Steve Job's calculus: Dealmaking, dollars means DRM is dead

Summary:Apple and EMI have found an interesting way to rid the world of digital rights management software for just a little extra pocket change. Apple will offer DRM-free music from EMI for $1.

Apple and EMI have found an interesting way to rid the world of digital rights management software for just a little extra pocket change.

Apple will offer DRM-free music from EMI for $1.29 per song (see Techmeme discussion). To entice you to pay a little more for DRM-free music you'll get higher quality 256 kbps AAC encoding.

Music with DRM will cost you 99 cents at the current quality standards. To most folks the extra 30 cents for DRM-free music is probably worth it. But what's interesting in this no-DRM announcement between Apple and EMI is that it really reveals Steve Jobs' secret sauce--dealmaking with media partners to line everyone's pockets.

Jobs, who is as much a media guy (he's on Disney's board) as he is a technology one, built the iPod-iTunes juggernaut by largely dealing with music companies to keep DRM yet make it easier to swallow. Now he cuts a deal (that's likely to be emulated elsewhere) so the music industry gets what it wants--higher pricing and more digital downloads to offset weak CD sales--and Jobs gets what he wants--more iTunes revenue and some good press.

The casualty of all this dealmaking, which was prodded slightly by Jobs anti-DRM open letter--is DRM. No label is going to forgo the revenue of $1.29 a song just to hang onto DRM. Meanwhile, iTunes consumers can upgrade their entire EMI library to DRM-free for an extra 30 cents a song.

Why will the music industry follow EMI's lead? Let's do the math.

Say I have 1,000 songs purchased on iTunes with the DRM. Let's assume all of those songs are EMI tunes. I hate DRM so I'll spend 30 cents a song to ditch DRM for a total of $300. Multiply that by a million customers and you get $300 million.

That won't happen overnight, but you can see the sales adding up for the music industry.

For Apple, the math looks like this: More music downloads. Piper Jaffray analyst Gene Munster estimates that only 5 percent of the songs carried around on an iPod are actually purchased at iTunes. A side benefit is that Apple gets European regulators off its back since iTunes songs will play on any MP3 player now.

The calculus for iPod sales gets a little more complicated notes Munster. With the EMI deal you get two effects that may offset. Munster writes:

"Short term, there will be a perception that this may also have a negative impact on iPod sales, as consumers can now play EMI's iTunes downloads on any digital music player. It is important to note that non-iPod MP3 players will not sync with iTunes the same way iPods do. Our belief is the success of the iPod is not because consumers are locked on the iTunes platform, but its success has been because of the total device and iTunes experience."

Overall though, the risk to iPod sales is minimal. If Apple increases music downloads and saves money by not hiring lawyers to fend off regulators, Apple probably comes out ahead. Apple will really come out ahead when other rivals--Microsoft Zune for instance--go with the higher-price-quality-no-DRM model. Once Apple rivals follow suit that negates any potential impact on iPod sales.


Topics: Apple

About

Larry Dignan is Editor in Chief of ZDNet and SmartPlanet as well as Editorial Director of ZDNet's sister site TechRepublic. He was most recently Executive Editor of News and Blogs at ZDNet. Prior to that he was executive news editor at eWeek and news editor at Baseline. He also served as the East Coast news editor and finance editor at CN... Full Bio

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