Wal-Mart Needs More Than DRM-Free Music to Compete With Apple

Includes: AAPL, WMT
by: Yankee Group

By Carl Howe

The headline is irresistible: Wal-Mart selling digital music free of copy curbs. And already reporters are eager to write the epitaph for Apple's (NASDAQ:AAPL) iTunes. The Wall Street Journal wrote Tuesday:

Wal-Mart's move undercuts Apple's pricing on its iTunes store. In May, Apple started selling some songs without DRM software for $1.29 a track, or 30 cents more than the usual price of songs on iTunes.

DRM has been a contentious issue in the world of online music sales. until recently most major record companies have insisted that digital retailers employ the software to prevent rampant copying. But two of the major labels have since shifted gears and begun to offer parts of their catalogues without protections.

Universal Music said two weeks ago it will allow digital tracks from its catalog, including artists such as Sting, 50 Cent and Stevie Wonder, to be sold online without copy-protection technology for a limited time. However, they won't be available for sale at Apple's iTunes store.


Apple uses its own DRM software, which doesn't work with services or devices made by competitors, resulting in locking owners of its popular iPod players into buying the most popular mainstream music at iTunes, and not from its competitors. Record companies have blamed this lock-in for limiting digital-music sales, which account for around 15% of all recorded-music sales in the U.S.

I believe that the reports of iTunes death at the hands of DRM-free music are exaggerated. Why? Because:

  • Wal-Mart's (NYSE:WMT) site remains in thrall to Microsoft's (NASDAQ:MSFT) DRM. Despite the near-universal appeal of MP3 music, you need a Microsoft Windows computer, Microsoft Media Player, and Microsoft Internet Explorer to even browse Wal-Mart's music site [I captured the image above using Windows 2000 on Virtual PC]. Ironically, customers looking to avoid DRM and gain access to DRM-free music only can do so by subscribing to Microsoft's rights-managed environments.
  • Wal-Mart's MP3 selection is only part of its store. While Universal is providing MP3 versions of many of its songs, it's by no means, well, universal. A quick spin through the store showed that almost all the MP3 songs were back catalog albums and singles. Buyers who are turning to Wal-Mart to quickly download the soundtrack to High School Musical 2 onto their iPods will still have to go to the iTunes Music Store; that and most modern albums are only available in Windows Media format at Wal-Mart.
  • Wal-Mart's store offers little differentiation except price. Wal-mart has no particular marketing differentiation in music over iTunes, Amazon, or the Zune marketplace other than its lower prices -- $0.88 for WMA tracks, $0.94 for MP3s. Worse, for a large segment of buyers -- the 74% of music player buyers with iPods for example -- the Wal-Mart customer experience is hit-or-miss for products that will actually work with their players. The result: customers are likely to cherry-pick low-cost tracks at Wal-Mart when they can, but any large-scale defections from iTunes or even Amazon just aren't going to happen without a lot more marketing work.
  • Apple already offers DRM-free music on the iTunes music store, so Wal-Mart's move only brings it to possible parity with that digital music leader. To unseat the leader in any market, a challenger must offer consumers a significantly better and differentiated experiences to get them to switch vendors. Said another way, you have to give them a big increase in value to overcome the switching cost of choosing another product. Wal-Mart's me-too move is too small to overcome the inertia of more than 100 million iTunes customers and three billion iTunes songs sold. If Wal-Mart wants to make a dent in Apple's iTunes domination, it will have to do more than cut prices to win its customers -- much more.

    click to enlarge
    walmart music