In the legislative debate over online music, it has become something of a mantra among Digital Rights Management (DRM) proponents that DRM is necessary to enable a wide variety of business models for digital music distribution. After hearing this in person at the 2007 State of the Net Conference, I decided to take a look at the range of legitimate online music distributors to see just how much the presence or lack of DRM affected business models. I examined seven online music stores, four of which use DRM, three of which do not. There are many other music stores on the Net, and this is not intended to be an exhaustive list. However, according to Q3 2006 figures, Apple controls approximately 72% of the market, eMusic controls about 10%, and the remaining stores are fighting for the scraps. Online music stores are no longer a strange new creature. They’ve existed since for years, and latecomer iTunes has sold over 2 billion songssince its May, 2003 launch. It would seem enough time has elapsed for a plethora of business models to reach consumers. My intent here is to find out whether DRM really enables the kind of innovation that satisfies musicians, labels, and consumers.

DRM-Based Business Models

iTunes

Buy the Condo Downtown  iTunes is the dominant player, commanding almost 3/4 of the market. It works on Macintosh and Windows systems. No subscription is required. The service provides downloads only, and utilizes FairPlay, a DRM technology that Apple has not licensed to other competitors. This means iTunes songs will not work on portable devices other than the iPod. FairPlay allows for playback on up to five computers and an unlimited number of iPods. Apple CEO Steve Jobs recently stated that he would prefer to sell music sans DRM

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Napster

Rent the Mansion in the Slums  Napster is the third most popular online music store, holding 4% of market. It works on Windows only. Subscription is required. This is not the original Napster, but PressPlay, the original Sony/Universal venture, in a new guise. Napster provides streaming music at no cost, but Windows Media Audio (WMA) DRM allows each song to be played only three times. Subscribers pay $9.95/month to download an unlimited amount of music for up to three computers. $14.95/month gives subscribers the ability to place music files on an unlimited number of computers, and on WMA-compatible devices such as the Creative Zen. Termination of a Napster subscription renders all downloaded music files unplayable. You can enjoy all the music you want, except that it won’t play on an iPod. Once you stop paying the rent, you’ve got nothing. Buy the Small Condo – Napster also offers a la carte purchase of music files to subscribers. These downloads use WMA DRM.

Yahoo! Music

Rent the Mansion in the Slums  Yahoo! Music comes in tied for fourth, with 3% of the market. It works on Windows only. Subscription is required. $6.95 allows unlimited downloads. For $14.99/mo or $11.99/mo (depending on whether payment is made monthly or annually), subscribers can play music on WMA-compatible devices. Again you can enjoy all the music you want, except that it won’t play on an iPod, and once you stop paying the rent, the music dies. Buy the Small Condo Downtown – Yahoo! also offers a la carte purchase of music files to subscribers. These downloads use WMA DRM, so the iPod is out. Note that Yahoo! Music boss Dave Goldberg has been saying DRM must go

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Zune

Rent the Mansion in A Different Slum  Zune, Microsoft’s hardware/software combo, only works with Windows and requires a subscription. For $14.99/mo, unlimited Zune files can be downloaded for use on computers and two (or more in some circumstances) Zune devices. Ending the subscription nixes use of all downloaded files. Microsoft’s own WMA PlaysForSure format will not work with the Zune device, so music obtained via Yahoo! Music or Napster will not work on the Zune. Buy the Even Smaller Condo Downtown – Zune provides a la carte purchase of music files to subscribers, but they are incompatible with iPods or PlaysForSure devices.

Business Models That Do Not Use DRM

eMusic

Buy the Ranch On the Edge of Town  eMusic is the second most popular online music store. The store sells music in standard MP3 format that can be used on any digital music player, from iPod to Zen to Zune, and on Linux, Macintosh, and Windows. Selection is more limited than that of the DRM-based stores, but smaller labels have jumped on the eMusic bandwagon, and acts like Barenaked Ladies, Credence Clearwater Revival, Jimi Hendrix, Moby, Thievery Corporation, and Tom Waites can be found. A subscription is required. 30 downloads/mo. costs $9.99, while $14.99 gets you 50 songs/mo. and $19.99 gets you 75 songs/mo. Songs do not carry over from month to month.

Amie Street

Buy the Ranch in the Country  Amie Street also sells universally-accessible MP3 tracks without DRM, but a subscription is not required. This store is all about indie music, and the pricing structure was established with this in mind. Artists and indie labels upload songs. As popularity of a song grows, its price increases from free to 98 cents per track. 70% of proceeds go to the band or label, and the rest goes to Amie Street. Site users make “RECs” or recommendations to other users, and receive credits when recommended tracks hit the 98 cent mark.

Magnatune

Buy the Bungalo on 100 Acres in the Mountains  Magnatune and Amie Street take a similar approach, except that Magnatune provides tracks in a wide variety of formats (AAC, FLAC, MP3, Ogg, and WAV), all without DRM. Magnatune gives artists half the revenue from music sold, and pricing is variable. Albums sell for between $5 and $22. The customer decides at time of purchase how much to pay for the music. John Buckman, Magnatune’s founder, offers an eloquent explanation of why he established Magnatune

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Conclusion

DRM-based stores seem to provide either:

  • ownership in a proprietary format, with use restrictions (iTunes, Napster, Yahoo!, Zune), or
  • rental in a proprietary format, with use restrictions (Napster, Yahoo!, Zune)

Non-DRM stores seem to provide either:

  • less expensive ownership in a nonproprietary format, without restrictions (eMusic, Amie Street, Magnatune), or
  • less expensive ownership in several nonproprietary formats, without restrictions (Magnatune)

DRM-based music stores can provide music for rent, something the labels been pushing since the earliest days of online music sales. But although predictions of the demise of ala carte pricing have been rife for years, music for rent hasn’t caught on in a big way. The top two online music stores, accounting for 82% of the market, are built around a la carte pricing. Apparently while some consumers are fine with renting music, most of them want to own it. DRM-based stores are each built around a file format and an associated DRM technology. This limits operating system choice and device compatibility. To use the “record player” analogy I heard at State of the Net, iTunes lets you play your Stevie Wonder record only if you’re using a Sony or Aiwa receiver and a Sony turntable. Napster and Yahoo! Music let you play it only on an Aiwa receiver and any turntable sold by Sears (as long as it’s not a Sony or an Aiwa). Zune lets you play it only on an Aiwa reciever and an Aiwa turntable. Depending on how narrowly define “business model,” each of these three types of stores may be operating under a different model. But are these variations really innovative? In Silicon Valley, the term “innovation” carries with it a subjective element. It’s not enough to introduce something new; it has to provide value. Perhaps in the context of online music sales, “innovation” is really providing customers with more choice in the form of compatibility across operating systems and devices, broad file format options, and customer-driven pricing mechanisms. If that is the case, DRM-based stores aren’t the ones doing the innovating.

Update

I’ve posted a follow-up with information about subsequent DRM moves in the music industry. [23 NOV 07].

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