The slow death of digital rights
From The Economist print edition
Record labels wrestle with the internet
HOW CAN the music industry make money online? Events in recent days have hinted at the diverging strategies of record labels and the musicians themselves. Earlier this month a jury in America sentenced a mother of two who makes $36,000 a year to pay $222,000 in damages for having made copyrighted songs available on a file-sharing network. Then on October 10th Radiohead, one of the world's most successful rock bands, made good on their promise to bypass record labels altogether by making their new album available online??and letting fans set the price they are willing to pay for it.
Leading record labels, in particular, have long insisted that songs sold online should be wrapped in virtual envelopes that prevent fans from e-mailing them to friends or uploading them to a file-sharing network. They argue that this is the most straightforward method of battling piracy and so increasing their sales??and have reinforced their position with lawsuits against online pirates. But critics say this model is doomed, and that the labels will have to come up with more imaginative ways of making money.
At any rate, the music industry's once united front in favour of ??digital rights management? (DRM) software is crumbling fast. In April EMI, the world's third-biggest record company, announced that it would forgo DRM. In August Universal Music Group, the industry's number one, began experimenting with DRM-free downloads. Since then, Wal-Mart and Amazon, the world's biggest retailers, have started selling songs without software to prevent copying. Even Microsoft and Sony, both leading developers of DRM, have moved away from the technology.
Rumours of DRM's death are exaggerated. The technology will survive, if only to monitor the usage of certain files and to protect other digital goods, such as computer games and films. Nonetheless, the trend shows how desperate record companies, faced with declining sales and profits, have become. As it has become clear that online music sales, though growing, will not make up for the decline in sales of old-fashioned compact discs, more and more music executives are beginning to conclude that DRM is not the solution to their problem. It is easily circumvented, makes life difficult for law-abiding fans and does nothing to prevent the copying and online distribution of music from CDs.
Yet the most pressing reason for the music industry to ditch DRM, says James McQuivey of Forrester Research, a consultancy, is to undermine the bargaining power it inadvertently gave to Apple by insisting on it. Thanks to the success of Apple's iPods and its iTunes music store, most legally downloaded songs are protected by the firm's own DRM technology, called FairPlay. That helps it to negotiate favourable terms with the labels, such as the right to sell all songs at the same price. Dropping DRM, the theory runs, will weaken Apple's position, because other online retailers could then sell tunes for the iPod.
That prospect is unlikely to leave Steve Jobs, Apple's chief executive, trembling in his boots. The ??lock-in? of the firm's music store is based more on branding and ease of use than on DRM. And getting rid of it would probably make digital music even more popular, and so increase the sales of iPods, which bring much more profit to Apple than iTunes.
Still, Mr Jobs will certainly be interested to learn whether consumers do indeed buy more songs online if DRM is done away with. Economic theory suggests that they will: less friction should lead to higher demand. Alas, EMI and Universal's trials are not very telling: the former charges a higher price for DRM-free songs, which are also of higher audio quality, while the latter sells only part of its catalogue that way. Moreover, EMI will not give any results (other than saying that the experiment is going surprisingly well) and Universal has yet to see a spike in sales.
Abandoning DRM might at least force record companies to develop new business models that focus not on the songs themselves, but on the activities that go along with them, argues Mark Mulligan of Jupiter Research, another consultancy. As a whole, the music industry is already moving this way; witness the trend to have artists sign ??360-degree contracts? that include concert, merchandise and endorsement deals. Madonna, for one, is said to be thinking of abandoning her long relationship with Warner Brothers Records in favour of such a contract. But record companies are still experimenting with such tactics online. Ideas include bundling songs with things like video games and having big consumer-goods firms pay for music which they can then pass on to their customers through their websites.
Radiohead's test may set an example for more such experiments. Besides naming their own price for the new album, fans can also buy a luxury version: £40 ($82) will buy a box containing two vinyl LPs and two CDs as well as artwork and lyric booklets. To Guy Hands of Terra Firma, the private-equity firm that bought EMI in August, it is ??a wake-up call which we should all welcome and respond to with creativity and energy?, as he wrote in an e-mail to EMI's staff. The file-sharing mother, meanwhile, has decided to appeal.
