iTunes Just Went DRM Free

Okay, that’s an exaggeration. But as an avid anti-DRM guy, I can’t go without mentioning this big news:

iTunes is going to start selling DRM free music from the 4th largest record label.

Holy crap. While the Beatles still aren’t going to be sold in digital format, virtually every other group owned by EMI is going to be available on iTunes without DRM.

a price of $1.29/€1.29/£0.99. iTunes will continue to offer consumers the ability to pay $0.99/€0.99/£0.79 for standard sound quality tracks with DRM still applied.  Complete albums from EMI Music artists purchased on the iTunes Store will automatically be sold at the higher sound quality and DRM-free, with no change in the price.

The price thing sucks a little, but I must applaud the move in general. Also, I admire the quick thinking to make whole albums cost the same amount as before, but without DRM – that’s smart.

So on to the analysis.

The EU

In recent months, the European Union has been on Apple’s case. They’ve been pissed that iTunes music only plays on iPods while regular CDs can play in any CD player. To be more clear: they’re irritated that DRM is locking down Europe’s music market into the (American) iPod. So after approximately a year of very public criticism, this announcement should shift their attention.

You see, up to this point, it looked like the only option was to make Apple license out their DRM technology. But this changes everything. Now that a major label has jumped on board, it certainly spreads the blame around to include the labels. This is a paradigm shift.

In the coming months, we should see some pressure from the EU on the music labels. See, it’s much harder for law makers to do stuff that could destroy the iPod: it’s not going to be popular among voters when Apple pulls iPods from your country because of your dumb restrictions. But the “music label” concept is a little bit more abstract. Nobody really associates Korn to EMI, for example. The problem for labels is that if some new restriction tempts them to pull their artists, they have no easy way of doing it so that consumers understand why. It’s likely people would notice, but nobody would sympathize (“What? They pulled the band because they didn’t want to make it DRM-free??”) That, and there’s more than one major label, while there’s only one iPod.

So while the labels might have had deeper pockets, Apple now has some major PR on their side making a case for Steve’s anti-DRM world. If this test case goes smoothly, other labels will feel intense pressure to follow EMI. And we’ll be seeing the most intense pressure from our pals in Europe.

Yeah, American law makers just don’t get it.

Why Did They Do It?

Steve Jobs truly believes DRM is bad. Why do I know that? Let me illustrate with a real life conversation I had:

A: Why don’t you like DRM? Works with my iPod fine.
Me: It only works with your iPod. If Apple became evil one day, they could do a lot of harm.
A: How so??
Me: Say I wanted to make a competing music player. Imagine trying to sell it to you.
A: Wait, my music isn’t going to work on your music player?
Me: Nope. That’s Apple’s competitive edge.
A: I see. Why not license it?
Me: If they did, Apple could, if they became evil, charge extortionist prices for that privilege.
A: How much?
Me: Cheap at first, but once Fair Play is the standard, Apple could say, “We’re doubling our fees now.”
A: Then why would Apple want to get rid of DRM?

See, that’s the weird part about all of this. Apple benefits the most by maintaining their Fair Play scheme. As more and more people buy iTunes music, their stranglehold gets tighter. Yet they’re trying to actively get rid of DRM. I have three explanations:

1. Apple sees a DRM “nuclear war” coming. Things will spiral out of control until legislation steps in — at which point nothing is guaranteed.
2. Apple sees the possibility of forced licensing coming. This would add huge costs to Apple as well as reduce the overall quality of the music experience. This in turn hurts Apple’s image every time a third party screws up. Jobs would fight that at all costs, and he has.
3. Jobs believes that in a free market, the iPod would reign supreme. Right now, DRM forces certain segments of consumers away from the iPod due to incompatibility with their preferred music service (which may not be iTunes).

In short, nothing good would come out of DRM, and Jobs would rather take his chances in a DRM free market. Of course, iTunes leads the pack by offering DRM-free music first. The most important change to Apple is the reduced maintenance of DRM. Less consumer headaches and more straight-forward usage means higher consumer satisfaction, which ultimately leads to more sales.

And Finally, a Shot at the Zune and Friends

The single biggest reason to do this is to expand the digital music market. Right now it is 1% of all music sales. I’m sure we’re going to see record iTunes sales coming from EMI bands this year.

What will happen to competition as a result? Well, that’s the most interesting part. In all of this, it doesn’t really change anything for most of Apple’s smaller competitors. They are getting a small gain, but iTunes hasn’t been what’s kept them from gaining significant market share. The big boys stand to gain a lot here. We should keep a close eye on Creative. But ultimately, because the market will eventually grow to represent 50 or 100 times what it does today, a shrinking market is not too much of a concern for Apple so long as they are selling iPods to a percentage of that expanded market.

I think the funniest “side effect” will be the one hitting the Zune. You see, Microsoft can’t copy Apple here. Because of their “cool” squirt feature, there’s no way in hell any label, even EMI, will agree to give Microsoft this same privilege. So while other smaller competitors may finally see some breathing room, Microsoft will get left in the dust because of their sharing feature. How ironic is that!

Edit: On a related note, I want to point out how much Microsoft blew it. As one of the only “big” companies that had the resources to challenge the iTunes+iPod bundle, Microsoft’s thinking was small. They could have bribed the music labels and done whatever it took to get them to take out DRM from the picture. Sharing is great, but all they could come up with was a DRM infested piece of garbage. Now, not even six months after the Zune’s tepid entrance, Apple has negotiated for one of the most lucrative music distribution deals made since, well, iTunes. Microsoft could have had the hype, the nerd-love, and profits to follow. All they had to do was think on behalf of the consumer’s best interest. What good is DRM sharing? What’s the real goal? The whole point of sharing was to drive sales of new artists. But then Microsoft turned around and decided the best way to share was by “Squirting” DRM files, most of which don’t have DRM to begin with.

I hope this serves as a lesson to those that put consumers second. If you do this enough times, it will eventually burn you big time. This is exactly why Apple is fighting so hard to get rid of DRM — they put you and I first. Microsoft could have had Apple’s lunch. They could have been the first and greatest music player that came with a media store that isn’t limited to just the Zune. They could have made Apple look cheap and less functional. Zune could have been great, Microsoft. What now? Squirting doesn’t seem so useful now, does it?

Let’s see how your draconian thinking effects Vista sales too. I hear that monster has even more DRM in it. Just wait until the day iTunes starts selling DRM free movies too.