Steve Jobs Figures Dealmaking, Dollars Have Killed DRM

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.

Comments

[jbelkin:]

Any loss sales of the iPod is balanced by extra sales now that people don't feel they are "locked" in. Let's face it - the vast majority of itunes store shoppers could care less - they liked the convenience of clicking once and it would buy, load and sync. But also keep in mind, that was not a lot of people, the average purchase is less than 10 per ipod - were the more savvy purchasers "holding back" because of DRM and/or lower sound quality (there's lots og blog entries about this but of course, that's anecdotal) so will this push them over the purchasing category? It can't hurt - but the most important thing to keep in mind is that Apple makes very little on itunes store urchases - maybe a net of a couple pennies (previously) so every bit is nice but not crucial to Apple - the over risding of ipod purchasers lived fine with not a lot of itunes music tracks and Apple's revenues are still substantial without it - Apple does NOT sell ipods at a loss hoping to sell you more "blades." It's an extra bonus if many more itunes tracks are purchased. Plus, while others will come on board - Apple, of course, gets the initial PR and of course, gets the extra branding when OTHER mp3's players add the extra feature line (compatible with itunes music store tracks)

2007 Apr 02 01:48 PM

[just_simple:]

A lot of people just think that iPod is just another MP3 player with iTune tied in (as those of Eupropean regulator). They forget about style that makes the difference between the iPod and other MP3 player. People buy iPod because it is iPod.

2007 Apr 03 06:33 PM