Don Dodge on The Next Big Thing

Universal Music says no to iTunes - Price and DRM major issues

Universal Music Group will not renew its contract with iTunes according to The New York Times. Universal Music is the worlds largest music company. There appear to be two big issues in the negotiations; Apples insistence on the 99 cent price for all music tracks, and Apples refusal to license its proprietary DRM to other device manufacturers.

This is a very high stakes poker game. Apple's iTunes service would be seriously crippled without Universal's vast music library. However, iTunes brought in about 15 percent of Universal’s first quarter revenue, or about $200 million.

The New York Times reported that Sony/BMG, the second largest music company recently signed a one year deal with iTunes. The previous deals had been two year agreements. Universal is under a month to month agreement with iTunes that can be canceled at any time.

The music industry has a pretty bad record  in business negotiations.  Yesterday I reviewed the Rolling Stone magazine article "The Record Industry's Decline" which suggested that the record industry should have made a deal with Napster 7 years ago. They compounded the problem by first trying to build their own digital music services, then suing their customers for copyright infringement, then waiting 2 years before signing a deal with Apple iTunes.

Universal Music has a good point about music pricing. They believe that some new hit songs are worth more than 99 cents and some older songs could be worth less, or specially priced for a promotion. They want the ability to set prices for their own product. Wow, what a concept!

The DRM issue is more complicated. Apple refuses to license its proprietary DRM software to other device manufacturers. This DRM ties iTunes to the iPod creating a virtual monopoly. Apple argues that licensing the DRM to other manufacturers might result in someone hacking the code. The record companies argue that if Apples DRM was available on other devices it would create a bigger, more open, market for their music. It should be noted that Microsoft and other vendors license their DRM to other companies and there have been no instances of hacking or compromising the DRM code.

Competition and economic interests will drive the right answers. There is more competition for iTunes now than there was 2 years ago. The record labels have other options. But, Universal Music and the other labels need to consider how quickly they can replace the lost iTunes revenues. The playing field is leveled now to the point that the answers are not obvious. That is a good thing for consumers.

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EMI offers higher quality, DRM free music for $1.29

EMI, one of the largest music labels in the world, today announced higher quality, DRM free, music for just $1.29 per download. Standard MP3 downloads are usually encoded at 128 kbps, but the new premium quality downloads will be twice the quality, at 256 kbps. By comparison, CD quality is around 320 kbps. The big news is that by dropping DRM the music can be used on any music player and copied to any device. TechMeme has lots of blog posts on the subject. Here is my short analysis.

DRM (Digital Rights Management) is a technology that can be "wrapped" around a digital file. It allows the owner to control how the file is used. For example, DRM could restrict copying, or it could restrict the number of times the file could be accessed, or it could cause the file to expire after a certain time period. Apple has it's own proprietary DRM system for the iPod. Microsoft, Sony, and others have their own DRM systems as well. The various DRM systems only work with specific devices that have special software to decode the DRM. This has caused lots of incompatibility issues.

EMI has addressed both issues; premium quality sound, and DRM free usage, all for the reasonable price of $1.29. EMI is making their entire music catalog available under the new system, but will continue to offer the existing 128 kbps, DRM version for $.99.

EMI will make the new music available in all the popular formats; AAC, WMA, MP3, and others, and the music can be sold through any of the music retailers including Apple, Microsoft, Sony, and others. The other music publishers will be under pressure to follow EMI's lead if this new initiative is as successful as expected.

Napster proposed a similar system more than 7 years ago. We suggested free file sharing of 56 kbps files that were good enough for "sampling" and probably analogous to AM radio quality sound. We would offer higher quality versions in 256 kbps format for sale at $1.00 per download. This way Napster could continue to offer free downloads of low quality files and sell high quality music. The Napster system could filter out other bit rate files so only 56 kbps files were available for free download. It was the best of both worlds. Sadly, we were ahead of our time and the idea never had a chance. For an inside look at Napster and what we tried to do, see "How Napster Changed the World - A look back 7 years later".

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Apple proprietary closed boxes Mac, iPod, iPhone

Apple creates brilliant designs with elegant user interfaces that work intuitively. I wrote a glowing report about the iPhone yesterday. Today I started thinking about how they do this. The answer is that Apple controls the whole experience from hardware to software to peripherals. Nothing bad about that, it is just a trade-off Apple makes to ensure everything works together seamlessly.

Jupiter Research says "What's missing from the iPhone"

1. It's not extensible by third parties, only Apple. The means at the moment no RSS readers, no Slingplayers.

2. There is no support for Microsoft Office attachments.

3. Not clear how well Exchange will work with calendar and contacts

4. No 3G support. (WiFi makes up for this in some ways.)

Engadget says "The iPhone is not a smartphone" because "smartphones" are a platform that allows third party software applications to be installed.

The Apple Mac has a small (about 5% market share) but loyal following of users. I never got into using Macs but the users I talk to always marvel at how everything works together. Yes but, everything has an Apple logo on it. You buy it from Apple, and pay a 20% premium price for it.

The iPod and iTunes work the same way...it is a closed, all inclusive experience. People love the iPod but they grumble about not being able to get music from other sources.

Apple builds closed proprietary devices. The larger marketplace wants open devices (computers, music players, phones) built on industry standards, or at least "de facto" standards. They want to be able to buy software, peripherals, and hardware upgrades from a variety of sources. This competition keeps prices low and drives innovation.

Apple users are very happy to make the trade-off from "open" to "closed", presumably for the ease of use. Ease of use and elegant design is very important in consumer devices. Most computer users want more power, options, and flexibility. Perhaps this is why Apple has been extremely successful in the consumer space, and modestly successful in the computer business.

Apple users are loyal and dedicated. I expect to hear all sorts of defenses of Apple's approach and how they are way better than the PC and anything Microsoft does. OK, no problem. For some segment of the market (5%) Apple fulfills all their needs beautifully. It just occurred to me today that the way they do it in computers, music players, and phones, is by controlling the whole experience.

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