Original URL: http://www.theregister.co.uk/2007/04/09/apple_emi_drm-free_analysis/

DRM-free music: EMI calls the tune and Apple takes the credit

Dangerous times for the record labels

By Faultline

Posted in Media, 9th April 2007 07:02 GMT

Comment Having been a big believer in DRM and its necessity, although dismissive of its inflexibility and lack of sophistication, we, Rethink Research, have to interpret the big news of last week that EMI will offer its catalog DRM-free, as at least dangerous and potentially disastrous. But that's only if it is looked at in the long term. In the short term it might even be beneficial to both EMI and Apple.

This has been dressed up as an Apple iTunes – EMI joint announcement, but it is a pure EMI move. We interpreted the recent call by Apple and Steve Jobs, for an end to DRM, as a move to get European law-makers off Apple’s back, and we still see it as that. We don't think that Jobs can really want an end to DRM, but EMI might.

We suppose it’s a matter of whether you believe that the EMI music will become MORE pirated than it is today just because it’s so easy to copy a track to a file sharing network, or if it would make little difference.

Apple risks little in the move as long as the rest of iTunes content still uses DRM, because that will mean that the great bulk of any individual music and video collection will HAVE to be played on an iPod or at least on iTunes, and not on anything else, which will mean the iPod retains most of its lock-in power. Even someone that upgrades all of his or her collection to the new EMI DRM-free format, will still have perhaps 75 per cent of their music in a DRM-enabled format and they would worry about buying a non Apple MP3 player, because of the worry of not being able to move some of their content.

And Jobs is very clear that he doesn’t think that video and music should be treated the same. Video comes with CSS protection, which although it is thought of as weak encryption protection, at least it takes a serious minded pirate to undo CSS, and put video in the clear. Jobs quite rightly points out that adding DRM for digital online music while leaving it off digital CDs, makes little sense.

Jobs at least has a sensible fallback position even if every one of the major record labels decides to follow EMI's move and remove DRM from their online music recordings. He can strongly advise video clients, such as Disney (where after all he is the largest shareholder), that they must retain DRM on video, and then Apple’s Fairplay DRM will remain in place and continue to put doubt into the minds of any consumer that considers buying a non-Apple mp3 player, worried that they may not be able to play some of their content, especially video, on any other make of device.

EMI claims that it is undertaking the move after a careful experiment it carried out with just a handful of songs, issuing them without DRM, and it perhaps has a feel for the likely consumer behavior around online purchasing with no DRM. By charging 30 cents more for each track, and offering it in a higher fidelity than previous online versions (up to 256 kbps AAC encoding, around double the previous quality) it will stimulate replacement sales as well as reaping more money from normal sales. Presumably all of that extra 30 cents goes to EMI, so it will be quite an important increase in revenue in the short term.

Gradually piracy should fall away, but it's not straightforward. If a new piece of P2P software appeared then the record labels now have the legal framework, at least in the US, to close it down. They also have much of the legal help they need in around 50% of Word Copyright Treaty countries, but there will always be some countries that have different interpretations of the law and weaker policing.

Even if acquiring new copies of P2P software which are clearly encouraging copyright abuse gets harder and harder, everyone still has Kazaa, or they can still get a copy of BitTorrent. Can people still use these copies for piracy? Yes of course.

So these new, higher quality tracks are going to appear on a P2P network at some stage. OK, whoever offers them can be prosecuted, but it will still happen. Are the tracks watermarked? Can EMI people tell if they have arrived out there in piracy land? There are some fairly sophisticated ways of tracking music, with or without a watermark, so EMI will have a handle on how many copies of its high quality music are up for grabs at any point in time, and to some extent it can harass those offering it illegally to the point where enough people continue buying the music, rather than get it illegally. Probably.

But if that’s all true and a buying habit is retained by enough people out there without DRM, then the other record labels just have to follow suit, partly so they can rid themselves of the costs associated with DRM and partly because of the hike that EMI might generate in short term, catch up and replacement revenues.

Naturally EMI chose to start this new idea with Apple, because of Apple’s CEO Steve Jobs making such a song and dance about it being stupid for record labels to issue music without DRM protection and then for Apple to be forced to use it. But EMI will be signing up with all of its existing outlets for online music pretty much as soon as they ask.

Apple's iTunes will use AAC formatted tracks, and complete albums from EMI artists purchased on the iTunes will automatically be sold at the higher sound quality DRM-free, with no price hike. So that is also an attempt to shift more albums, something that every record label has been trying to do for some time on iTunes.

Part of the huge losses that the record labels bemoan isn’t just piracy related. In physical formats consumers have almost had to buy albums, when often they only want a single track. iTunes and all online music sales which allow individual tracks, have killed all of that, and now people are back to buying singles.

EMI will also offer an upgrade to the DRM free version from an existing track for 30 cents in the US, 30 Euro cents in Europe and 20 pence in the UK. EMI music videos will also be available on iTunes without DRM with no change in price.

EMI will also offer WMA and MP3 formatted tracks and potentially other unprotected formats as each online music store approaches it. EMI says that it still believes in DRM when it is used to enable subscription services (where consumers can have access to unlimited music for a monthly payment) and for P2P delivered music that deliberately uses super-distribution as a form of promotion. Also it will continue to use DRM on time-limited downloads such as those offered by ad-supported services.

Apple said it would continue to offer its entire catalog of five million songs in the same versions as today in 128 kbps AAC encoding with DRM at the existing price of 99 cents per song.

EMI also cut a far less far reaching deal with Nokia to co-market and mobile music. Nokia will feature EMI at its flagship stores and websites, but it sounds a far cry from the full catalog.

Meanwhile music service provider Playlouder also said last week it had licensed the EMI catalog, but these will be the heavily DRMed versions of the EMI tracks, because this is a music subscription service that encourages music sharing. Playlouder has already signed Sony BMG and a string of independents to its service.

Copyright © 2007, Faultline

Faultline is published by Rethink Research, a London-based publishing and consulting firm. This weekly newsletter is an assessment of the impact of the week's events in the world of digital media. Faultline is where media meets technology. Subscription details here.