Steve Jobs is Right Again – People Will Pay for Free Music

Steve Jobs is right again. In a post on the Apple web site he reacts to calls for Apple to open their Fairplay DRM system to licensing with an interesting (and insightful) proposal:
"The third alternative is to abolish DRMs entirely. Imagine a world where every online store sells DRM-free music encoded in open licensable formats. In such a world, any player can play music purchased from any store, and any store can sell music which is playable on all players. This is clearly the best alternative for consumers, and Apple would embrace it in a heartbeat."
This has gotten a lot of coverage today, from Business Week to the New York Times. Jobs' post was prompted by a number of European countries examining (and in some cases declaring illegal) the digital rights management (DRM) system that Apple uses with the iTunes music store and the iPod. The system is there to make sure that if you cough up $.99 for a song, you don't spread it around the internet for free. These countries say the effect is to lock customers in to iPods and iTunes so they can't buy another player without forfeiting their music. Jobs' response? He never wanted to have a DRM system in the first place. He would gladly dump the whole thing, and let you buy music anywhere you wanted and use any player you wanted - but it's not up to Apple. Although you might buy your Ben Folds from iTunes, Apple doesn't have any of the rights to that music - the vast majority of the time, the rights are owned by a major record label, with just four labels dominating the market. They require DRM. That said, why wouldn't Apple like the idea of DRM? A naive observer (or record company executive) would say it's good for Apple, too, since it means iPod buyers will use the iTunes store and vice-versa, and it forces people to buy songs instead of pirating them. This is why Steve Jobs has been so successful. He thinks more people will pay for free music than music tied up in the rules and inconvenience of DRM. And he's right. To understand why, you need a little history. Starting in the mid 90s but really picking up around 1997, MP3s started popping up here and there on web sites. At first it seemed like most MP3s were available from fan sites for particular bands or genres, but soon mass-popularity mp3 sites started popping up and getting a lot of traffic. Pretty soon most of them were filled with banner ads and made useless by spam. But no matter, because in 1999 Napster came out, allowing peer-to-peer sharing of music files. Millions of people used Napster to download songs. The record companies, represented by their organization the RIAA, took them to court. Napster, they said, was providing the means for the outright theft of millions of songs, and should be shut down. And it was, in 2001. But here's where Jobs (along with many other commentators who don't have billion-dollar companies behind them) saw something the record companies did not - people were downloading songs without paying, sure, but if you wanted to download music there was no way to pay for it. Clearly there was a demand, and where there is a demand, there is a market, but the labels were not interested in it at all. They said these millions of people were just theives, that no one would ever pay for a download. Nothing useful happened until 2003 when Apple opened the iTunes music store, and Jobs proved them wrong. I don't think it took a singular genius to do so, since a lot of people at the time were all saying the same thing: give us a way to pay for downloads, and we will. But he had the opportunity and the ability to convince record labels to try it out. And it worked. Downloads have not replaced CD sales, but they have been growing very, very quickly considering the labels said they would never work and they still compete with free downloads. Why haven't downloads replaced CD sales? They are different media, and in some ways will always be different - some people like the phsyical object, CDs make a better gift, etc. But a big part of the reason is that downloads are made artificially into an inferior good because of DRM restrictions. Here's an example of how DRM removes value. CDs are generally not restricted, but once in a while a label will try to restrict them in some way. On one of the very rare occasions we were listening to commercial radio, my wife and I heard a song by Kasabian that we liked. We went out and got the CD. The first thing we did after listening to it in the car was put it in my computer to rip the songs to MP3. I spend a lot of time at my desk so I listen to music at my computer more than anywhere else, so I generally rip all my CDs and listen to my large music library. The CD had some copy-protection scheme that caused the tracks to skip and become garbled. Like all DRM, there's a way around it, but the damage was done - I was too lazy to re-rip, and now I don't hear Kasabian tracks when working on projects or surfing the web and they have fallen off my list of bands to look for when buying music. Further, it felt to me personally like an attack on my computer. All my other CDs worked just fine, but this one didn't-taking something that works and making it not work is usually called "breaking it," and it seemed to me that the record label was trying to break my CD and my computer. I've never been one to take pride in having obscure tastes, but this no doubt contributed to my steady loss of interest in buying new mainstream music. Lately I've been sampling (often free) stuff from indies instead. The value of that CD was much, much less to me than others I had purchased because of DRM, and the DRM had the long-term effect of shrinking the music market, if only just a little bit (my personal spending). I spend much of my time as a programmer, and programmers tend to be logical, realistic people. We tend to think things like DRM are ultimately unworkable because we know there is no such thing as a perfectly secure solution. We also get annoyed when it is difficult to move data from one format to another, whether it's because the libraries are buggy or because of purposeful restrictions. We also don't take kindly to the ridiculousness surrounding the enforcement in the legal system - evidence that only works in court because judges don't understand the technology, penalties in the thousands of dollars per song, etc. So maybe I am biased against DRM. But if I could buy songs from iTunes (or wherever) without DRM, and play them on whatever device I want, I would. I don't think I'm the only one. And Jobs has been trying to make this point for a long time. In a Rolling Stone interview from 2003 (thanks to Guillaume Laurent’s tech blog for reminding me of the reference) he explains:
"When we first went to talk to these record companies -- you know, it was a while ago. It took us 18 months. And at first we said: None of this technology that you're talking about's gonna work. We have Ph.D.'s here, that know the stuff cold, and we don't believe it's possible to protect digital content. ... What's new is this amazingly efficient distribution system for stolen property called the Internet -- and no one's gonna shut down the Internet. And it only takes one stolen copy to be on the Internet. And the way we expressed it to them is: Pick one lock -- open every door. It only takes one person to pick a lock. Worst case: Somebody just takes the analog outputs of their CD player and rerecords it -- puts it on the Internet. You'll never stop that. So what you have to do is compete with it."
Some say this is just a ploy to deflect criticism from Apple to the music industry. It seems to me that if Jobs just wanted to deflect critism, he would just start licensing Fairplay. If he wanted to deflect criticism and maintain a competitive advantage, he would license Fairplay at a high engouh cost that, when coupled witht he demands of music publishers, would make competition with iTunes very difficult. He could decide to to it today and have to first licensee up and running in a week. But that's not the point - the point is expanding the market as a whole. And the best way to do that is to make the product more valuable to the consumer, and one very quick, very easy way to increase the value is to dump the DRM.

  1. Excellent article! I really enjoyed reading it. Very information.

    Dornessa Harris
    June 3rd, 2007 at 9:12 pm

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