Apple’s Abandons DRM and Embraces Variable Pricing

At the annual Macworld conference last month, Apple announced multiple major changes to its iTunes music store. For music lovers, the most notable of these changes was the removal of DRM restrictions from its music catalog. Starting in April, Apple will also be offering tracks at three different price points: $.69, $.99, and $1.29. In addition, iPhone users will now be able to preview and purchase music wirelessly via the 3G network.


The announcement came after Apple reached a deal with major record labels, who had resisted the removal of DRM protections from iTunes. Previously, only EMI and independent labels had offered tracks without Apple’s FairPlay DRM. Now, every song purchased via the online store will not only allow copying to an unlimited number of computers, but also be compatible with mp3 players other than the iPod. Older tracks may be upgraded at the rate of $.30 for single tracks, one third the original cost for albums, and $.60 for music videos. Tracks without DRM are offered at 256 kpbs, in contrast to the lower fidelity 196 kpbs previously sold on iTunes.1


A $.30 hike in prices for a select number of popular tracks will not, on the face of it, have much impact on recorded music revenue. The real goal is to encourage customers to buy more albums or discounted “bundles” containing three or four songs. Because online music stores allow customers to pick and choose which tracks to buy, fewer people elect to purchase entire albums at a time. This trend has contributed to the ever-declining volume of music sales. The real aim of variable pricing, then, is to increase volume rather than to benefit from higher prices.


This announcement seems to demonstrate that the decline of Digital Rights Management is well under way, and will likely continue. Labels had previously defended copy protection for it music, but have now relented. Now that the biggest online music stores (as well as competitors like Amazon Mp3 and Walmart Mp3) can offer music without DRM, it would be hard to turn back the clock and re-instate FairPlay. Public opinion has long been largely against DRM, and music buyers would very resistant to give up the freedom they now have.
Both Apple and the three major labels whose catalogues are affected by the deal relented on changes they had resisted. For its part, Apple had long been committed to the single $.99 price point. The single price reflects the company’s simple, one-size-fits-all approach to its business. But labels had protested the price as constraining, limiting the profitability of online music.
In return for allowing variable pricing on its store, Apple was able to get the labels to agree to the removal of DRM. The labels had already been providing restriction-free downloads to competitors like as a way to loosen Apple’s stranglehold on digital music. Increasingly, FairPlay had seemed out of step with prevailing trends in the music business, so Apple wanted to avoid falling behind.



However, there is also speculation that there was another major negotiation point that may have even overshadowed DRM in terms of importance. Apple wanted to boost its iPhone by allowing 3G and EDGE wireless downloads. Apparently, the labels used this as a bargaining chip to get the variable pricing it had been holding out for. There is no clear reason that the majors would be averse to over-the-air downloads; it seems that they were simply able to withhold something Apple wanted and use it as leverage.2
So while Apple certainly got what it wanted, it appears that Sony, Warner, and Universal came out a bit ahead in this deal. In other words, it scored a victory by finally securing variable pricing, but did not give up anything of great value. Probably, the labels will only benefit by making its music available over-the-air to iPhone users. And DRM has already been on the way out for some time.


Except for a brief time when Sony attempted to impose digital rights management on its CD releases, most music has been sold without any restrictions. So long as one single person is able to obtain a restriction-free music file, that track can easily be shared worldwide over the internet. Putting DRM on a large percentage of purchased tracks has done little to prevent piracy. That, combined with the fact that FairPlay targeted those actually paying for music and not the people stealing it, has proven that selling DRM-equipped music was actually of very little value to the record labels.


Another notable effect of this announcement is an end to Apple’s legal troubles in certain countries, most notably Norway. That country had challenged FairPlay as an illegal impediment to competition because iTunes tracks were only compatible with Apple’s proprietary music players. The legal challenge against Apple has now been dropped, as any action by Norway’s Market Council would now be essentially moot. Norway probably only represented a fraction of Apple’s business and the threat of action against the company had moved slowly, so it is hard to believe that this was a major consideration in the decision. Even so, Apple must be happy that the matter is finally settled, as one ruling against FairPlay could have led other countries to take similar action.


In the end, this is probably not a major game changer for digital music; it is just the culmination of something that has been a long time coming. After all, the most active pirates do not purchase music and so do not care if iTunes has DRM or not. And a whole lot of people have no interest in using anything but a computer and an iPod to use music. And owners of the Zune player and other music players have had DRM-free music services to purchase music for some time. But if Apple had not made this move, the iTunes music store would have seemed increasingly behind the times. That is something that the forward-thinking Apple could not allow.

By Mark Schafer




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