Original URL: http://www.theregister.co.uk/2007/04/03/emi_apple_drm_analysis/

Free music has never looked so cheap

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

By Andrew Orlowski

Posted in Media, 3rd April 2007 13:39 GMT

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).

The rise of digital, and the popularity of buyers cherry-picking hits in preference to buying CDs, have made this cost-heavy model unsustainable. The independents can at least look to the future knowing they don't have huge expenses to cover: they can cut their cloth accordingly. Indies also embraced digital quicker because it gave them what they always struggled to get in the physical marketplace - a more level playing field. Distribution has always been the smaller labels' greatest problem.

If the future doesn't have a place for big record labels as they look today, it will have a place for something that looks like them, because the demand is there. Some artists will always get greedy and demand global marketing operations that make them as ubiquitous as the large brand advertisers, such as Nike, Nokia, and Pepsi. They need to remind us they're there, constantly. But most businesses will balk at such demands.

Both indies and majors can continue to provide good value CDs - top quality audio digital music that comes with its own backup copy - and if they package them well, charge a premium for the packaging. If I find a common flaw in both camps' thinking, it's the unjustified fear that physical sales will fall off a cliff.

However, the abundance of free illicit music creates a much deeper discomfort for majors and indies alike.

Digital evangelists hope the absence of friction, such as DRM, will make computer networks more attractive. Isn't a DRM-free world what The Register has been banging on about for years?

Well, yes, but it isn't clear that digital downloads will rise as a consequence. The like-for-like comparison means that if you choose to pay Apple for 10 DRM-free songs it'll cost you almost $20, while you'll get no artwork or backup copy. The digital maven now looks less of a pioneer, and more of a fool. By removing the ludicrous, artificial countermeasure of DRM it's now plain that individual unit sales of songs and even albums aren't sustainable for anyone in the digital world, except as publicity vehicles or loss leaders. For us, it makes no more sense buying digital music by the unit than it does dropping a 10p piece every few minutes into the radio set.

Do we cease to pay artists completely, or do we move to a model where music is a service? Thanks to EMI and Apple, that choice is a lot clearer today. ®

Bootnote: It hasn't escaped our notice that former EMI chief Alain Levy has finally got his way. Levy was ousted in the new year, but his call for an end to one-price, 99c downloads has at last been fulfilled...