Original URL: http://www.theregister.co.uk/2007/02/09/steve_gordon_drm/

The slow death of DRM

It's bad for business

By Steve Gordon

Posted in Media, 9th February 2007 16:45 GMT

Column The DRM walls are crumbling. Earlier this week, Steve Jobs called on the major record labels to allow online music sales unfettered by digital rights management restrictions.

Today, the Wall Street Journal disclosed that EMI is in negotiations with several digital music services to sell unprotected MP3s of its catalogue. Jobs was motivated at least in part by legal actions against Apple in Europe and the US as discussed below. But whatever his motivation, Jobs is right: DRM has been a disaster for the recording business. This article will outline the brief but sad history of DRM, the current legal attacks on it, and the reasons why the recording business would be far better off without it.

A disaster of historical proportions

When I was still a lawyer at Sony Music, before the BMG merger, we had a business affairs summit. The year was 1999.

This was the first year our annual discussion covered digital music. It was led by an attorney specialising in litigation. The attorney used a projector to show us the original Napster. She asked for someone to name a song. She typed in the title and it immediately came up. She clicked the keyboard again, and boom, the song downloaded to her computer. And it was completely DRM-free.

That is, the song could be copied, ripped, mixed, and burned freely. Then she showed us Sony's digital offering. A consumer could "download" Mariah Carey tracks for $3 each, but because of the DRM, you could only listen to it on your desktop. I seriously doubt that more than a few poor souls took advantage of Sony's offer, and this feeble initiative was quickly withdrawn.

You could argue that the price was the big difference. But if Sony had offered the same product as Napster at a reasonable price, then the music business might now be leading the digital revolution and raking in money.

But instead of truly competing with "free," Sony chose to sue Napster. That strategy lead to the emergence of other P2P services which simply took its place.

Three years later the major labels finally took their first serious stab at competing with P2P by launching MusicNet and Pressplay. But both services were mired by, and ultimately destroyed by, DRM. Neither Pressplay, from Sony and Universal, nor MusicNet, a service from EMI, BMG and Warner, allowed downloads or portability, thanks to DRM. They were stillborn and died quickly.

More recently, Sony BMG tried applying DRM to CDs and that led to public scandal, dozens of lawsuits, losses of millions of dollars and, in large part, Andy Lack's exit as head of Sony BMG. The DRM used in that case not only attempted to deter copying, it installed a hidden spyware on consumers' computers called rootkit that created security holes that allowed viruses to break in. Attempts to remove the spyware by some customers damaged their PC.

Sony BMG had to recall millions of CDs, and was forced to pay $4.25m to 39 states and the District of Columbia - and much more to consumers - to resolve various lawsuits. The good news is the extreme stink of this debacle will deter Sony BMG and any other majors to implement CD-based protections in the future.

Consumer litigation against DRM

Steve Jobs was the first industry figure to convince the labels to offer downloads without many restrictions on copying and burning. However, the parties agreed to deploy Apple's FairPlay DRM, which prevents songs purchased at the iTunes store from playing in any other player than the iPod because of Apple's refusal to license FairPlay to other music services, or in turn, license competitors' DRM technology. European legislators have been giving considerable attention to this "interoperability" failure. But Norway recently actually declared Apple was engaging in anti-competitive behaviour, giving the company until October to repair the situation or shut down. In addition the campaign has been joined by consumer lobbies in four other countries: Sweden, Denmark, France and Germany. If these initiatives are successful, they could be enough to break FairPlay and make Apple either license FairPlay or shutdown iTunes in Europe.

In the United States, Apple's Fairplay also faces a legal onslaught. In Tucker vs. Apple Computer led in July in the US District Court, Northern District of California, the plaintiff alleges that Apple unfairly restricts consumer choice because it does not load onto the iPod the software needed to play music that uses Microsoft's protected standards (PlaysForSure and the new Zune DRM) in addition to Apple's own. The suit is seeking damages for anyone who purchased an iPod or content from iTunes after April 2003. A motion filed by Apple to dismiss the charges was denied.

Whatever the outcome of these legal initiates, DRM may be discarded because as the rest of this article will discuss, DRM is bad for business and even worse for the major labels who insist on using it.

Digital growth is flagging

There can be no hard proof that DRM has interfered with the growth of digital sales, because the majors have never released the catalogues online without it. But it is absolutely clear that digital sales with DRM are not helping get the labels out of the crisis resulting from declining CD sales. The global decrease in CD sales since 1999 has been approximately 25 per cent. But digital sales only accounted for 10 per cent of all sales last year, and therefore do not come close to compensating for declining CD sales.

As an indication of how insignificant authorised digital downloads are to the music business, Apple's four year slog with its iTunes store has grossed it less than $2bn, whereas gross sales from ringtones were over $6bn worldwide last year alone. And the growth of digital sales is definitely flagging. Although digital sales grew last year, the rate of increase was less than in 2005, and according to Billboard Magazine, in the year to come the US "revenue from digital downloads and mobile content is expected to be flat or, in some cases, decline next year".

Is DRM to blame? Common sense suggests that DRM is a huge factor in the lack of growth in digital sales. As Steve Jobs correctly points out in his "Thoughts on Music", the absurdity of DRM is that anyone can now buy a CD, and rip, mix, burn, and upload to their heart's content.

"So if the music companies are selling over 90 per cent of their music DRM-free," wrote Jobs, "what benefits do they get from selling the remaining small percentage of their music encumbered with a DRM system? There appear to be none."

Making consumers pay a comparable price for a digital download, which at 99 cents per single roughly equals what you would pay for a CD, encourages them to steal. People don't want limits on what they can do with the music, so consumers take the slight risk of an RIAA lawsuit and retaliate by downloading for free. Illegal downloads still outnumber legal by 40 to 1 according to the big label representatives, although insiders put the figure as high as 100 to 1. DRM is not serving these consumers, and that's how DRM is hurting rather than serving the copyright owners it is meant to protect.

Pressure to dump DRM

Although spokesmen for the major labels, including RIAA chairman Mitch Bainwol, continue to be unwilling to position their tracks without protections, at least one of the majors, EMI, is actively considering moving ahead without DRM, the Wall Street Journal reports today.

Moreover, there is mounting pressure by industry players, especially legit distributors, to get rid of it. The main pressure from the distributors is coming from Steve Jobs. In addition, Amazon.com is reportedly itching to get into digital downloads, but is holding out for a DRM-free service. Amazon is an important outlet for both music and MP3 players including the iPod, and it already has a relationships with both consumers of music and the major labels. Amazon may in itself have the power to force a DRM strategy shift. Calls for discarding DRM are also coming from Rhapsody and Yahoo!.

Even if the legal attacks against DRM do not prevail, the majors should take note: get rid of DRM, because it's bad for business.

© Steve Gordon 2007. Steve is an entertainment attorney and consultant in New York, and the author of The Future Of The Music Business. He was Director of Business Affairs, TV and Video at Sony Music for ten years. His website is at www.stevegordonlaw.com.