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

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.

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TOPICS: Apple
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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.


Topic: Apple

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27 comments
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  • Great news

    This is excellent news for consumers, music and movie fans, and for the future of
    digital content. www.HungryFlix.com has been offering movie downloads with no
    DRM for years now and we really belive that DRM is not a solution. It is rewarding to
    now see the major studios and Apple agreeing with us.
    Brian Andrews
    • Come on.... Shameless plug

      And you know it.
      IAHawkeye
  • So where does this leave Vista?

    All that effort by Microsoft to build in DRM then along comes Jobs who then "shoots their fox". From Apple's point of view this is win-win-win. More money, great publicity and their arch rival looking more flat footed and a purveyor of bloatware than ever before.

    I wonder if they've finished securing Steve Ballmer's furniture to the floor yet?
    bportlock
    • Nothing happens

      Its no differnt then having a car full of all the bells and whistles.

      The fact that you don't use the radio makes no diffenece to the overall operation of the car.

      And what about Ballmer's furniture? Is Steve Jobs gonna stop by and steal it? Apple can't be doing that bad.
      John Zern
      • auto analogy not applicable

        John Zern wrote:
        "Its no differnt then having a car full of all the bells and whistles."

        "The fact that you don't use the radio makes no diffenece to the overall operation of the car."


        Even though the code is not used, it is still there, some in memory, and the rest taking up disk space. Just having the extra code in the OS makes it more complex and more susceptible to errors when patching and/or updating.

        The car radio adds negligible weight and complexity to a car.
        mystic100
      • Ballmer's furniture

        He was rumoured to have thrown a chair at somebody when he lost his temper.
        bportlock
        • Ballmer's alleged rage at Google cited in suit

          Microsoft CEO vowed to 'bury' rival, filing says

          By DAN RICHMAN
          SEATTLE POST-INTELLIGENCER REPORTER

          Flinging obscenities and furniture, Microsoft Chief Executive Steve Ballmer pledged to "kill" Google and "bury" its leader when he learned an employee was jumping to that company, according to documents filed Friday in a lawsuit that reflects the deep rivalry between the firms.

          The account by the former employee, which Ballmer disputes as a "gross exaggeration," was submitted by Google in Seattle's King County Superior Court as part of the most recent exchanges in a dispute over the search company's effort to hire a former Microsoft executive, Kai-Fu Lee.
          An_Axe_to_Grind
      • Bells and Whistles have/provide value

        Sure, in an auto it is all "fluff" and not important for getting you from A to B. The Vista DRM provides no value for the consumer. Is a more complex OS, with multiple encryption paths and for many a non usable media player from MS (mfproc.exe or whatever it is called is always envoked, DRMed music or not), a bell or a whistle?

        DRMed music is dead. EMI said they are looking at Video too. Do you think it will be long before all the super advanced and unreliable HD DRM is left as a casualty of consumer indifference?

        I suspect that the entire DRM subsystem or the vast majority of it, removed by SP2.

        TripleII
        TripleII-21189418044173169409978279405827
      • It does do harm.

        The DRM slows file copying to the point Vista is almost unusable for large db moves. It is amost unusable for copying a file.
        OldMarine
        • You use DRM on your db? (nt)

          nt = no text
          CobraA1
  • I will buy songs again

    Once, I've had to burn my bought DRM music songs (not from Itunes Store) to a CD then ripped them back to MP3 just to put them onto my Ipod. I know I am not supposed to do that but listening to music on my Ipod was the reason I bought music. I've not bought any songs since then. Now, the wait is over. Good job Jobs, but what about others?
    greenoil
    • I'm sure it's just a matter of time. (nt)

      nt = no text
      CobraA1
  • Uh Hum... Apology David?

    And the other amigos. See another post for details.
    IAHawkeye
  • I'll buy...

    I've been a long time anti-iPod person. There are many reasons, but one of the biggest was DRM. In my mind Apple all but just about killed the mp3 movement with the iPod by taking over the market with DRM laden music. Now that they have turned around, I feel they are coming into the light. Though I don't like AAC encoding so much, at least their movement is good. I'm also a little put off by the $.30 rise in price, I do feel the increased bit rate helps offset the increase in payment. MP3 (and other such encodings) changed the world. It made it easy to transport music, more music, much more than in the past. As technology advances, the need for smaller files will also become less. So larger bit rates are definately a good thing.

    Now, if Apple will get with the program on making a REAL audio machine. Bring in some long time music reproduction companies and make the iPod more than just a simple "cheap walkman" with mediocer output, then I will fully do a 180 on my iPod stance. It takes more than a good set of headphones to reproduce good sound. The player itself must still be of higher quality than Apple currently makes. At least Microsoft went to long time audio machine maker Toshiba for their Zune. The sound difference is very noticable between the Zune and the iPod. Hopefully MS will wake up to the DRM problem like Apple did. On that I feel MS is never going to wake up though.
    Narg
    • iPod != DRM

      You may be anti-iPod for any number of reasons you choose, but DRM shouldn't
      be one of them. My iPod has 25Gb of music on it, none of it copy-protected, all of
      it ripped from CDs that I own. I have downloaded only two songs from iTunes
      (which is where the DRM is), and those were free Tuesday downloads.

      iTunes has DRM, the iPod does not.
      msalzberg
      • Agreed, most people that use iPods don't use DRM!

        Agreed, people should not equate the iPod with DRM - because, just like you, most people just rip their CDs to it!

        The vast majority of music on iPods is [b]not[/b] DRMed music.
        CobraA1
    • iPod sound quality not that important for most

      Since most people buy the iPod for portable use, the sound quality is less important than the convenience and overall experience. It is true that some people (like you) will put more importance on sound quality, but the mass buying public does not. For many, a bitrate of 128 is an acceptable compromise between sound quality and maximizing the amount of songs that can be put on their iPod or other portable device.

      The DRM-free songs with the higher bitrate will be better for CD burning and other high fidelity uses. I will still convert to lower bitrates for my iPod though.

      I agree that dropping DRM will help iTunes, iPod sales, and the digital music industry in general. I still believe that the current price for digital song downloads at $0.99 is too high and the DRM-free music at $1.29 is also too high. I think that if the prices were $0.69 and $0.89 respectively, more people would buy songs and there would be less pirating. The record industry's business model of artificially keeping prices high has failed, so they should learn from their past mistakes and make digital music available at a reasonable price. This would make it a win-win-win for consumers, record companies, and artists.
      mystic100
      • Here's an issue with Sound Quality

        On my PC with basic PC speakers or PC headphones I found the MP3 was good enough. The imperfections just didn't come through. Recently I bought new set of PC headphones, regularly $200 but I got them for $25. I'm sure the regularly $200 was just a marketing gimic though to make you feel like you were getting a real deal. That's what I thought till I tried them and OMG did all my music sound terrible. So terrible I was blaming the new headphones until I tried them on my hometheatre system. I watched a movie with them and all I can say is I'm amazed at the sound quality. What these headphones did on my PC was highlight the flaw in all the music I have the PC. So I went out a bought a cheap pair of $9.99 headphones and they sounded better on my PC and now I use the good headphones for watching movies late at night.

        The point I'm getting at is that headphones are getting cheaper and the ones that will highlight the flaws in music aren't $100+ anymore. As more people buy these they might feel like I didn't think there is something wrong with the headphones but it's really the music.
        voska
    • The $0.30 up-tick is not for Apple ...

      ... it's to get the music industry to accept DRM-free music distribution. For the RIAA and its membership, it is about money. Revenues lost to decline CD sales (thanks in large part to peer-to-peer outfits who are turing consumers into felons!) They only agreed to on-line sales to boost revenues. Now, they are agreeing to DRM-free sales in order to boost revenues further.

      Most consumers cannot tell the difference between WAV, AAC (128K v 256K+), MP3 (128K v 256K+), and WMA (64K, 128K+).

      The iPod is a REAL audio machine. Speakers make the difference. Compare the same iPode output using Bose QC2 headphones and it is apparent. (Connect a set of Companion 5's to your ocmputer and be blown away. You get what you pay for!) iPod sells better than the competition because they offer more options for accessories and playback.
      M Wagner
      • Record industry is killing itself...

        Just wanna touch on two points brought up by mwagner. But first, me: I'm an audio engineer, musician, and avid music fan.

        mwagner said: Revenues lost to decline CD sales (thanks in large part to peer-to-peer outfits who are turing consumers into felons!)...

        P2P file sharing doesn't share all of the blame for plummeting CD sales. You're correct. But it also doesn't share the majority of it either. The commoditization of music does.

        See, the record companies are killing themselves. To put it simply, there is very little music worth buying anymore. Its all disposable, sound of the minute garbage. (I wonder what the oldies stations are gonna play in 25 years... Akon's 'I Wanna F**k You'?)

        Record companies no longer develop talent, they stopped looking for sustainable acts, and they stopped assisting artists in connecting with fans. Their model is all wrong. That's why they are dying a slow death. They look for instant hits, style with no substance. So while they comb their roster of artists looking for these hitmakers (and add to and subtract from their roster as necessary), many otherwise viable artists (you know, the ones who might give you a 'ten-gold-albums' career) fall through the cracks. So when they find their hit, they plop their whole promotion budget behind it. Therefore these viable artists are cut off from their fans, because they get no promotion, in favor of the Akon's of the world. Why? Its simple: Their business model requires a certified diamond (10 million sales) record at least once every couple of years, with 3-4 multiplatinum records interspersed. Gold and platinum albums are no longer profitable for them. Once upon a time, a Gold single (SINGLE - 45rpm record with a B side) was considered a smashing success... What happened? The Commoditization of music. The record companies are killing themselves.

        Losing DRM? I see it as a last grasp...

        mwagner said: The iPod is a REAL audio machine...

        The hell it is. I get paid for my ears, and I've heard an iPod before.

        mwagner said: Speakers make the difference.

        Speakers are only one element in a chain in which each link has a great deal of importance. There is a clear and disturbing difference between listening to the same mp3 on an iPod and my pro audio soundcard, played through the same speakers; to give one example.
        mp3entertainment