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One of the few loud and outstanding criticisms of the iPod player and iTunes service is the closed Fairplay Digital Rights Management system (DRM) employed for music bought through the iTunes store. 

On February 6th, Steve Jobs posted an essay on Apple’s website addressing those criticisms.  The posting, which can be read here is factually informative, articulate and worth reading.   Even so much as Jobs has Apple’s interest at heart, and has to be diplomatic given Apples relationships with the music industry, the content of the essay outweighs the bias. It is relevant to anyone watching (or seeking to understand) the changing music landscape. I might even reprint it instead of my own posting later this week.  (I think it’s that insightful.)

In his address, Jobs points out that the existence of the Fairplay system was not by choice but necessity.  The Big 4 of record companies (Universal, Sony BMG, Warner and EMI) control distribution on  over 70% of the world’s music.  Absent DRM tools, these distributors wouldn’t allow their libraries inclusion in download services. Absent Fairplay (or equivalent), the iTunes store, and arguably much of the landscape of legal downloadable music, would be barren.

The music industry has forced those handling electronic distribution to accept DRM tools.  Unfortunately, in doing so the music industry has also created a climate where the incentives are for closed proprietary systems rather than portable open ones.  Specifically, in Apple’s case, failure to respond to a breakdown of the DRM in a rapid amount of time would void Apple’s right to sell most of the music they offer.  Apple has to maintain the integrity DRM system above all else.  Considering the best security is to keep something as tightly controlled as possible – and DRM systems are always under attack – opening the code to more eyes by licensing it increases the likelihood of those attacks being successful.  Apple can’t afford to do that, nor can Microsoft, Sony or others in similar situations.  Each company’s best shot at maintaining the integrity of the DRM is to keep it proprietary.

As a result of all these competing closed systems consumers suffer and the music industry hurts itself.   The logic goes like this: Consumers can’t use downloaded content across different device platforms.  That’s more than a frustration for many– it’s incentive to avoid buying music by DRM-laden licensed download.  It might even drive some consumers to consider alternate choices; choices which might include searching for free legal downloads (like live concert recordings from bands that allow legal taping and trading of their performances), or paid downloads of independent music (non Big 4) that are not chained to DRM tools, or the music industries biggest fear: trade of pirated music.  

It’s a catch-22 of sorts for the leaders of the music industry – they fear piracy and forced DRM techniques to be used in efforts to control their products online…but forcing DRM leads to competing fragmented systems, and fragmented systems alienates customers who are driven away.  By trying to protect against piracy, the actions employed stand to encourage the behavior the music industry was trying to prevent.   That screams out “Houston, we have a problem.”

Comparably troubling for the music industry is the potential lost revenue opportunity DRM systems are causing them in the form of potential lost sales.   Now admittedly, “lost sales” (or how many consumers simply don’t buy when they otherwise would) is probably impossible to quantify but numbers presented in Job’s piece provide a back-door method for assessing that.  He points out that 90 million iPods were sold through ’06 and 2 billion songs purchased from iTunes. That translates to 22 songs downloaded per iPod.  That’s a small fraction of the music on the average iPod.  The number could be reasonably much higher given proper incentives.

Jobs mathematically deduces that 97% of the music on an average iPod (which he pegs at having nearly 1000 songs loaded) was not purchased from iTunes.  That and other numbers in his essay are exaggerated and simplistic.  Among other things, Job’s doesn’t discount for individuals owning multiple iPod’s (90million iPods doesn’t mean 90 million unique users – people traded up from generations of products, or replaced broken units etc).  Still, even considering simplification errors like that in his calculations, it would be probably be conservatively accurate to say that more than 75 to 80% of songs on an iPod were not bought through iTunes.

That math might not be as supportive of Job’s self-interested claim that the DRM isn’t enough to lock users into buying only iPods in the future,still it is enough of a majority to show that much of the average consumers music library is not DRM protected.   Much of that music probably comes from CD’s which are DRM-free, but  probably a good portion  came through methods that didn’t generate money for the music industry (be it: free downloads, pirated music (illegal downloads or downloaded from a friends computer), even buying used CD’s and digitizing them instead of downloading an  album.)

The music industry is not like the movie industry which is able to encrypt its content online and off. (DVD’s are encrypted with DRM, CD’s are not), as a result of this, there is an even bigger paradox.  Jobs points out that in 2006 less than 2 billion songs were sold with DRM protections through online stores.  During the same period more than 20 billion songs were sold on CD’s (and CD’s are DRM-free).  That means less than 10 percent of music sold has DRM protections, and the vast majority of the same content protected by DRM to prevent piracy is not protected elsewhere.  Given that it is not that much harder for someone to pirate a CD than a download, this fact undermines the logic that DRM is necessary to prevent illegal copies.  Pirates have access to 90% of the music industries wares – why does clamping down on 10% (which is ultimately available elsewhere anyway) help them?

DRM systems are  slowing down the rate of legal downloads.  Maybe that’s part of the point for the music industry.  Maybe DRM systems help drive CD sales over downloads, but time will ultimately make that a losing battle and when it does, too much content will be floating around in unprotected digital format (from CD’s) to have any chance of locking it back up.  If driving CD sales today is somehow part of the rationale, it’s backward thinking; trying to hold on to the past instead of embracing the future. The music industry can’t really expect to put the Genie back in the bottle when it comes to music online and I imagine they probably don’t want to.  They just want more control than they are going to be able to have.

At this point, I think the music industry needs to stop chasing its tail in efforts to protect its territory and products.   It needs to forget past troubles like Napster and Kazaa. Instead, the music industry needs to think through its logic and accept one of two conclusions: one is that DRM systems will only serve their overall best interests if there is a single unified DRM process which also encrypts CD’s with some form of the same copy protection.  (And that may be technologically or logistically impossible to pull off given the volume of CD’s and CD players already in the market).  The second option, in the event the first can’t be done, as Jobs suggests, the only other option, is to accept the DRM-free scenario that has long been the case with CD’s and apply it to the digital domain as well.  

Who knows, maybe the labels could even find a way to phase in DRM free downloads as a value-added offering.  Perhaps a $2.25 DRM–free download as an alternate offering to regular Fairplay encoded songs might go over well.  It could even mean a larger royalty stream for the labels.

Rather than trying to prevent piracy with faulty logic and Swiss Cheese like tactics, the industry would be better served giving consumers incentives to work with it (a DRM–free world?) and spending the saved resources to more aggressively go after large scale pirates who try to undermine their business.  This kind of solution is not the tighter control the movie industry has, and the music industry would like, but it’s the only choice given how things have evolved.