EMI, the world’s third largest record company, announced yesterday that it will sell its music without DRM (copy protection) on Apple’s iTunes Music Store. Songs will be available in two formats: the original DRMed format for the original $0.99 price, or a higher-fidelity DRM-free format for $1.29.
This is a huge step forward for EMI and the industry. Given the consumer demand for DRM-free music, and the inability of DRM to stop infringement, it was only a matter of time before the industry made this move. But there was considerable reluctance to take the first step, partly because a generation of industry executives had backed DRM-based strategies. The industry orthodoxy has been that DRM (a) reduces infringement a lot, and (b) doesn’t lower customer demand much. But EMI must disbelieve at least one of these two propositions; if not, its new strategy is irrational. (If removing DRM increases piracy a lot but doesn’t create many new customers, then it will cost EMI money.) Now that EMI has broken the ice, the migration to DRM-free music can proceed, to the ultimate benefit of record companies and law-abiding customers alike.
Still, it’s interesting how EMI and Apple decided to do this. The simple step would have been to sell only DRM-free music, at the familiar $0.99 price point, or perhaps at a higher price point. Instead, the companies chose to offer two versions, and to bundle DRM-freedom with higher fidelity, with a differentiated price 30% above the still-available original.
Why bundle higher fidelity with DRM-freedom? It seems unlikely that the customers who want higher fidelity are the same ones who want DRM-freedom. (Cory Doctorow argues that customers who want one are probably less likely to want the other.) Given the importance of the DRM issue to the industry, you’d think they would want good data on customer preferences, such as how many customers will pay thirty cents more to get DRM-freedom. By bundling DRM-freedom with another feature, the new offering will obscure that experiment.
Another possibility is that it’s Apple that wants to obscure the experiment. Apple has taken heat from European antitrust authorities for using DRM to lock customers in to the iTunes/iPod product line; the Euro-authorities would like Apple to open its system. If DRM-free tracks cost thirty cents extra, Apple would in effect be selling freedom from lockin for thirty cents a song – not something Apple wants to do while trying to convince the authorities that lockin isn’t a real problem. By bundling the lockin-freedom with something else (higher fidelity) Apple might obscure the fact that it is charging a premium for lockin-free music.
One effect of selling DRM-free music will be to increase the market for complementary products that make other (lawful) uses of music. Examples include non-Apple music players, jukebox software, collaborative recommendation systems, and so on. (DRM frustrates the use of such complements.) Complements will multiply and improve, which over time will make DRM-free music even more attractive to consumers. This process will take some time, so the full benefits of the new strategy to EMI won’t be evident immediately. Even if the switch to DRM-free music is only a break-even proposition of EMI in the short run, it will look better and better in the long run as complements create customer value, some of which will be capturable by EMI through higher prices or increased sales.
The growth of complements will also increase other companies’ incentives to sell DRM-free music. And each company that switches to DRM-free sales will only intensify this effect, boosting complements more and making DRM-free sales even more attractive to the remaining holdout companies. Expect a kind of tipping effect among the major record companies. This may not happen immediately, but over time it seems pretty much inevitable.
In the meantime, EMI will look like the most customer-friendly and tech-savvy major record company.
