Yesterday Universal Music Group announced that it will sell some of its digital music without copy protection (a.k.a Digital Rights Management) for a trial period from selected online outlets such as Amazon.com, Google, Wal-Mart, Best Buy and Rhapsody. While those of us who abhor DRM applaud this move, the glaring omission of the No. 1 vendor of digital music, the iTunes Store, raises immediate questions.
Universal spokesman Peter LoFrumento told the Associated Press the label excluded the iTunes store so it could use it as a control group in its experiment in selling DRM-free music. Nice spin, guys. Could it be that Universal is just annoyed with Apple's dominance of the digital download market and is doing everything it can to weaken it?
Let's rewind one month. Then Universal was wrangling with Apple over the terms of the deal that allows the iTunes Store to sell music by Universal artists. As you may recall, Universal refused to renew its annual contract with Apple. Ultimately, the companies settled on a month-to-month agreement, which is what Universal wanted. At the time Universal said it wanted more flexibility in its dealings with Apple, and that it had month-to-month contracts with other vendors. Most observers, however, saw Universal chafing at Apple's control of pricing at the iTunes Store (99 cents per song), among other issues. Though Universal "won" the battle, the result had little impact on its larger goal of loosening Apple's control of digital music sales. For that to happen, the iTunes Store – which at last count still holds about 70 percent of the music download market -- needs stiffer competition.
Realizing this, the brains at Universal came up with a plan to offer DRM-free songs through virtually every vendor but Apple. While I'm sure Universal is curious about how well DRM-free music will sell, it's at least as curious about how many customers the strategy can lure away from the iTunes Store. If the plan works – that is, if significant numbers of people start buying Universal music from other online vendors -- the trial period could be extended indefinitely. Universal could use the withholding of DRM-free music as a weapon in order to squeeze more concessions, such as variable pricing, from Apple. More ominously, one or more of the other Big Four music labels could follow suit.
At least one of the four, EMI, almost certainly will not adopt such hardball tactics. EMI elected in May to sell DRM-free tracks on iTunes (though at the higher price of $1.29), leaving DRM foes wondering if the other three big labels – Sony BMG, Warner and of course Universal – would hop on board. We now have Universal's answer. If Sony and Warner follow EMI's lead and work out agreements with Apple to sell DRM-free songs, iTunes' will retain its dominance for the foreseeable future. But if they choose Universal's option of selling DRM-free music everywhere but iTunes, that could result in lost sales (at least for music – video sales would be unaffected). Many would shun copy protected music from Apple if they could buy DRM-free songs elsewhere at similar prices.
Even in such a worst-case scenario, though, Apple has little cause for concern. The iTunes Store makes very little profit, having been created to promote iPod sales. The DRM-free MP3 tracks that everyone else would be selling will play on all iPods. I have never subscribed to the argument that the DRM on iTunes songs "locked" customers into the iPod because the majority fill their iPods mostly with DRM-free MP3s ripped from CDs anyway. From a business standpoint it makes little difference to Apple where people obtain their music as long as they keep buying iPods. The profit margin on an iPod is vastly greater than the measly few percent Apple gets from selling music on iTunes. No matter what becomes of the iTunes Store, the iPod, with its 70 percent share of the MP3 player market, should remain an engine of profit for Apple Inc. for years to come. And if all this results in driving a stake through the dark heart of DRM music, then so be it.
