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DRM's gone. Now the problems begin...

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Analysis For the major record labels, yesterday's deal between EMI and Apple doesn't herald a new beginning, but the beginning of the end.

From next month, EMI will distribute much of its repertoire without DRM through Apple's iTunes store. Independent labels have been distributing DRM-free songs for three years, avoiding the lock-ins created by competing hardware manufacturers. But EMI is the first of the "Big Four" majors to recognise that artificially recreating the inconveniences of physical product in a digital form isn't good business.

Let's leave aside the many gotchas in the announcement, such as the price increase which takes the cost of an unencumbered song to almost $2 (that's the UK price converted to US dollars, folks), the absence of the Beatles' catalogue, and the continuation of DRM as "on by default".

Let's also leave aside the mutual panic which brought Apple and EMI together yesterday. EMI is in financial free-fall, it's unsuccessfully tried to find a buyer for several years, and it's now so desperate it will try anything. Apple is under regulatory pressure not only to modify its DRM consumer lock-in but, along with EMI and the labels, faces an EU anti-trust probe into its pricing. Both companies jumped before they were pushed.

But it's a move that will only make the major labels' digital agony increase. Why? Because legal digital downloads have always competed with free, illegal music. And by shattering the illusion that legal music is somehow special, because of these technological countermeasures, a like-for-like comparison can now take place. This isn't a face-off the big labels want.

This weekend, the Torrents carried all the major labels' premium CD cash cows. The albums are cleanly encoded and lovingly zipped up to include large, high quality JPEGs of the front and back of the CD covers. A broadband user can order all this for guaranteed overnight delivery. That's an excellent service for "free" - and one in which songwriters, publishers, and rights holders don't see a penny.

According to the RIAA, free downloads outnumber legal downloads by 40 to 1, although one experienced music business insider said this was an underestimate. These days, the major labels don't over-exaggerate the popularity of free music, they underestimate it.

"If the RIAA says it's 40 to 1, then it's probably 100 to 1," he said.

So how come, you might wonder, did so many of the independents agree to DRM free music when it's a step too far for the biggest three labels, Universal, SonyBMG, and Warner?

The answer is in what creates the cost structure in each case, indie or major? Independent labels typically offer artists a 50:50 revenue share and they create a sustainable business without incurring huge expenses. The Big Four are all about incurring huge expenses, then recouping them from huge sales. Expenses include notoriously large advances to artists, such as the £80m EMI paid to Robbie Williams in 2002 for a five album deal. These are clawed back in several ways. However, it's not the advance that's the problem. Defending the Williams deal at the time, EMI pointed out he'd shifted around £300m worth of CDs in the preceding five years. The problem is that for every Robbie, many more artists are recruited, given large advances and marketing budgets, before eventually being abandoned.

(EMI is occasionally described - usually by Americans - as "the world's biggest indie". But it's trapped in a major's cost structures).

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