EMI DRM-free deal -Shortsighted, risky, and possibly irresponsible to the company's shareholders

EMI DRM-free deal -Shortsighted, risky, and possibly irresponsible to the company's shareholders

Summary: DRM Watch has an interesting article which examines EMI's DRM-free music deal with Apple and now Microsoft.

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TOPICS: Apple
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DRM Watch has an interesting article which examines EMI's DRM-free music deal with Apple and now Microsoft. 

It's been interesting over the past few days to watch the reaction from different tech sectors to the EMI/Apple and then the EMI/Microsoft deal to make DRM-free music with less compression available to the public.  To call the response "mixed" I think describes it well.  Basically, the impression I'm getting is that no one, not even within EMI, Apple or Microsoft, really knows how this is going to play out.  Bill Rosenblatt, writing for DRM Watch, does a good job of analyzing the possible short-term impact of these deals.  So, is this a good move for EMI?  Rosenblatt doesn't think so:

As far as EMI is concerned, the deal was shortsighted, risky, and possibly irresponsible to the company's shareholders.  EMI is the smallest of the four majors, enjoys no synergies with corporate siblings, and is undergoing financial hard times.  This move with Apple was a lunge for near-term revenue, at the quite possible expense of longer term revenue for EMI and the rest of the industry.

The announcement also didn't help EMI's stock price:

Any longer-term revenue effects from the deal are unpredictable.  The financial markets concur with this assessment: EMI's stock has edged down slightly in the days since the Apple announcement. 

But the deal is very good for Apple:

The short-term effects of this announcement on Apple, as with EMI, are predictable; but unlike EMI, they look positive (Apple's stock was up about 1% on the news).  Apple is now well and truly in control of music download economics for Internet distribution.  This deal should also be a huge help to Apple in defusing consumer advocacy actions in many European countries.

What about the knock-on effect on iPod sales?

Apple has determined that it no longer needs DRM to sell iPods.  It stands to benefit most from any additional unauthorized copying resulting from the lack of DRM.  And any additional movement towards DRM-free music will hurt its would-be competitors among device and platform makers, notably Microsoft.  In other words, give credit where it is due: Apple has indeed played this scenario smartly. 

I think that it'll be interesting to keep an eye on iPod sales over the next 12 to 24 months and see what happens.  Initially, there's no way that the EMI deal can have a negative effect on iPod sales.  After all, the type of person likely to by DRM-free EMI tunes from iTunes is also likely to have a large DRMed library too, forcing them to remain within the iPod ecosystem.  But over time, especially if more and bigger player jump aboard the "DRM-free" wagon, there will be an increasing number of iTunes users who won't be locked into this ecosystem (assuming, of course, that they buy smart and stick to non-DRM stuff) and will be free to pick and choose their next media player from outside the iPod range. 

Has EMI given too much power to Apple?

What does EMI get in the longer term?  No one really knows.  The effect that the lack of DRM will have on content misuse or on revenue is unpredictable.  What we do know is that this deal flies in the face of the music industry's view that Apple has too much control over it.  That's where the irresponsibility part comes in.  If EMI wanted to go DRM-free, it would have been better off in the long run if it did so with an iTunes competitor. 

Next --> 

This is a good point, but I think that EMI is hoping that Apple's halo will help profits, in the short-term.

It's a missed opportunity for the majors, most likely gone forever.  EMI has launched an experiment from which there is no turning back. 

Now, if EMI has done one thing, it's bound to have annoyed and irritated the other major players.  What EMI has done is set a standard for DRM-free music that the other players will either have to match (and then be accused of doing more than following the herd), or do better in terms of say price, which could hurt bottom lines.  I don't agree that EMI could turn back from this deal at some future point, but as soon as another player comes on board the entire industry will be locked in a price and features war, which is going to be great for consumers.

But, if DRM-free music what consumers really want?

The market will decide whether music tracks without DRM (and with less audio compression) are worth the extra money.  We do not believe that the existing market research really predicts how consumers value DRM versus DRM interoperability versus no DRM. 

This is really the crux of the whole matter.  Will consumers pay more (and it's not a "little more" like I've seen it described elsewhere, 25 to 30 per cent is a lot more) for higher quality, DRM-free music?  Sure, there's a market, but how big is it?  How many people are unhappy with the current state of downloads who will be happy enough now to start buying downloads?  Some tech communities make a lot of noise about the negative effects of DRM and how it's bad for consumers (and there's no doubt in my mind that it is bad), but the flip-side of that coin is that people are still buying DRMed content.

First of all, we believe that the number of consumers who would truly benefit from "interoperability" is small.  Furthermore, market research that asks consumers if they would pay more for "interoperability" is strictly hypothetical -- of course people prefer interoperability; it's like asking if you prefer "pure" or "chemically treated" water -- and fails to isolate DRM as a factor in interoperability. 

This is a good point.  We're always hearing anti-DRM arguments that go something like "I want to be able to listen to my music in the car, when I'm on the move and in the gym, from my toaster ... and DRM doesn't allow me to do this."  This argument just doesn't convince me because there are plenty of "one stop shop" devices on the market that will let you listen to music wherever you are, and the number of people trying to juggle their library across multiple devices has got to be small.  In fact, the only people I know who try to do this are tech-savvy users who seem to have been sucked in to buying DRMed content and then wish they hadn't.  My experience is that the average consumer is pretty happy with how things are.

Effects on revenue and piracy are unknowable at this point, as are the next steps of the other three majors.

Now if this deal is only going to do one thing, it's going to settle once and for all the debate on whether DRM protects the industry against piracy.  In 12 to 24 months we'll know the answer to this question thanks to EMI.

Is DRM dead?

We don't think so.  Rights management should continue to play a role in helping content owners define different economic offers.  Subscription on-demand services like Rhapsody and Napster are unworkable without DRM, and certain types of users prefer them.  Furthermore, we don't see film and television content owners changing their stances on DRM anytime soon; this deal will most likely fall under the heading of "music industry mistakes we don't want to repeat."

No, DRM isn't dead, but I think that things are going to change as a result of what EMI's done here.  Hopefully, we'll now see the digital download evolve into a more consumer-friendly market that respects the buyer rather than considering them thieves.  But it's not going to change overnight.  So, for now at least, I'll still be buying CDs.

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91 comments
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  • DRM Watches arguments are pointless

    The simple fact that all the content is already available DRM free makes all the
    authors points irrelevant. Most who prefer pirated music will continue to download
    from file sharing services. Some will purchase the non DRM for ease and quality and
    therefore increasing legal purchasing. Some will download the DRM free versions that
    otherwise avoided DRM'ed tracks due to real or percieved restrictions and those of us
    that rip our CD's will continue to do so. The way EMI and Apple have done this simply
    adds another choice and in no way impacts the rate of theft or format lock in.
    Zoraster
    • But doesn't that...

      ...fly in the face of the argumnent that people were pirating because of abuse by the music industry? If removing DRM doesn't decrease pirating, that means there are pirates who will do it no matter what. And there goes the "steal from them because they're stealing from us" argument.

      Carl Rapson
      rapson
      • Does it matter?

        The sum of the equation remains the same. Those that will steal will still find what
        they want on P2P. DRM does not reduce theft now or when legit music is available.
        This makes DRM an obstacle only for people that want to legally download music and
        use it under fair use. The only ways to reduce the theft of music is to educate the
        public that it is wrong. Many do not realize this to this day, even grandma and
        grandpa. Also having added value tied to the purchase such as discounts on concerts
        and swag can have a great impact on selling. Sound is free and if you can hear it you
        can copy it. This is the sad reality the industry is hopelessly trying to fight.
        Zoraster
      • What Planet Are You On!!!

        It is not the pirates complaining about DRM. It is the legit consumers most notably Librarians, Lawyers, Consumer Advocates, The Tech Savy, and anyone with half a brain that doesn't like DRM. Almost none of the pirates are arguing that they are "stealing" from us. It is legit legal customers who have noted that DRM is stealing our rights. I personally have never used P2P to download songs and I certainly do see DRM as stealing my rights.

        You actually have it backwards... if piracy doesn't increase due to the lack of DRM, and it is highly likely it won't, then it shows DRM is a complete failure instead of the 99% failure it is now.
        Edward Meyers
      • on the contrary

        This merely means the industry will stop loosing dissatisfied customers who legally purchase then find later that for whatever glitchy DRM reason they can't access the music they purchased. a locked door only keep out an honest man.
        Hrothgar - PCLinuxOS User
    • DRM Watches arguments are pointless

      You are so right. The author and his points are a complete waist of a web page.
      Really don't get what the point of his article is and all he quotes from other sources
      he keeps using. Non-DRM is irresponsible?? WTF - so selling a CD is irresponsible...

      DRM for music is on its way out...
      panic man
      • Authur has a very vested interest

        The man;

        http://www.giantstepsmts.com/bios.htm

        His company;

        http://www.giantstepsmts.com/index.htm

        Clients;

        http://www.giantstepsmts.com/clients.htm
        Zoraster
        • You Got His Number!

          And it aint 000-too-short.

          Thanks for the links.

          Sorta like a poster on another thread dissing the open document standard saying "I am an employee of Microsoft".

          No kidding! Never woulda guessed it!
          Ole Man
        • Right on!

          How did this article get on ZDnet without some sort of disclaimer that the author is in the copy protection industry???
          Photog7
  • EMI selling CDs--shortsighted, risky and possibly irresponsible

    Selling all those cd's with no DRM? Isn't that going to horribly harm the company? Every argument the article makes against selling non-DRMed music online can be translated directly to cd sales, which strangely, no one seems to have a problem with their lack of DRM.

    What is the difference between selling a digital file on a disc with no DRM and a download of the same file? Absolutely none. If you're going to sell one, then you've already exposed yourself to all of the danger possible, so selling the other DRM-free adds no increased risk. Then again, selling either one with DRM is still just as risky and just as likely to end up on p2p networks within minutes, so why spend the extra money? Wasting money on DRM that doesn't work is just that--wasting money.

    Yes, people do want DRM-free music. Look at the backlash against Sony's rootkit, and how sales dropped off for those cd's once people were aware of it. No, I don't think people are willing to pay more for it because I think 99 cents is already overpriced for a song. The $9.99 per album seems a pretty reasonable deal to me though, and better yet, eMusic offers DRM free 192 kb/s mp3 files for around 25 cents a piece, depending on your service plan.
    tic swayback
    • Bang on, EMI should not fear additional losses

      As swayback says, anyone who fears that unlocking digital downloads will cause a significant increase in pirating is not thinking things through.

      Where do people who illegally download get their music?? Clearly, P2P file-sharing networks.

      Where do P2P file-sharing networks get the music? Simple, ripped CD's.

      Will offering both CD's and digital downloads DRM-free cause an increase in the availability via P2P file-sharing networks?
      No, because potential availability in a p2p market is already infinite. The only thing that matters in terms of p2p market availability is how many people 'want' to offer a particular download. In other words, its a song's popularity that dictates availability, not how many CD's are unlocked digital downloads are made available.

      Now, perhaps the other major labels were deluding themselves that eventually they could sell only drm'ed digital downloads, and not bother with CD's. Does offering drm free content in this scenario have any consequences?
      Sort of. In this scenario it will take longer for content to become widely available in the p2p market because fewer people are capable of providing the initial drm-free copies. i.e. you will need some hackers to crack the DRM and then make the songs available. So, offering DRM free downloads may cause you to lose out on some sales in the first few weeks of the song is available. But then EMI is offering the DRM free songs at a premium, so that, arguably, makes up the difference.

      No I wouldn't worry too much.
      Feldon
    • Agreed- It's a Zero Sum Move

      Agree 100% with you. It wasn't like Apple's DRM was ever very effective in the first place - 180 Seconds to P2P.

      They aren't incurring any additional risks and they are effectively raising the cost of an iTune. The iTune/Zune market will probably support this price point though.

      Tape singles sold in the .99-2.50price point and that is what Steve based the iTunes price on- despite the fact there is no physical media costs to the manufacture.
      Edward Meyers
    • I agree. And people like me might cause increased sales...

      As you said, those that want to steal music can easily do so already. Music DRM is just an annoyance for honest people in my opinion.

      As for me, I don't use P2P to download illegally. OTOH, I also won't purchase DRM downloads because I don't want to be restricted as to where I can play the music and I definitely don't want to be locked into any company's hardware.

      My ideal is to be able to download a song and play it on my PC, or burn it to a CD so I can play it in my car or on my boom box, etc. Probably won't ever buy a portable device because having those things in my ears drives me nuts.

      For now, I'm restricted to copying the music from CDs that I buy. Even those are few and far between though in that most CD albums are at least 50% garbage and single track CDs are a waste.

      If DRM-free tracks become available for download, people like me will buy them. In my mind, it's the ideal situation. I can get exactly what I want and I can play it when/where I want. From a consumer perspective, I applaud EMI.
      shawkins
    • Labels want to kill CDs

      Over the long term, what the labels want is to kill CDs and go to DRM-only music. That's what they've been doing with "copy protected" pseudo-CDs, and why they want DRM online.

      The pushback against "copy protected CDs" is less than I hoped but more than they expected. EMI's move is not so much "shortsighted and risky", it's recognising that over the long term DRM is not going to work, and they're getting a short-term monetary win from being the first to throw in the towel. Longer term the price of digital music is going to be closer to eMusic's 33 cents a track than Apple's $1.29... and the other labels would be smart to pick up a sweetheart deal like EMI's getting while the getting's good.
      Resuna
  • Flawed assumptions

    Adrian writes: "But over time, especially if more and bigger player jump aboard the
    "DRM-free" wagon, there will be an increasing number of iTunes users who won't
    be locked into this ecosystem'"

    There is no iTunes ecosystem. 95% of music on iPods comes from CDs or from
    illegal network downloads. In other words, iPods sell themselves Adrian.

    And if by 'bigger player' you mean Microsoft, you're only wishing. Apple's
    acheivements come from hard work, not, as in Microsoft's case, monopoly
    advantages.

    To get an idea of how much bigger Apple is compared to Microsoft in the legal
    downloading media market, you only have to look at the attention Apple has
    brought to bear on European licensing rights issues that the EU is now forced to
    address. This is a social issue with world-wide implications and Apple, not
    Microsoft, brought it to everyone's attention.

    If you're implying that Apple will just become a footnote in all of this, think again.
    Apple isn't going to repeat its mistakes of the past. You should be more
    concerned about Microsoft, who has been complacently expecting everything to
    just fall into its lap, and has gotten so big they can't innovate (not that they ever
    did) or quickly change with the times.
    YinToYourYang-22527499
    • And we all used Walkmans at one time

      See many of those around anymore?
      the iPod and Apple will have their day and be gone. Just like everyone else.
      mdemuth
      • Thanks for the metaphysics of life

        But we're talking about the mundane and the NOW here.

        But while you bring up the future, let's not forget that Apple will be one of those
        companies who will be moving on, starting with the iPhone. Bye-bye Zune. Apple
        will just keep on sucking the air out of the environment in which every Microsoft
        product will be still-born.

        But you seem more interested in holding out for something else. Whatever it is,
        when you find it, I hope you can make a small acknowledgement of Apple's
        influence on everything you and grandchildren do.
        YinToYourYang-22527499
        • Talk about metaphysics

          Influence on the grandkids? Apple is a 1 trick show. Without the iPod, you have very little, including profits.

          Fools said the same thing about the XBox. About Windows Mobile.
          Welcome to reality.
          mdemuth
        • Cover your eyes

          Apple should pull the plug on iPhone

          [url=http://www.marketwatch.com/news/story/apple-should-pull-plug-iphone/story.aspx?guid={3289E5E2-E67C-4395-8A8E-B94C1B480D4A}&siteid=yhoo&dist=yhoo]fyi[/url]
          D T Schmitz
      • Walkmans

        Walkmans (Walkmen?) may not be around any more, but last I heard Sony is still out there. It will be the same with Apple.
        WhoIsDaMan