Amazon, Apple, DRM And Digital Downloads

Hypebot picked up this story Monday, but I didn't notice until last night. According to the site, Amazon will enter the downloadable music business with digital-rights-unmanaged MP3 files in late Q1 2007:

What is most surprising (and exciting) about Amazon's new store is that the online giant is apparently telling labels that they will only sell DRM free mp3's and will offer variable pricing.

As the first major download store launch since Microsoft made it clear with ZUNE that it was not supporting it's own PlayForSure DRM, perhaps Amazon was left with no choice. Yahoo! Music, Napster, URGE and others based on PlayForSure are starting to look like forgotten step-children. Only eMusic has gained real momentum against the iTunes juggarnaut and eMusic sells mp3's.

The open question is such a move is what Apple's response might be. After all, if Amazon were to do this, we might see a rapid shift from iTunes to Amazon, since MP3 files would be usable on all players (thereby avoiding perceived lock-ins to iPods that Apple's Fairplay songs provide) and the fact that such music collections would be "future-proof". That is, a collection of MP3 files should be playable for years to come, regardless of whether Amazon or Apple are still in business or supporting the format.

My view: if Amazon can convince the record labels to offer music in DRM-free MP3 form, Apple would be silly not to follow suit. I suggested such a move to Apple back in March when the company was fighting with the French government, but if Apple can let Amazon do all the heavy lifting of getting the labels signed up for DRM-free music, so much the better. Further, the technology for providing watermarks for MP3 music continues to evolve to allow, thereby

But lest readers think that someone will finally eclipse Apple in the music downloading business, the reality is that I don't think labels will sign Amazon's deal for all their music. Instead, I think they'll offer their lower-value back catalogs of music in MP3 form, but will still demand some type of DRM for their hit albums and tracks for, say, the first six months of a record's release. In many ways, this would parallel the window system for movie releases, where movies arrive first as full priced DVDs, then move to video-on-demand, and later get released on network TV where everyone and their brother can record them via TiVO, recordable DVD, or (heavens forbid such archaic technology) VHS tape. There is no reason music should not follow a similar distribution path online.

The result: because Apple controls the dominant DRM system today, iTunes would still hold a huge competitive edge against Amazon for hit music, and therefore, would likely remain the dominant market leader. But another MP3 service would certainly bring competitive pressure to bear on Apple and would help the industry realize that DRM hinders rather than helps the growth of music. But it's the labels who stand in the way of that growth, not Apple. And in the meantime, Apple and iTunes will prosper no matter which way the industry plays the game.

Full disclosure: I do own a little Apple stock.

Comments

[Julian Ivan...:]

Nice piece! So when are we going to see the headline: "Amazon DRM-Free Music Downloads To Boost iPod Sales" in the financial and tech media? Answer: never.

Obviously anything which boosts the appeal of downloads (as DRM-free MP3s would definitely do!) is going to increase the popularity of all MP3 players. As the iPod is by far the market leader, it - and AAPL - stand to benefit far more than anybody else from such a development. It is widely known that music downloads make Apple very little - if any - profit, so there's no loss to earnings for AAPL from music bought elsewhere, only more profit from more iPods sold. Users will still use the best jukebox software out there - iTunes - to manage their DRM-free music, probably on their iPods, so the source of the music itself if DRM-free is actually fairly irrelevant.

Of course you won't read a story like that from most financial journalists, because it wouldn't make good headlines. Far more likely is: "Will Amazon's DRM-Free MP3s Kill Apple's iTunes?" A wholly irrelevant and far less important question (to which the answer is obviously "no" in any event).

That's the way this media-whoring game works.

2006 Dec 20 02:16 PM

[Paul Johnson:]

Pure Amazon fantasy.

2006 Dec 20 03:07 PM

[Andrew Wise:]

1.5 Billion
Number of songs iTunes has sold since its inception

70 Million
Number of iPods on the street

20 Songs
That breaks down to a mere 20 songs per iPod

Last time I checked, the 80GB iPod holds 20,000 songs, so, either there are a lot of iPod users with some a LOT of empty space, or iTunes is missing out on a lot of music sales.

2006 Dec 21 03:26 AM