Metue.com

Vivendi, owner of Universal Music, has been complaining Apple’s share of digital music revenue is too high.  They’ve canceled their long term contract with iTunes and threatened to walk for good.  But for all the posturing is there anywhere for them to walk to?  It’s starting to look like there isn’t, like there’s only one game in town.  Apple controls more than 70 percent of the digital music market and one by one competitor’s, handcuffed by the record labels insistence on requiring copyright protections that won’t play on iPods, are dropping out.

Last month, MTVs Urge music service struck a partnership with Rhapsody and announced a major restructuring.  At the end of August, Sony too acknowledged failure and pulled the  plug on their struggling music service Sony Connect.   Now little startup AnywhereCD and big player Virgin Digital are on the outs too.

AnywhereCD, which launched last year with ambitious plans to bundle CD’s with digital downloads announced this week they’ll close down. They were never able to build relationships with any labels besides Warner Brothers.  And their Warner’s relationship, which ended up in and out of court, wasn’t healthy either.

Virgin Digital, announced Monday they’re shutting down too.  Virgin stopped taking new customers in the UK last week and both their US and UK sites will officially shutter October 19th.  Unable to sell music playable on iPods (due to the DRM issues), they were never able to build audience.

The old maxim is “you’ve got to sleep in the bed you made.”  For the music industry, it all comes back to the paradox of their insistence on DRM technologies:   The iPod is the leading player in the market and is the only player capable of decrypting Apple’s Fairplay DRM encryption.  The labels forced Apple to use encryption, and in the terms of those contracts, gave Apple an incentive to keep that encryption system closed and proprietary. That in turn, took away iPod owner’s purchasing options. They could either buy from Apple or not buy music online if they wanted it to play on the iPod.  The more popular the iPod has become, the more reinforcing its become of Apple’s leading position as a music retailer.  (See the Metue article on the Paradox of DRM or Steve Jobs open call for DRM-Free music for more information on this) 

So now, the labels don’t like Apple’s bargaining power and are crying foul.  But where can they go?   Apple’s closest competitor, eMusic, has about a ten percent market share but labels can’t go there – eMusic sells DRM-Free music from Independents. eMusic doesn’t sell Big 4 music. And there’s no where else. No other retailer has more than a few percentage points of market share; not enough to get be noticed.

The same decisions that put Apple where they are, coupled with the popularity of the iPod, make it virtually impossible for competitors to succeed selling digital songs.  It’s a simple equation. If a retailers music can’t play on the leading line of players (the iPods), they won’t make a lot of sales.  If they don’t have customers buying products, they have no business.

There are only three ways out of the hole: i. invent a new business model; or ii. find a way to make MP3 players that have a shot at competing with iPods; or iii. drop the DRM restrictions and allow music to be sold that plays on any device; open the markets and allow free-trade. Only dropping DRM is realistic but the industry remains reticent to do that.

Only EMI (which may well be their savior) is aggressively pursuing a drm-free strategy.  The rest of the labels are still undecided. Sure, Universal is experimenting with it.  Warner’s toyed with it too but all of the labels are going to have to follow EMI’s approach, or potentially competitive retailers will continue to disappear.