Will DRM-free music, subscription model threaten iTunes

Dropping DRM will make it attractive for users to download music because it eliminates some of the hassles

Need proof that Apple's iPod and iTunes Store has forever changed how people, particularly mobile people, acquire music? Here it is: The recording industry recently reported that nearly 13 percent fewer CDs were sold in 2006 than the previous year, while sales of downloaded digital songs increased by almost 60 percent.

The iPod/iTunes combination accounts for about 70 percent of all digital music sales and portable media devices, according to market studies. But some industry analysts believe that we're only at the beginning of the digital media age and that changes are coming that could cut into Apple's dominance.

For example, nobody is quite sure what the impact will be as digital rights management (DRM) for purchased music fades away. One major record company, EMI, has said it will allow online stores like the iTunes Store to sell DRM-free downloadable music. Other major labels are expected to follow suit.

Another trend that could change the digital media scene -- and Apple's dominance of it -- is new models for subscription music services. So far, subscription services such as Rhapsody and Napster, in which users pay a monthly rental fee for downloading as much music as they want, have not proved popular. However, some claim that subscription service business models are evolving and may yet attract lots of new users.

"Everything is changing," said Neil Strother, an analyst at JupiterResearch. "It's a really disruptive time."

The end of DRM

The rise of the Internet in the mid-90s gave rise to the illegal sharing of media, largely through use of peer-to-peer file-sharing software such as the first generations of Napster. The recording industry responded first by prosecuting some of those who participated in file sharing, then by requiring DRM on music that was sold via legitimate online outlets, such as iTunes.

But consumers don't like DRM.

"DRM leads to suboptimal satisfaction," said James McQuivey, a principal analyst at market research firm Forrester Research. "DRM muddies the experience, so you're never sure if it'll work for you."

For one thing, DRM limits where you can play music. If, for example, you buy a song from iTunes, the DRM -- plus the fact that Apple uses a proprietary music format -- means you can play only the music on an iPod. Such limitations have angered many users, particularly in Europe where the European Union is threatening Apple with legal action for limiting competition.

The situation gets even dicier with Microsoft's PlaysForSure DRM, which is used by the music subscription services. PlaysForSure is somewhat more open, since, for example, you can buy a PlaysForSure-compliant device from a vendor like SanDisk or Creative Labs that works with virtually all of iTunes' competitors. But, as we'll discuss later, nobody is certain of the future of PlaysForSure.

As a result, dropping DRM likely will make it even more attractive for users to download music because it eliminates some of the hassles. That explains why industry leaders like Apple's Steve Jobs advocate terminating it.

The music subscription flop

Nobody doubts that subscription services had the potential to be a major factor in the digital music game. After all, for about US$15 a month, you can download virtually all the music you want from services such as Rhapsody, Napster and Yahoo Music Unlimited. That's less than the cost of buying two CDs from iTunes or a single CD from a brick-and-mortar record store.

Subscribers can then listen to their downloaded subscription music at their PC and with their media players, which can connect to home and car stereos. But everybody, even subscription proponents, agree that, so far, the services have been a flop. One reason is that subscription services are hard to explain.

"One of the problems with subscription music is that, until you try one, you'll never understand why you should do it," McQuivey said. "But when you try it, it's incredible. But I'm not bullish about the [subscription services] because, even though I find it a satisfying experience, I don't know how they could market it to get people over that first hump."

Subscription services face other problems as well. For one thing, while the services boast more than 2 million downloadable tracks, that still isn't as many tracks as iTunes offers for sale. As a result, subscribers may still need to purchase some music in addition to their monthly subscription fee.

Then, there's the issue of the balky PlaysForSure DRM software, which the subscription services use. Microsoft rolled out PlaysForSure to great fanfare more than two years ago but has not released a significant update since. Among the frequently heard complaints associated with PlaysForSure is that it can get tangled with the software provided by music services, meaning that sometimes legitimately downloaded music can't be played.

That balkiness, and the fact that Microsoft has not indicated when, or if, it will update PlaysForSure, has angered subscription vendors.

"Yes, we feel abandoned by Microsoft," an executive at one of the subscription providers, who asked that his name not be used, said at last January's Consumer Electronics Show. "We're pretty angry about it." That anger was heightened last November when Microsoft released its Zune media player and Zune Marketplace, an online store that offers a subscription service. That put Microsoft in direct competition with the subscription services to which it also was selling DRM.

What all this means is that subscription services must change dramatically before they will have a significant impact on the digital music industry and take business away from Apple, which has repeatedly said it is unlikely to offer a subscription service. Many believe the subscription services will, indeed, change, and Microsoft claims it is leading the charge.

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David Haskin

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