Napster is sold or shuttered? What will happen with Rhapsody decides to change its business model? What happens when Apple wants to change its delivery method? Yahoo! has announced they will be giving coupons to re-purchased music on Rhapsody to customers whose PDL licenses have been lost. Wal-Mart has decided to keep its DRM license servers up longer. In an already razor thin margin business, dealing with DRM customer service issues, and keeping servers running after a service has been shuttered turns music into a money-losing weight on distributors.

Next up is what happens to the CinemaNow and Movielink movies you have purchased? Movie studios understandably want to protect their content, and in their case, streaming is not yet an option for high resolution HD 720p or 1080p video. Netflix, Hulu and others seem to be able to stream decent video quality, but customers will soon demand higher resolution as they convert over to newer, larger flat-screen and home theater displays.

So I'm converted: DRM is evil.

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.