Why Music and Video are Crucial to Apple’s Future

Apple’s downgraded earnings guidance represents its first profit warning in 10 years. This is clearly a big deal, and probably not as much to do with a weakening Chinese economy if Alibaba’s 2018 Singles’ Day annual growth of 23% is anything to go by. But it does not indicate Apple is about to do a Nokia and quickly become an also-ran in the smartphone business. Nokia’s downfall was triggered by a corporate rigidity, with the company unwilling to embrace — among many other things — touchscreens. Apple’s touchscreen approach, coupled with a superior user experience and its ability to deliver a vibrant, fully integrated App Store, saw it quickly become the leader in a nascent market. Apple’s disruptive early follower strategy is well documented across all its product lines and the iPhone was a masterclass in this approach. But the smartphone market is now mature and in mature markets, market fluctuations need only be small to have dramatic impact. That is where Apple is now, and music and video will be a big part of how Apple squares the circle.

Apple started its shift towards being a services-led business back in Q1 2016, issuing a set of supplemental investor information with detail on its services business and revenue. Fast forward to Q3 2018 and Apple reported quarterly services revenues of $10 billion—16% of its total quarterly revenue of $62.9 billion. So, services are already a big part of Apple’s business but the high-margin App Store is the lion’s share of that. App Store revenues will continue to grow, even in a saturated smartphone market, as users shift more of their spending to mobile. But it will not grow fast enough to offset slowing iPhone sales. Added to that, key content services are moving away from iTunes billing to avoid the 15% iTunes transaction fee. Netflix, the App Store’s top grossing app in 2018, recently announced it is phasing out iTunes billing, which is estimated to deliver Apple around a quarter of a billion dollars a year. That may only be c.1% of Apple’s services revenue but it is a sizeable dent. So Apple has to look elsewhere for services revenue. This is where music and video come in.

Streaming will drive revenue but not margin

Streaming is booming across both music and video. Apple has benefited doubly by ‘taxing’ third-party services like Spotify and Netflix, while enjoying success with Apple Music. With third-party apps driving external billing, Apple needs its own streaming revenue to grow. A video service should finally launch this year to drive the charge. However, the problem with both music and video streaming is that neither is a high-margin business. Apple’s residual investor value lies in being a premium, high-margin business. So it has a quandary: grow streaming revenues to boost services revenue but at a lower margin. This means Apple cannot simply build its streaming business as a standalone entity, but instead must integrate it into its core devices business.

Nokia might just have drawn Apple’s next blueprint

During its race to the bottom, Nokia launched the first 100% bundled music handset proposition Comes With Music (CWM). It was way ahead of its time, and now might be the time for Apple to execute another early (well, sort of early) follower move. CWM was built in the download era but the concept of device lifetime, unlimited music included in the price of the phone works even better in a streaming context. I first suggested Apple should do this in 2014. Back then Apple didn’t need to do it. Now it does. But rather than music alone, it would make sense for Apple to execute a multi-content play with music, video, newsand perhaps even monthly App Store credits. Think of it as Apple’s answer to Amazon Prime. To be clear, the reason for this is not so much to drive streaming revenue but to drive iPhone and iPad margins and in doing so, not saddle its balance sheet with low streaming margins. Here’s how it would work.

Streaming as a margin driver for hardware

Apple weathered much of the smartphone slowdown in 2018 by selling higher priced devices such as the iPhone X. This revenue over volume approach proved its worth. The latest earnings guidance shows that even more is needed. Apple could retail super premium editions of iPhones and iPads with lifetime content bundles included. By factoring in these bundled content costs into iPhone and iPad profits and losses, Apple can transform low margin streaming revenue into margin contributors for hardware. Done right, Apple can increase both hardware and services revenue without having a major margin hit. Add in Apple potentially flicking the switch on the currently mothballed strategy of becoming mobile operator, and the strategy goes one step further.

Free streaming without the ads

If reports that Apple is buying a stake in iHeart Media are true, then it will have another plank in the strategy. Radio is an advertising business, but Tim Cook hates ads so the likelihood is that any streaming radio content would be ad free. Given that consumers are unlikely to want to pay for a linear radio offering, Apple would need to wrap the content costs into hardware margins. This could either be part of the core content bundle, or could even be a lower priced content bundle, with Apple Music being available as a bolt-on, or as part of a higher priced bundle or, more likely, both. Ad-supported streaming becoming ad free would of course scare the hell out of Spotify.

Music to the rescue, again

2019 will probably be too soon for this strategy to finds its way into market, but do expect the first elements of it coming into place. Music saved Apple’s business once already thanks to the iTunes Music Store boosting flagging iPod sales. This paved the way for the greatest ever period in Apple’s history. Now we are approaching a similar junction and music, along with video and maybe games, are poised to do the same once again.

Nokia Mix Radio (What Happened After Comes With Music)

In the excitement of Nokia’s announcement of its first Windows phones today, one would be forgiven for missing the announcement of Nokia’s first major move in the music space since Comes With Music: Mix Radio.

Nokia’s post-Comes With Music strategy was always going to be a difficult one to get right.  Regular readers will know I was a big fan of the Comes With Music, subsidized-music-on-handset model but that I thought it might be someone else who makes it a success (Boinc will certainly have a good go at it).  Nokia paid the price of being the first mover – as Apple’s successes attest, it’s the early follower who normally wins out.  Nokia bore the brunt of a lot of criticism for Comes With Music, some of it warranted, some not, and then cleared the decks, with key figures like Liz Shimel moving on.  Music still matters to Nokia, a lot, as it does to most CE companies.  But Nokia got burned by investing heavily in a highly disruptive model that delivered negative ROI.  Meanwhile Apple stuck with a basic download store and continues to clean up.

This is the world into which Nokia’s post-Comes With Music strategy was born.  And the result? Nokia Mix Radio.  No subscription, no download fees, no log in etc.  You simply tap the home screen and music starts playing and you can even select to listen to the music offline. Comes With Music exit stage left, make way for Comes With Radio.

Nokia Mix Radio is certainly no Spotify challenger and it is certainly no Comes With Music.  But that’s the point.  Nokia’s post-Comes With Music, music strategy is all about looking at how to get the best ROI on delivering differentiated on-device music experiences without having to try to change the world.

Of course, expect Nokia’s music strategy to ramp up, and for Mix Radio to be a stepping stone – there may even be a Microsoft play – but don’t expect Comes With Music take two.

Music Subscriptions: Dead or Alive?

[Please note that this post first appeared on the Forrester Consumer Product Strategy blog.  Over the coming month or so I will be migrating all of my activity there.  I will soon be posting new information here for you to amend your feeds and subscriptions. Thanks]
[Posted by Mark Mulligan]

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Real Networks yesterday announced that they intend to spin-off music subscription service Rhapsody as a stand alone business. Rhapsody has long been held up as the best of breed music service, but in the age of Spotify and Comes With Music it and other premium rentals have increasingly struggled to maintain relevancy.  Spotify and Comes With Music each may have

fundamental business issues and are very different offerings, but they both provideunlimited music free at point of consumption.  Once you have that proposition in the marketplace selling 9.99 rented streams looses its shine, however good the discovery and usability may be.

This time two years ago Rhapsody, Napster and Yahoo had about 1.8 million paying subscribers between them.  Since then Yahoo got out of the game (passing its subs onto Rhapsody), Napster got sold and the total count is now around 1.3 million. So just as the music industry is meant to be booming online, its premium tier sheds over a quarter of its value across its heavyweight proponents.

The simple fact is that charging 9.99 or more a month for music that often only sits on your PC is not a mass market value proposition.  It’s great for aficionados but mass market consumers aren’t used to buying music that way.

So is this the end for subscriptions?  No, not at all, in fact they’re doing better than ever, it’s just the old guard that is struggling to keep pace.  A new generation of subscription services are being built that place portability at their core and that often hide some or all of the end-cost to consumers.

Let’s take a quick look at the numbers, here are total paid subscribers by territory (all numbers are approximate):

• Europe: 1.25 million (key players: Spotify,Vodafone, Napster)
• US: 2 million (key players: Rhapsody, Napster)
• ROW: 5 million (key players: Melon)

That gives a global total of about 8.25 million, which is promising though still short of where they need to be.  If subscription services are to help digital music break free of the iPod orbit and go mass market then two things need to happen:

• Premium subscriptions need to be unlimited MP3
• Mass market subscriptions need to have channel partners such as telcos and device companies hide some or all of the cost to consumers i.e. subsidized subscriptions (For the record I think the ‘cost to consumer’ price point for unlimited music should be 3 euros/dollars/pounds  a month.)

The first generation of music subscriptions may have been niche also rans, but the next wave – given the right business models – could be much more important.

Putting the Crowd in the Cloud

[Please note that this post first appeared on the Forrester Consumer Product Strategy blog.  Over the coming month or so I will be migrating all of my activity there.  I will soon be posting new information here for you to amend your feeds and subscriptions. Thanks]

[Posted by Mark Mulligan]

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I have a favour to ask of you: I have the germ of an idea which I am developing for a forthcoming report and I want try it on you.  So please let me know your thoughts.

Apart from the persistent pressure of free, two of the recurring trends that look set to shape the future of digital music are:

1. The Cloud
2. Social

First a few thoughts on the cloud….

The cloud is of course is already with us, but largely as a collection of disparate connected music experiences (e.g. Pandora, Spotify, Comes With Music) rather than as something more all-encompassing.  I’m skeptical of the truly ubiquitous experience happening anytime soon.  Indeed, the practical limitations on ubiquitous connectivity mean that connectivity will in fact fall short of ubiquity for some time (more on that from my colleague Ian Fogg later this year).  But it is clear that over the next few years more of the dots will be joined.  And sometimes the dots will be joined by innovative workarounds, such as Spotify’s ‘offline’ streaming solution.

And a few thoughts on social…

Readers of my Music Product Manifesto will know that I’m a stronger believer in the near term potential of social in music experiences than I am of the cloud.  In order to effectively compete against free music products need to create new, unique music experiences and social interactivity is a key means of achieving this.  If you put a $0.99 iTunes download against a $0.50 Amazon download against a BitTorrent $0.00 download the BitTorrent download will always win.  Future music products need to do more. Formally layering social functionality into the experience is key here, both to add a connected element but also for discovery.  With so much noise online, trusted taste makers (or ‘curators’ as Nettwerk Music’s Tony McBride calls them) are key.  And who do we trust most for recommendations?  People we know and connect with.

My thesis is that these two dynamics not only don’t have to be, dare I say it, disconnected, but that they should be inextricably linked. Their paths should be moulded together.

The likes of Last.FM (Audio Scrobbler) and Apple (Genius) have started to demonstrated the power of ‘Crowd Sourcing’ in the music discovery journey.  Spotify and YouTube and many others are showing the way for cloud based music experiences.

The time has come to be the crowd in the cloud.

Social tools and media are of course already inherently connected and inherently cloud based, whether it be Facebook, Twitter or MySpace.  When woven into the fabric of a digital music offering they bring that experience to life.  In a connected music experience that exists across multiple devices and multiple platforms, social connectivity is more important than ever. Social connectivity turns a bored 10 minutes waiting for a train into a connected a fun engaged interaction with a friend, sharing playlists on MySpace. It transforms looking for something new to listen to on your iPhone into a social discovery journey.

This idea’s still taking shape, so I’d love to hear your thoughts.  I’ll post further on the concept as it evolves.

Five Music Predictions for 2010 (and Five Reasons Why 2009 was a Flop)

[Please note that this post first appeared on the Forrester Consumer Product Strategy blog.  Over the coming month or so I will be migrating all of my activity there.  I will soon be posting new information here for you to amend your feeds and subscriptions. Thanks]

Lots happened in 2009 but it wasn’t a vintage year for digital music (in fact it was the year it well and truly lost the digital buzz to eReaders). All in all I’d give 2009 a 6 out of 10, with the launch of Spotify accounting for at least couple of those points and the following as the 5 key disappointments:

1. Comes With Music under-whelmed (as did Play Now plus)
2. ISP services didn’t get off the ground (including unlimited MP3’s nearly but not quite moment)
3. Apple’s new killer music format was….oh iTunes albums
4. imeem gave a master class in how not to make money out of social music
5. The big boys (MySpace, Apple) snapped up the innovative competition (Lala, iLike, imeem)

So will be 2010 be any different?  Though I don’t think it will be the year digital music will really come of age (that’s at least a couple more years away) I do expect it on balance to be a stronger one than its predecessor.  Leaving aside the few specific developments I’m not able to talk about here are a few of my predictions:

1. Apple launches a major refresh to the music experience.  (I’ll caveat this first prediction with the disclaimer that Apple make a habit of proving wrong those of us foolish enough to try to second guess them.)  With that said, there are many things Apple could do with music in 2010.  Whatever they do, they have to do something significant if they are to stay on top of their game. They’ve spent much of 2009 collecting user data via the Genius app and they’ve acquired some top notch streaming and programming expertise via the Lala acquisition. And of course they’re busy developing with content partners for the forthcoming touch screen note book.  Here’s hoping that this will all add up to something like an integrated on-device, connected, interactive and immersive music experience where the cost is bundled into the price of the device (perhaps with the touch screen note book as the flagship device for the offering).  Apple wouldn’t be in the game of hiding the cost of music to the consumer (a la Comes With Music) but they may use content subscription bundling as a way to maintain premium price points and differentiation for their devices.
2. MySpace deepens its focus on music. Though MySpace will spend most of 2010 simply ingesting iLike and imeem, the acquisitions form part of a longer term strategy to breathe much needed new life into MySpace’s music role.  The new management talent is tasked with pulling MySpace from the brink of becoming a garbled also ran and dragging it by the collar into the 2^nd decade of the century.  Though they’re unlikely to admit it, the mainstream social networking race against Facebook is as good as over. By contrast they remain the #1 destination for artist communities online, yet without a major reinvention they’ll start to feel the competitive pressure bite there also.
3. Spotify scales back its US launch. Spotify appears to be paying the price for the major labels having second thoughts about ad supported on-demand content.  Those pesky US licenses have been proving tough to tie down and I’d expect to see Spotify’s US launch to be more strongly focused on the premium tier than it is in Europe.  If so, it could actually prove to be something of a blessing for the Swedish upstart, allowing it to consolidate the monetization of its core user base rather than building a US ad business from scratch whilst millions of free US subscribers add cost to the bottom line. Whatever the case, Spotify’s European revenue fundamentals should improve in Europe in 2010.
4. ISP music services don’t pack a killer punch. I’m a firm believer that ISPs will become established as a core element of the digital music value chain and the best way of fighting piracy head on.  In 2010 we’ll see more services launched both in the US and in Europe, especially the UK.  But I don’t see anything yet to suggest they’ll be adequately provisioned to flourish. It’ll take another year or two of revenue pain decline for the labels to adjust their license requirements sufficiently. What do I think will work?  5 pounds / euros / dollars a month for household access to near unlimited (i.e. fair use) MP3.
5. Semi–pro sites and services prosper. I’m not sure I’d go as far as to say 2010 will be their year, but it will certainly see continued growth for the likes of SellaBand, MyMajorCompany and Tune Core. These sites that create a route to audiences for artists either not good enough or not yet good enough for record deals, play to the strength of the Internet as a social channel for artists and fans. Which of course is all the more reason for MySpace to be watching its back.

To conclude, 2010 will be another year in which digital music continues to find its feet, but significant progress will be made.

Monkeying Around With Mobile Music (Updated)

Today the triumvirate of Universal Music, UK broadcaster Channel 4 and UK mobile operator Orange announced a Pay As You Go (PAYG) mobile music service called Monkey.  The service is aimed squarely at younger consumers, which matches the demographic of PAYG users and Channel 4’s audience.  The underlying principle of the service is that it has a low barrier to entry: it utilizes the voice network rather than data network and is thus available across all handsets and does not require any application download.  Instead consumers simply dial 247 to listen to playlists streamed at 64 kbps.  Most of the more sophisticated behaviour, such as playlist creation, music discovery etc., is expected to happen online, using a cloud based player, where tracks will be streamed at 128 kbps.  Playlists can also be shared using widgets for major social networks and via text.

So what impact is this offering likely to have?  It’s clearly aimed at enticing young consumers away from file sharing and the positioning point is effectively ‘free music when you top up your phone’.  I think there is a risk of worst of both worlds here.  Firstly, I don’t buy into the argument that streaming reduces file sharing penetration.  It may cause file sharers to download less from P2P networks, but it’s unlikely to entice them away from them as they’ll still want music for their MP3 player, to burn onto CD for their friends etc.  Granted, Monkey steps closer to being a replacement in that it has a portability story (of sorts) and it has a sharing story (of sorts).  But it doesn’t provide true portability (what do you do when you’re underground for example) and it only offers partial catalogue.

The killer point though is that it uses voice minutes and the cost of calls is 20p per minute.  So it will cost about 70p to listen to a single and an entire 10 pound top up will give you about 1 album and no time left for talking.  So consumers are paying the same amount as an iTunes single download (even more for an album) but only getting a low quality analogue audio stream.  (And what happens when somebody wants to call them when they’re listening over the voice line?)

*Orange just called me to clarify their press release.  The press release reads:

• “Monkey customers can access the service on their phones by dialling [sic] 247.”
  and
• “Calls cost 20p per minute”

However, following my phone call from Orange it transpires that the per minute pricing applies to voice only and not music calls, even though this isn’t actually explained in the release.

Also another interesting detail emerges: the service is actually a limited mobile music service, not an unlimited mobile music subscription, hence the careful use of the term ‘access to music’ in the release.  Customers are only allowed to listen to 600 minutes of music per month on their phone (again not in the release), which translates into 14 albums.  If you take a 30 pounds top up, that then translates into 2 pounds ten per album listen, so if you listen to an album, say 3 times in a month, that’s 6.30 an album.  Which isn’t far off the cost of a standard album, but of course you don’t get to keep it after you’ve finished listening . The ‘3 listens’ cost drops to 4.20 for a 20 pound top up, 2.10 if you just take a 10 pound top up.  So still far from free, even though they’re being told it’s ‘free’ music,  which in turn reinforces conceptions that music is a free commodity (thus further undermining perceived values of music).

The additional fact that Universal will make some releases available here before anywhere else is a brave move and underlines the major’s persistently adventurous product innovation.  It will certainly be a key asset for demonstrating consumer value, but it will need careful positioning alongside premium products.  How, for example, would a high-end 15 pounds a month subscriber to Virgin’s unlimited MP3 subscription service (also in conjunction with UMG) feel if they realized they were getting new releases after the lower end Monkey customers were?

The other interesting sub text here is the underwhelming success of Comes With Music (Universal and Orange are both key UK partners for Nokia).   Is this picking up where CWM has failed to do so?  As I’ve stated here many times before, I am a firm believer in the CWM model and I believe it is the best tool that the music industry currently has for fighting piracy.  It is a genuinely compelling alternative to file sharing as it has a viable portability and ownership story.  Unfortunately it’s been hindered by channel issues, marketing problems and limited consumer awareness and understanding.

When I asked how Monkey would be positioned alongside CWM, UMG’s Rob Wells said Monkey was aimed more at younger, lower end consumers and Orange’s Pippa Dunn said that Monkey was for PAYG customers whilst CWM was for subscription customers.  Orange’s positioning is clean and elegant, but it’s a shame that CWM is effectively being marginalized as a high-end proposition.  That is not its sweet spot. Indeed the strong CWM association with the 5800 illustrates Nokia’s understanding that CWM is best positioned at younger, lower spending consumers and that it does not stand up as well when held up against higher end digital music offerings.  Also, from a broader music industry perspective CWM needs to be reaching younger consumers.  I hope Monkey doesn’t distract from that.

Unlimited Mobile Music Gains Momentum in Singapore

This weekend saw the launch in Singapore of SingTel’s unlimited music download service Amped in partnership with Universal Music.  The service is available with a SingTel data plan, so is very much a data revenue driver for the operator.

Although a relatively small market, Singapore is fast becoming the global capital of unlimited mobile music subscription services.  Nokia’s Comes With Music and Sony Ericsson’s Play Now plus are both already live in the market and enjoying some success: Nokia reported more than three million CWM track downloads in less than two months, making it the best performing global CWM music.  The early momentum in Singapore illustrates that each market has its own digital sweet spot, its own unique digital music consumer footprint.  In the case of Singapore, unlimited mobile music downloads looks like it is the slipper that fits.

Comes With Music Finally Gets Its Route To Market

Orange today announced they will be ‘exclusively’ providing Comes With Music on the Nokia 5800 in the UK.  Finally Nokia’s Come With Music gets the route to market it needs.

I’ve long been a strong advocate of CWM and that belief remains intact despite reportedly poor sales to date.  Nokia always needed strong channel partner participation to make the service a success. Without the route-to-market, marketing support and – most crucially – subsidy support that the operators provide CWM is left looking like an overpriced, under featured oddity.  But with the support of an operator it comes into its own.

Orange packages start at just 25 pounds a month.  For this consumers not only get a decent number of voice minutes and texts, but they also get the handset for free and unlimited music that they get to own for ever.  That is a compelling proposition and offers genuine value for money. Unsubsidized, the cost in Italy for the same handset and music service, but without a voice and text tariff is just short of 500 Euros.  The comparison is stark and is central to why CWM has under-whelmed thus far.

CWM is an exciting product because, when packaged correctly, looks and feels like free to the consumer.  In this context DRM restrictions and a phone that falls short of iPhone sexiness are entirely tolerable.  But with a premium price point they become non-starters.

CWM, along with the likes of Spotify, We7, Last.FM and imeem, is one of the key weapons that the music industry has in its armoury to fight free with free itself.  CWM may not be free, but packaged like this it ‘feels like free’ and that’s enough to have real potential of pulling young music fans away from illegal downloading on a scale that hasn’t yet been achieved.

Spotify: Why It’s Been So Successful and What it Needs to do Next

I first spoke to the guys at Spotify a good few months ago and I have to confess to thinking at the time that they were just another digital music start-up. In fact, it was worse than that, I thought they were potentially another doomed digital music start-up if they didn’t revise their strategy.

On the face of it Spotify doesn’t actually have that much to offer. The discovery, programming and community features are next to non-existent in comparison to the feature rich functionality that the current next-wave of digital music services such as imeem, Pandora, Last.FM and Comes With Music are offering. Added to that the core of the business model seemed to be a 9.99 monthly subscription for non-portable streaming music rentals (with an ad supported layer that appeared to be a customer acquisition tool). In short, it was the increasingly defunct premium subscription model that Napster, Yahoo and Rhapsody have all failed to push out of a niche. To give a sense of the degree of failure, the share of European Internet users that paid for music subscriptions in 2008 was approximately 0.1 percent.

And yet despite all of that, Spotify is proving to be a roaring success, rapidly become the darling of the digerati (it certainly seems to have replaced Blip.FM as the service of choice for European Twitterers). Why? There are three key factors behind Spotify’s success:

1. The actual lack of sophisticated functionality has actually proven to be an asset: the simplicity of the proposition has made it equally popular among tweens as it has pensioners.
2. Spotify used smart viral marketing tactics, launching in an invite-only mode, but giving each user a large number of invites. This created apparent (though not actual) scarcity which drove demand, making those invites hot-tickets and giving whoever had them kudos. It was essentially a pyramid selling scheme, but it worked, and some.
3. The single most important factor though is the fact the ad-supported tier offers completely free access to very comprehensive catalogue.

In short, Spotify gives you most of the music you could want for free without hassles or complications. My Forrester colleague James McQuivey has developed a methodology called the Convenience Quotient that measures products and services based upon the benefits to consumers and the barriers to adoption. Spotify would get a strong CQ score because it makes it easy to get strong benefits.

So what next for Spotify?

Spotify, by accident or intent, now has the potential to become a mass market free music offering. They need to build up their audience sufficiently to attract big advertisers to generate enough revenue to enable them to ditch any business plan reliance on the premium tiers. Founder and CEO Daniel Ek is talking up strong new features for premium subscribers, some sort of mobile play and even downloads. I hope they don’t spend too much time focusing on the premium offering. They’ll struggle to get anything as near as compelling user experience as Rhapsody which even with market leading UI failed to break out of niche.  I’d also steer clear of ad supported downloads. That would require messy DRM implementation which will muddy the service’s current simplicity.

Mobile though could be a hugely important move. Pandora’s iPhone app has demonstrated how well implemented mobile can turn a PC-centric service into a truly portable one. If you have a compelling portable streaming element, the need for downloads becomes much less important.

So interesting times ahead for Spotify. They succeeded so far by smart adherence to the KISS principle: Keep It Simple Stupid.   If they stick those ideals they stand every chance of stepping up to the next level.

Apple iTunes Music Store (Finally) Goes DRM-free: First Take

So finally Apple gets DRM-free across all of its music catalogue on the iTunes Music Store (80% now, 100% end of Q1). It’s late, not too late but non-the-less late. As Apple accounts for the vast majority of the paid download market we can talk effectively talk about the impact this will have on the broader digital music market rather than just on iTunes sales.

Don’t expect it to kick start the digital music market (which is worryingly sluggish). This is just a basic enabler the market needs for long term viability. It is, however, crucial for future differentiation of the next wave of digital music services. Subsidized and ad supported services such as Qtrax and Nokia’s Comes With Music give consumers music for free but with DRM restrictions. DRM will become the key tool for differentiating premium from subsidized. The more you pay, the less DRM you have.

So it’s a case of DRM is dead, long live DRM.

But why did we have to wait so long for this announcement? European digital music execs told Forrester in late 2006 that they were ready for dropping DRM and, in April EMI went DRM free on iTunes and elsewhere. Most readers will have noticed that much of Apple’s competition has been acquiring increasingly comprehensive MP3 catalogue from the majors whilst Apple has not. Some of the majors trying to ‘level the playing field’ is undoubtedly a factor here, but it’s evident that Apple remains the biggest game in town with or without DRM-free. So all this strategy achieved was penalizing the majority of digital music buyers and the key force in one of the few dynamic parts of the industry the labels have left.

DRM-free should be a non-story by now. It’s not even much of an issue for the majority of digital music consumers. Principally because they don’t come up against it. Apple has dominant market share in devices and downloads. So the majority of digital music buyers don’t have DRM interoperability issues. And anyone who wants to burn more than 5 CDs knows how to. But at some time Apple may lose market share, perhaps to music enabled phones. When it does, consumers will start encountering interoperability issues. So it’s actually in the interests of the labels to weaken Apple’s lock in sooner rather than later in order to aid any such transition.

Finally, from an Apple perspective, dropping DRM starts a process of bringing iTMS up to date. Whilst the iPod and iPhone have undergone key transformation, the iTMS has essentially remained unchanged save for Genius. Whilst MP3, social music and mobile music happened around it iTMS clung stubbornly to it’s 2003 blueprint. Nokia’s Comes With Music is arguably the first major challenger to the iPod / iTunes dominance, because it a) is an integrated device / service proposition buy b) because it tries to do something radically different i.e. unlimited permanent downloads. Apple know they need to respond. DRM-free across all catalogue is a first step towards putting clear blue water between them, but they need to do a lot more yet. Ideally the next steps will be in the social-music direction, building upon the start made with Genius.