PriceSCAN Blog

Steve Jobs' recent call for record labels to eliminate DRM on music downloads would undermine a key competitive advantage of CDs, and that may be why many in the music industry are so resistant to the idea. So long as music bought over the Web is saddled with anti-copying software, it remains an inferior product to music purchased on DRM-free CDs. To understand why the labels prefer a CD-based world, you have to go back to the 1970s, when the industry discovered the amazing economies of scale inherent in promoting the albums of a handful of "superstar" acts, particularly in the wake of "Frampton Comes Alive" (the architects of this strategy and their effect on creativity are chronicled in Fredric Dannon's appropriately titled "Hit Men" ). In this model, the album format forces the purchase of many songs just to obtain the one track the consumer might actually desire (in fairness, some artists also prefer the album format as a way to offer an integrated vision over more than one song). Further, the costs of vinyl and, later, CD album production, coupled with the distribution relationships between the labels and physical store retail chains, presented formidable barriers to entry for independent record companies and musicians. This gave the majors the ability to restrict the number of artists they released. By eliminating the need to back a wide range of acts, promotional monies could be deployed more efficiently, at least from the standpoint of profitability.
Now contrast this situation with a market dominated by downloadable music. Songs are purchased a la carte, and distribution is controlled by internet retailers with potentially weaker ties to the labels. Production barriers to entry are sharply lower, a factor amplified by the emergence of inexpensive studio technologies and software like GarageBand. Consumer choice is expanded across a wide spectrum of artists, resulting in a highly segmented, even atomized market. A lot more artists may make a living, but at the expense of the economies of scale associated with the star system. In short, not a great deal for a major label.
However, as Jobs points out, only a small fraction of music residing on iPods are actually purchased downloads; much of the rest has been ripped from DRM-free CDs. If DRM-free music becomes available for download, eliminating the competitive advantage of CDs, it's likely the slowing rise of this mode of distribution will begin to accelerate again, at the expense of disks. This may explain the RIAA's counterproposal of having Apple make its FairPlay DRM standard available to other manufacturers and e-tailers, thus preserving the DRM-crippled nature of downloaded music.
As of this writing Apple has not embraced this suggestion, let alone the proposal I made at the beginning of this piece. Jobs has reason to try to turn attention from Apple's own DRM to the industry's policies, as members of the European Union are objecting to the inability of consumers to use music purchased from iTunes on non-Apple players (the EU also has issues with Apple offering less favorable royalty terms to independents versus the majors). Yet there are tentative signs that Cupertino's vision may carry the day. Late last week came word that the RIAA's united front may be crumbling, as EMI was said to be soliciting bids from online sellers for the right to deliver music from its catalogue free of DRM. It's possible that the majors see the handwriting on the wall, as they watch CD sales decline as even DRM-hobbled download purchases continue to grow. The rise of indie bands promotion on MySpace through downloads free not only of DRM but of any cost whatsoever must surely give these firms pause. In the end, they may have to adapt to a world of greater choice, trading the star system's efficiencies for the benefits of Web-enabled viral marketing.
As I said at the start, Apple could go a long way to making a DRM-free world a reality if they would allow artists and labels to go DRM-free right now. It could do this in the MP3 format, thus allowing use by non-iPod consumers. And, while they're at it, they could offer indies the same royalty sales deals they offer the majors.
Steve?