[Infowarrior] - Music Fans: Dismantle DRM

[Richard Forno]

Technology January 5, 2007, 12:01AM EST
Music Fans: Dismantle DRM
New lawsuits are using antitrust law to challenge media giants' music
download policies, claiming they unfairly restrict users' purchases
http://businessweek.com/technology/content/jan2007/tc20070105_896787.htm?cha
n=technology_technology+index+page_today%27s+top+stories

by Catherine Holahan

When it comes to legal action over downloaded music, the defendants are
often individuals: The lone user downloads one too many copyrighted files
and Big Media goes on the offensive. But now, the little guy is turning the
tables.

A fresh crop of lawsuits filed on behalf of individuals argue that it's the
big companies that are ripping off the consumer.

Melanie Tucker, a San Diego resident, says Apple Computer (AAPL) unfairly
restricts how its iTunes Store customers can use legally purchased music.
Apple uses its so-called Digital Rights Management, or DRM, software to
prevent iTunes songs from easily running on media players that compete with
its iPods. (The files can be converted but the process is time-consuming and
can be confusing.) Apple's brand of DRM software, called FairPlay, also
prevents music purchased through services other than iTunes from playing on
the iPod.

Tucker maintains that the company, which controls between 70% to more than
85% of the legal music download market and perhaps a 90% share of the
digital music player market, is behaving like an overly aggressive monopoly,
stifling competition in violation of antitrust legislation. "Apple has
monopoly power in both markets through iTunes and iPod and they have made a
conscious decision to disable people from freely using other formats on
their iPod and vice versa," says Andrew S. Friedman, one of Tucker's
attorneys. Friedman is seeking class-action status for the suit.
My Tunes vs. iTunes

Tucker's suit comes on the heels of a March, 2006 class action filed by
Scott Ruth against music industry players including Sony BMG Music
Entertainment (owned by Sony (SNE) and Bertelsmann Media), Universal Music
Group, Time Warner Music Group (TWX), and EMI (EMI). Ruth, an Arizona
resident, argues that the labels are violating antitrust agreements by using
DRM to prevent music from being sold by a variety of retailers, thereby
stifling competition that could keep prices down. Both Ruth and Tucker's
suits seek compensation for music download customers as well as a change in
the restrictions.

The arguments in Ruth and Tucker's suits are not particularly new. Consumers
have long complained that legally purchased songs cannot be played on all
their devices in part because of restrictions on the number of devices that
can hold a license for a song at any one time. Traditionally, the record
labels and download services have argued that the restrictions are necessary
to combat piracy and ensure artists are compensated. Seeing few
alternatives, many music lovers have begrudgingly accepted this answer‹or
opted for illegal downloading.

But the lawsuits show customers are no longer willing to accept the status
quo. Some DRM opponents have begun arguing that DRM restrictions are
actually fueling piracy by forcing users to choose between buying music that
they will only be able to play on a limited number of compatible devices or
stealing music that they can play anywhere. "Right now the fact is that
pirated music and pirated movies are actually worth more than the movies and
music you buy," says Rob Enderle, principal analyst with the Enderle Group.
"I can't think of another product that is actually worth more stolen than if
you purchased it."
Music Biz Ready to Play

The music industry is showing signs of softening. While record labels aren't
changing their tune on the need for DRM to prohibit piracy, the Recording
Industry Association of America, which represents the major labels, wants
changes that would let users play downloaded music across a variety of
devices. "We are focused on interoperability," says RIAA President Cary
Sherman.

Over time, the recording industry has gradually shown other signs of
flexibility. It has allowed music subscription sites to license music and
has enabled services that give songs away for free in exchange for exposing
customers to advertisements. It has even enabled users to put rented songs,
obtained through subscription services, on portable devices‹long a sticking
point between the industry, the services, and the users who did not want to
get subscriptions without the ability to take their music with them (see
BusinessWeek.com, 9/5/06, "Meet the iTunes Wannabes").
Interoperability Is Key

Much of the change in attitude has resulted from consumer backlash and the
music industry's growing frustration with Apple, which has refused to give
the industry more control over pricing (see BusinessWeek.com, 12/19/05,
"Apple May Be Holding back the Music Biz"). The trouble is, Apple is opposed
to interoperability and labels don't have a choice but to do what the Web
stores want. "How powerful is a company when they are negotiating with
Wal-Mart (WMT)?" asks Sherman. "Want Wal-Mart to carry your stuff, your
prices are going to come down. Record companies have to negotiate with Apple
because they are the dominant player."

Both Apple and Microsoft (MSFT), maker of the Zune music player, have said
they have not made their products interoperable because people want a
seamless experience between download store and device. The more media player
manufacturers and download services are involved, the more difficult
seamless interoperability becomes. Microsoft experienced this with its
"PlaysForSure" technology, which was used by Samsung, Creative Labs (CREAF),
and others with only varying degrees of success. That's one of the reasons
why, in releasing Zune, Microsoft opted for a system that didn't have to
work with products it didn't control (see BusinessWeek.com, 11/12/06, "A
Method to Microsoft's Zune Madness"). Calls to Apple and Microsoft
representatives were not returned.

However, such interoperability issues would likely not exist if the
companies just did away with DRM altogether, allowing users to download
music and then copy it to as many devices as they want. Several download
services such as eMusic and Amie Street have developed businesses around
nonrestricted music files and flexible price models. And eMusic, which
focuses on independent label artists similar to Amie Street, has been
particularly successful. In the three years it has been in business, it has
sold more than 100 million songs. "Paying customers will stay paying
customers and people looking for free music will continue to look for free
music," says eMusic president and chief executive officer David Pakman. "We
challenge the notion that [DRM] is a requirement in order for the industry
to grow."
New Business Model

What's more, eMusic has seen steady growth. It is now the No. 2 music
service after iTunes, based on volume of songs sold (Apple sells about 1.8
million songs a day). On average, eMusic customers buy 20 songs a month,
spending about $168 a year on songs, says Pakman. The average iPod owner
buys fewer than 15 songs a year per owned iPod (see BusinessWeek.com,
11/21/06, "Online Music's Elusive Bottom Line").

Pakman sees the number of songs his customers buy as evidence that songs can
be progressively priced in a way that reflects demand for particular songs
and discourages piracy. Elliott Breece, co-founder and CEO of Amie Street,
concurs. Songs at Amie Street start free and then become gradually more
expensive as they start to sell. Prices are capped at 98 cents, a penny less
than the price for each iTunes song. Amie Street has sold more than 70,000
songs since its October launch. Breece says that Amie Street wouldn't be
able to compete if users couldn't download songs and play them wherever they
wanted. "People want to buy and own stuff," says Breece. "In a lot of ways
DRM isn't really natural."

The protections, however, are a way to secure loyalty among customers. After
all, why would a longtime iPod user want to buy another, comparably priced
music device if doing so would require spending hours to convert files into
the appropriate format? Thus, barring an anti-Apple court decision (which
even Friedman concedes would be a couple years off at the earliest), there's
no real reason for Apple to change. Unless, of course, consumers start
voting with their pocketbooks by purchasing music through non-DRM services
and listening to it on non-iPod players.
An Open-Format Future?

Michael Bebel is CEO of Ruckus Network, an advertising and
subscription-supported music download service that is focused on college
students and uses Microsoft's PlaysForSure technology. Bebel says he can see
a future with no DRM‹if consumers stand up in big enough numbers. "I think
that at least the calls for change are going to reach a critical point this
year," says Bebel. "But change never occurs as rapidly as one might hope or
like."

The labels could help speed the change by refusing to license certain songs
to iTunes in order to bolster less restrictive forms of DRM. But they would
risk losing sales from frustrated fans who might not want to purchase an
actual CD to get an individual song on their iPods. If in the unlikely event
labels drop DRM altogether, Apple would still be able to affix its own
restrictions when selling through iTunes. That's why music sold through
iTunes from labels such as Nettwerk Music Group, which does not use DRM,
still cannot be easily played on non-Apple media devices. "Our whole
motivation in the digital world is to not try to control the consumer
experience," says Brent Muhle, Nettwerk's general manager. "So if a consumer
is a rabid iTunes user and they want to buy from iTunes we want them to have
a media file to buy. If they want to buy directly from us, we are going to
give it to them in as open a format as possible."

Still, no one tech service remains dominant forever. Remember when Microsoft
ruled the world? It still has the most dominant operating system, but it is
facing accelerating competition and has been forced by courts to play nicer
with rivals. And the lawsuits certainly hurt Microsoft's public profile and
emboldened the competition.

Apple could suffer a similar fate, eventually relaxing its stance on
interoperability. After all, France is suing the company because of its
reluctance to open up the iPod to other music services (see
BusinessWeek.com, 3/21/06, "Apple vs. France"). That suit, coupled with
Tucker's potential class action and others, could make Steve Jobs think
harder about making the iTunes Store or the iPod more compatible with
competing devices or stores. But, short of a court order, don't expect a
change of heart any time soon.

Holahan is a writer for BusinessWeek.com in New York.