Sunday, April 08, 2007

EMI DRM-free deal -Shortsighted, risky, and possibly irresponsible to the company’s shareholders

It's been interesting over the past few days to watch the reaction from different tech sectors to the EMI/Apple and then the EMI/Microsoft deal to make DRM-free music with less compression available to the public. To call the response "mixed" I think describes it well. Basically, the impression I'm getting is that no one, not even within EMI, Apple or Microsoft, really knows how this is going to play out. Bill Rosenblatt, writing for DRM Watch, does a good job of analyzing the possible short-term impact of these deals. So, is this a good move for EMI? Rosenblatt doesn't think so:

As far as EMI is concerned, the deal was shortsighted, risky, and possibly irresponsible to the company's shareholders. EMI is the smallest of the four majors, enjoys no synergies with corporate siblings, and is undergoing financial hard times. This move with Apple was a lunge for near-term revenue, at the quite possible expense of longer term revenue for EMI and the rest of the industry.

The announcement also didn't help EMI's stock price:

Any longer-term revenue effects from the deal are unpredictable. The financial markets concur with this assessment: EMI's stock has edged down slightly in the days since the Apple announcement.

But the deal is very good for Apple:

The short-term effects of this announcement on Apple, as with EMI, are predictable; but unlike EMI, they look positive (Apple's stock was up about 1% on the news). Apple is now well and truly in control of music download economics for Internet distribution. This deal should also be a huge help to Apple in defusing consumer advocacy actions in many European countries.

What about the knock-on effect on iPod sales?

Apple has determined that it no longer needs DRM to sell iPods. It stands to benefit most from any additional unauthorized copying resulting from the lack of DRM. And any additional movement towards DRM-free music will hurt its would-be competitors among device and platform makers, notably Microsoft. In other words, give credit where it is due: Apple has indeed played this scenario smartly.

I think that it'll be interesting to keep an eye on iPod sales over the next 12 to 24 months and see what happens. Initially, there's no way that the EMI deal can have a negative effect on iPod sales. After all, the type of person likely to by DRM-free EMI tunes from iTunes is also likely to have a large DRMed library too, forcing them to remain within the iPod ecosystem. But over time, especially if more and bigger player jump aboard the "DRM-free" wagon, there will be an increasing number of iTunes users who won't be locked into this ecosystem (assuming, of course, that they buy smart and stick to non-DRM stuff) and will be free to pick and choose their next media player from outside the iPod range.

Has EMI given too much power to Apple?

What does EMI get in the longer term? No one really knows. The effect that the lack of DRM will have on content misuse or on revenue is unpredictable. What we do know is that this deal flies in the face of the music industry's view that Apple has too much control over it. That's where the irresponsibility part comes in. If EMI wanted to go DRM-free, it would have been better off in the long run if it did so with an iTunes competitor.

This is a good point, but I think that EMI is hoping that Apple's halo will help profits, in the short-term.

It's a missed opportunity for the majors, most likely gone forever. EMI has launched an experiment from which there is no turning back.

Now, if EMI has done one thing, it's bound to have annoyed and irritated the other major players. What EMI has done is set a standard for DRM-free music that the other players will either have to match (and then be accused of doing more than following the herd), or do better in terms of say price, which could hurt bottom lines. I don't agree that EMI could turn back from this deal at some future point, but as soon as another player comes on board the entire industry will be locked in a price and features war, which is going to be great for consumers.

But, if DRM-free music what consumers really want?

The market will decide whether music tracks without DRM (and with less audio compression) are worth the extra money. We do not believe that the existing market research really predicts how consumers value DRM versus DRM interoperability versus no DRM.

This is really the crux of the whole matter. Will consumers pay more (and it's not a "little more" like I've seen it described elsewhere, 25 to 30 per cent is a lot more) for higher quality, DRM-free music? Sure, there's a market, but how big is it? How many people are unhappy with the current state of downloads who will be happy enough now to start buying downloads? Some tech communities make a lot of noise about the negative effects of DRM and how it's bad for consumers (and there's no doubt in my mind that it is bad), but the flip-side of that coin is that people are still buying DRMed content.

First of all, we believe that the number of consumers who would truly benefit from "interoperability" is small. Furthermore, market research that asks consumers if they would pay more for "interoperability" is strictly hypothetical — of course people prefer interoperability; it's like asking if you prefer "pure" or "chemically treated" water — and fails to isolate DRM as a factor in interoperability.

This is a good point. We're always hearing anti-DRM arguments that go something like "I want to be able to listen to my music in the car, when I'm on the move and in the gym, from my toaster … and DRM doesn't allow me to do this." This argument just doesn't convince me because there are plenty of "one stop shop" devices on the market that will let you listen to music wherever you are, and the number of people trying to juggle their library across multiple devices has got to be small. In fact, the only people I know who try to do this are tech-savvy users who seem to have been sucked in to buying DRMed content and then wish they hadn't. My experience is that the average consumer is pretty happy with how things are.

Effects on revenue and piracy are unknowable at this point, as are the next steps of the other three majors.

Now if this deal is only going to do one thing, it's going to settle once and for all the debate on whether DRM protects the industry against piracy. In 12 to 24 months we'll know the answer to this question thanks to EMI.

Is DRM dead?

We don't think so. Rights management should continue to play a role in helping content owners define different economic offers. Subscription on-demand services like Rhapsody and Napster are unworkable without DRM, and certain types of users prefer them. Furthermore, we don't see film and television content owners changing their stances on DRM anytime soon; this deal will most likely fall under the heading of "music industry mistakes we don't want to repeat."

No, DRM isn't dead, but I think that things are going to change as a result of what EMI's done here. Hopefully, we'll now see the digital download evolve into a more consumer-friendly market that respects the buyer rather than considering them thieves. But it's not going to change overnight. So, for now at least, I'll still be buying CDs.

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