Online music retailers dashing to ditch DRM

by Rob Pegoraro, Faster Forward/Washington Post

Steve Jobs wasn't kidding when he wrote that "Thoughts on Music" essay back in February that condemned the use of "digital rights management" technology in music sales--the iTunes Store will feature DRM-free downloads by the end of this month. Similarly, EMI wasn't fooling around when it joined Apple in this new initiative; yesterday, that record label said it would also offer its catalogue in "unprotected" form on Amazon's upcoming MP3-only store, as well as a variety of European music-download sites.

This morning's column tries to get at the significance of all these moves. I think this is huge: One of the recording industry's core beliefs is disintegrating almost overnight.

Not everybody in the business believed this idea in the first place, though. People at many independent labels and smaller music-download sites have long thought otherwise--as I was reminded in some interviews yesterday, most of which didn't make the column.

"The fewer restrictions, the merrier," said Kim Coletta, founder of D.C.-based DeSoto Records. DeSoto's catalogue is available on iTunes--Coletta said it will soon be offered in DRM-free form--but has also long been sold as regular MP3 files at the Download Punk site.

Unlike most major labels, DeSoto has already made the transition from physical sales to downloads. "The amount of revenue I receive from my digital sales far surpasses what I receive from CDs," Coletta said. She's seen this in her own daily life, too: "I teach at a boys middle school three days a week. These kids, they don't buy CDs at all--they either steal music or buy it digitally."

Alec Bourgeois, publicist for D.C.'s Dischord Records, voiced similar thoughts. "We don't have a problem at all with making it more accessible to people," he said of Dischord's music. But he wasn't necessarily a fan of Apple's initiative, simply because it would involve raising the per-song price: "We'd rather keep music a little cheaper."

Dischord's catalogue is available at iTunes as well as a handful of MP3 stores--Download Punk, Other Music and eMusic. But Bourgeois said most people have continued shopping at iTunes: "The independent option isn't doing as well."

That's why it's so important when name-brand shops like iTunes and Amazon ditch DRM. Sites like eMusic, which has been selling music in MP3 form since 1998 and is the second most popular download store after iTunes, have shown it's possible: eMusic CEO David Pakman told me yesterday that the store's periodic surveys of peer-to-peer networks have found only one eMusic track being shared (which Pakman credited to eMusic's over-25 demographics, saying "peer to peer is primarily the domain of young customers"). But the major labels and music stores need to get with the program too.

My guess is that Yahoo will be the next big store to make this move. A spokeswoman forwarded this comment from Yahoo Music general manager Ian Rogers after my deadline last night:

We have long advocated for the end of DRM-encrypted music and predicted earlier this year that half of our catalogue would be DRM-free by the end of the year. We're talking to all of the major labels about the possibilities but can't comment on the specifics of the discussions.

And what about Microsoft, which has put more effort into copy-control software than almost anybody else? The company didn't sound quite so enthusiastic in a statement from Zune general manager Chris Stephenson sent by a publicist yesterday evening:

DRM will continue to play an important role in the music business, especially with the growth of subscription services and other types of discovery mechanisms. We don't have any specific announcements on our DRM-free business strategy at this time, but testing new business models is a key to unlocking the future of digital entertainment.

Customers will ultimately make this decision. When you can choose between 99-cent, digitally secured downloads at iTunes and $1.29 unrestricted ones (with better sound quality but a larger file size), which kind will you buy? What about when Amazon enters the market--will you shop there or at iTunes? Will you still shop at the Zune Marketplace or Napster if they continue to offer only copy-restricted tracks? Finally, what about the rental downloads offered at subscription sites such as Zune or Napster? Would they still appeal to you if every song you buy comes with zero usage limits?

Lots to think about... share your thoughts in the comments, and read on after the jump for some possibly-enlightening statistics about the digital-music business. ---

The NPD Group, a Port Washington, N.Y., market-research firm, regularly surveys computer users to see where their music has been coming from. First we have NPD's data on the market share of the top five music-download stores in 2006:

iTunes: 70%
eMusic: 10%
Napster: 4%
MSN Music: 3%
Rhapsody: 3%

(You may remember MSN Music: It's the store Microsoft euthanized in favor of its Zune Marketplace.) As for how downloads fit into the larger music market, NPD found that iTunes had 5.5 percent of the total music-sale business in 2006, making it the fifth largest retailer in the U.S. after Amazon (6.2 percent), Target (7.9 percent), Best Buy (13.8 percent) and Wal-Mart (17.3 percent).

Then we have the piracy-versus-legit comparison--how many households downloaded songs from peer-to-peer networks (which in almost all cases means without paying for them), compared to downloads from authorized sites (which could include promotional downloads at record labels' own home pages). The numbers here reveal an interesting trend: The number of P2P-using households crept up from 13.9 million in 2005 to 15 million in 2006, but legitimately-downloading households almost doubled, from 7.6 million to 12.6 million.

The actual song traffic did not quite reflect those patterns: NPD found 3.4 billion songs circulating over P2P in 2005 and 5 billion in 2006, while 327 million files were downloaded from authorized sites in 2005 and 500 million in 2006.

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