What’s Next For Apple As The DRM-Free Music Era Begins?

With Apple’s (AAPL) iTunes update, the DRM-free era officially begins. The big question is what comes next for Apple?

Apple's move to sell DRM-free tunes from EMI may be a boon initially since other rivals are still saddled with clunky copyright protection schemes. Amazon (AMZN) plans to go DRM-free, but not until later in the year.

The longer-term picture is a little more unsettled. Here are a few items we’re about to find out about:

• Will music buyers pay more to ditch DRM? Apple is selling DRM-free music for $1.29. The DRM-free music sounds better due to a higher encoding rate, but ditching evil software is the big sell here. Will folks buy it?
• How many people will upgrade an entire DRM library to DRM-free with one click? Will some iTunes customers upgrade by accident?
• Will Apple’s dominance be weakened without DRM? Copyright protection software helped tether iTunes customers to the iPod. As the world goes DRM-free that lock-in effect erodes. It won’t happen overnight, but it is a risk. “While today’s news is a positive for consumers, we believe it weakens one of Apple’s long-term competitive advantages in the digital content segment. As we have noted previously, DRM-free content reduces the switching costs for consumers wishing to exit the iPod-iTunes ecosystem, which reduces barriers to entry for Apple’s potential competitors,” wrote J.P. Morgan analyst Bill Shope in a research note.

There won’t be answers to those questions initially, but it does bear watching. For now, it’s clear sailing for Apple–especially ahead of its developers forum the week of June 11. Morgan Stanley upped its stock target for Apple shares to $150 from $110.

Comments

[Dan Poarch:]

"DRM-free content reduces the switching costs for consumers wishing to exit the iPod-iTunes ecosystem, which reduces barriers to entry for Apple’s potential competitors"

True. But Apple is smarter than this statement assumes. Steve Jobs wouldn't open up DRM if he didn't believe in the iTunes "ecosystem." Every PC laptop I see people using is running iTunes, a free app. And it's not just the free app and the expensive iPod, it's the user experience. iTunes is simple and smooth and anyone can run it. I have yet to see a PC app that even comes close.

Personal media management will be the centerpiece of personal computing over the next five years. Notice that one of the first things that they demoed with the Microsoft multi-touch screen was the photo dump.

Also, look at the variety of players that Apple alone releases. It's possible that one user could own a video iPod, a Shuffle for working out, a MacBook Pro, a desktop or spouse laptop, an AppleTV and coming soon an iPhone. DRM is clearly inoperable in an environment like this especially when one of these items is rotated every six months. DRM would become a frustration in this "ecosystem." I would say that Steve Jobs wants iPhone content on as many players as possible, and that he hopes 90% of those players are his, in one form or another.

2007 May 30 04:06 PM

[Dan Poarch:]

I meant to say... "DRM would become a frustration in this "ecosystem." I would say that Steve Jobs wants <b>iTunes</b&... content on as many players as possible, and that he hopes 90% of those players are his, in one form or another."

2007 May 30 04:08 PM