Apple and the Labels Sketch Out the Roadmap for Digital Music 3.0*

With speculation regarding the negotiations between Apple and the labels consuming quantities of newsprint it’s worth taking a quick look at some of the key issues.

Dropping DRM
The most newsworthy aspect is whether Steve Jobs et al will convince the other majors to follow EMI’s lead and drop copy protection on their catalogue. It’s unlikely that they’ll get UMG, WMG and Sony BMG to echo EMI’s move, but Apple must be hopeful of gaining at least some concessions from one or more of them across at least some portion of their catalogue. (See our recent report on the EMI / Apple initiative for more detailed discussion of the longer term implications and prospects). Jobs suggested at the EMI launch that he expected approximately half of catalogue to be available DRM free by year end. That’s a conservative estimate that essentially covers EMI and the indies. Jobs is hoping that he’s under-promising with a view to over-delivering. A tactic at which he is adept.

Variable PricingThe one price fits all strategy proved an astute move for driving adoption of iTMS, by simplifying the consumer proposition. However it has now served its purpose and both Apple and the labels would benefit from a more flexible approach to pricing. Bringing a consumer electronics pricing mentality to selling music only works so far. Not all music is worth the same. Just as Apple wouldn’t want to be forced to sell a generation one iPod for the same price as a video iPod, the music industry doesn’t want to sell 70’s album tracks for the same price as a top 20 single. (Well ok, they’d love to do just that, but they’re realistic.)

The new tier of DRM-free high quality music tracks on iTMS has essentially opened the doors to variable pricing. But with yet another nuanced masterstroke by Jobs, it has been done at Apple’s initiative. So once again Apple assumes the negotiating high ground as the discussions broaden to encompass differentiated pricing across all catalogue.

However if variable pricing is implemented, Apple is going to have a challenging task on their hand to make the same variations apply to DRM and DRM free catalogue without appearing to have more numbers than a phone book.

DRM Interoperability
This issue would of course become largely (but not entirely) obsolete if the majors all decided to drop it from their catalogue. Of course they won’t and even if they did there would still be the standard priced DRM-ed content. Apple’s position is clear: they will not open up Fairplay. Is that negotiable? Perhaps, but only for something really good, like entire catalogue of remaining majors being made free of DRM.

Digital BundlesThe labels would love to see greater variation in product formats e.g. bundles of videos and tracks. This of course makes great sense and is something we at Jupiter have been advising for some time now. There’s no reason Apple wouldn’t consider such options, indeed they’ve already started their own experimentation. In short, the digital down model doesn’t need to limit itself to trying to replicate the CD in digital form. Just as the 99 cents uniform price point has served its purpose well, so has the digital track. Now the market is more than ready to accommodate product and format experimentation. Which will prove a vital tool for driving increased overall spend, rather than just physical substitution and cannibalization.

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*You’re probably wondering why Digital Music 3.0? Here’s why:
1.0 – the first services that tried to build a legitimate alternative to P2P e.g. Vitaminic, MP3.com. Legitimate market still on warm up lap.
1.5 – the first generation of major label backed services e.g. OD2 but label licenses overly restrictive. Legitimate market not so much as still stuck on the starting blocks as having one foot nailed to it.
2.0 – iTMS changes the game, redefining the entire digital music landscape with similar liberal usage rights following for other services. Legitimate market disappearing off round the bend.
3.0 – as the end of the lap nears, the question is which battons will be passed on: DRM free? Variable pricing? Interoperability? etc etc