|Tuesday, February 6, 2007
15:05 - Apple will embrace this wholeheartedly
Pound that podium, Steve. The throngs, they cheer.
This essay, published in Apple's "Hot News" section (and via Daring Fireball), is pretty clearly a public response to all the lawsuits being leveled (mostly in Europe) to force Apple to open up the FairPlay standard. Anyone who thinks the only reason Apple is reluctant to do so is because they're greedy and short-sighted really ought to give this a read, because it's pretty darn forthright. Makes me wish other companies had CEOs who were as candid about their motivations, and as willing to talk about ways that what they're doing could be made better, given the right kind of cooperation from others.
Here we go:
The rub comes from the music Apple sells on its online iTunes Store. Since Apple does not own or control any music itself, it must license the rights to distribute music from others, primarily the “big four” music companies: Universal, Sony BMG, Warner and EMI. These four companies control the distribution of over 70% of the world’s music. When Apple approached these companies to license their music to distribute legally over the Internet, they were extremely cautious and required Apple to protect their music from being illegally copied. The solution was to create a DRM system, which envelopes each song purchased from the iTunes store in special and secret software so that it cannot be played on unauthorized devices.
It's amazing to me how many pundits overlook this simple point and assume that Apple is only trying to jealously lock people in to its proprietary format. Nobody likes DRM except for the labels. Apple doesn't like DRM. It's an irritant and a source of unnecessary development effort and due diligence that otherwise wouldn't be necessary. But it's a requirement if people are to download popular music.
Apple was able to negotiate landmark usage rights at the time, which include allowing users to play their DRM protected music on up to 5 computers and on an unlimited number of iPods. Obtaining such rights from the music companies was unprecedented at the time, and even today is unmatched by most other digital music services. However, a key provision of our agreements with the music companies is that if our DRM system is compromised and their music becomes playable on unauthorized devices, we have only a small number of weeks to fix the problem or they can withdraw their entire music catalog from our iTunes store.
It helps to put oneself in Apple's shoes here. I'd be willing to guess that the "small number of weeks" is like two or three; with that in mind, every time FairPlay is cracked (and it has been), it's not a matter of "let's just hope nobody exploits this en masse". It's a fire-drill. It's a potential business-killer, because failure to address it—immediately—is grounds for the labels pulling out. Makes DRM sound like quite a liability for the software maker. I sure wouldn't want to be them.
And lest we forget, the "5 computers" limit was not the original term. When the iTMS first launched, you could only use your downloads on three computers. Apple negotiated that up to five, though, at the expense of reducing the number of CDs you could burn of a single playlist from 10 to 7. Big win. Ballsy move. Just like this essay.
Some have argued that once a consumer purchases a body of music from one of the proprietary music stores, they are forever locked into only using music players from that one company. Or, if they buy a specific player, they are locked into buying music only from that company’s music store. Is this true? Let’s look at the data for iPods and the iTunes store – they are the industry’s most popular products and we have accurate data for them. Through the end of 2006, customers purchased a total of 90 million iPods and 2 billion songs from the iTunes store. On average, that’s 22 songs purchased from the iTunes store for each iPod ever sold.
Today’s most popular iPod holds 1000 songs, and research tells us that the average iPod is nearly full. This means that only 22 out of 1000 songs, or under 3% of the music on the average iPod, is purchased from the iTunes store and protected with a DRM. The remaining 97% of the music is unprotected and playable on any player that can play the open formats. Its hard to believe that just 3% of the music on the average iPod is enough to lock users into buying only iPods in the future. And since 97% of the music on the average iPod was not purchased from the iTunes store, iPod users are clearly not locked into the iTunes store to acquire their music.
Various pundits, politicians, and label execs have used these numbers to claim that the majority of music on iPods is stolen. What they usually overlook, oddly (since it's still the most popular avenue by far by which music is loaded onto computers), is people ripping the music from the CDs they already own. Steve isn't hiding or spinning these numbers—he's using them to illustrate a rather uncharacteristic point, namely that iTunes music is still an almost insignificant proportion of the labels' sales and iPod users' libraries. As much as he's crowed about iTunes sales milestones in every keynote, it's all been primarily to talk up the market share angle and the proportional popularity of the iPod in the music-player market. It's not to demonstrate that digital downloads are in any way displacing physical CDs as the preferred way for people to get their music.
97%? That's a lot of DRM-free music. Such music comes from one of two places: ripped (and owned) CDs, and stolen/downloaded MP3s. I would venture to say that more people who make up the reasonably affluent iPod-owning demographic are likely to buy from the iTunes store than download via KaZaA. Sure, there are high-school and college kids all contributing to the vast, evil P2P network; but you don't hear too much about that these days anymore. Even college kids recognize the value proposition of guaranteed quality of content and delivery that you get from any legal download service, and if they like the unlimited-download model, there's always Napster. It's all about the path of least resistance, even for emo goth kids in darkened dorm rooms. If they've got the money for iPods, they've got the respect for music that will drive them to buy CDs rather than download crackly MP3s of their favorite bands.
Still, that's not quite what he's saying here, and it's really immaterial to his point, as we'll get to shortly.
"But why cannot ze Apple just license ze FairPlays?" asks France.
The second alternative is for Apple to license its FairPlay DRM technology to current and future competitors with the goal of achieving interoperability between different company’s players and music stores. On the surface, this seems like a good idea since it might offer customers increased choice now and in the future. And Apple might benefit by charging a small licensing fee for its FairPlay DRM. However, when we look a bit deeper, problems begin to emerge. The most serious problem is that licensing a DRM involves disclosing some of its secrets to many people in many companies, and history tells us that inevitably these secrets will leak. The Internet has made such leaks far more damaging, since a single leak can be spread worldwide in less than a minute. Such leaks can rapidly result in software programs available as free downloads on the Internet which will disable the DRM protection so that formerly protected songs can be played on unauthorized players.
An equally serious problem is how to quickly repair the damage caused by such a leak. A successful repair will likely involve enhancing the music store software, the music jukebox software, and the software in the players with new secrets, then transferring this updated software into the tens (or hundreds) of millions of Macs, Windows PCs and players already in use. This must all be done quickly and in a very coordinated way. Such an undertaking is very difficult when just one company controls all of the pieces. It is near impossible if multiple companies control separate pieces of the puzzle, and all of them must quickly act in concert to repair the damage from a leak.
Apple has concluded that if it licenses FairPlay to others, it can no longer guarantee to protect the music it licenses from the big four music companies. Perhaps this same conclusion contributed to Microsoft’s recent decision to switch their emphasis from an “open” model of licensing their DRM to others to a “closed” model of offering a proprietary music store, proprietary jukebox software and proprietary players.
Fair enough? Fair enough, I'd say. It's the same reason why Apple hates DRM in the first place: it's a pain in the ass. It's be even more so if they licensed it—they'd not only be responsible for their own lapses, they'd be on the hook to clean up after everyone else's too. And one flub means the labels pull out. No thank you.
Here's where Steve goes all flowers-and-rainbows, and I've got to say he paints a rosy picture:
The third alternative is to abolish DRMs entirely. Imagine a world where every online store sells DRM-free music encoded in open licensable formats. In such a world, any player can play music purchased from any store, and any store can sell music which is playable on all players. This is clearly the best alternative for consumers, and Apple would embrace it in a heartbeat. If the big four music companies would license Apple their music without the requirement that it be protected with a DRM, we would switch to selling only DRM-free music on our iTunes store. Every iPod ever made will play this DRM-free music.
Why would the big four music companies agree to let Apple and others distribute their music without using DRM systems to protect it? The simplest answer is because DRMs haven’t worked, and may never work, to halt music piracy. Though the big four music companies require that all their music sold online be protected with DRMs, these same music companies continue to sell billions of CDs a year which contain completely unprotected music. That’s right! No DRM system was ever developed for the CD, so all the music distributed on CDs can be easily uploaded to the Internet, then (illegally) downloaded and played on any computer or player.
In 2006, under 2 billion DRM-protected songs were sold worldwide by online stores, while over 20 billion songs were sold completely DRM-free and unprotected on CDs by the music companies themselves. The music companies sell the vast majority of their music DRM-free, and show no signs of changing this behavior, since the overwhelming majority of their revenues depend on selling CDs which must play in CD players that support no DRM system.
So if the music companies are selling over 90 percent of their music DRM-free, what benefits do they get from selling the remaining small percentage of their music encumbered with a DRM system? There appear to be none. If anything, the technical expertise and overhead required to create, operate and update a DRM system has limited the number of participants selling DRM protected music. If such requirements were removed, the music industry might experience an influx of new companies willing to invest in innovative new stores and players. This can only be seen as a positive by the music companies.
Steve is not only positing that the vast majority of DRM-free music on people's iPods is ripped from CDs, he's saying that even if it weren't, it doesn't matter. In this day and age, the fact that we've got CDs in the first place makes the distinction between legally owned CDs and illegally shared MP3s meaningless. As long as CDs have to work in your non-DRM'd in-dash CD player, there'll be no DRM on CDs; and as long as there's no DRM on CDs, there will be file-sharing. And yet the labels still manage to make money.
More importantly, Apple still manages to make money, even with 97% of the music on iPods being equally playable on any other device. That's the key point of all this: Is 3% of the music really worth suing over?
Much of the concern over DRM systems has arisen in European countries. Perhaps those unhappy with the current situation should redirect their energies towards persuading the music companies to sell their music DRM-free. For Europeans, two and a half of the big four music companies are located right in their backyard. The largest, Universal, is 100% owned by Vivendi, a French company. EMI is a British company, and Sony BMG is 50% owned by Bertelsmann, a German company. Convincing them to license their music to Apple and others DRM-free will create a truly interoperable music marketplace. Apple will embrace this wholeheartedly.
This is what makes this essay a direct response to the European lawsuits. When it comes to anticompetitive practices, the root cause of the problem is that the labels—rightly or wrongly—consider it an unacceptable risk to allow legal DRM-less downloads, even though they're publishing DRM-less CDs every day that dwarf the market share of DRM'd downloads. Convince them otherwise and their requirement of DRM will disappear.
With Microsoft and other companies jumping on board the DRM bandwagon and building ever more of it into their software, one gets the impression that the DRM-demading labels are enjoying a tide tilting in their favor. They're telling the software makers like Microsoft and Apple how high to jump, and cheerfully sidestepping being made the scapegoats for why the DRM is necessary in the first place. Microsoft has so much invested in Vista DRM that they're unlikely to have been the ones to stand up and tell off the labels like this—but I'm glad someone did.
Steve has given interviews in the past where he gave glimpses into his take on DRM, but never anything this in-depth and direct. He's said, in essence, that getting customers to not steal music is—like so much else in software—a user-interface problem: if you make it easy to do the right thing, that's what people will do. If you make it difficult, then people will find ways to circumvent it.
iTunes' DRM is so non-intrusive that most users never even know it's there; it doesn't inhibit anyone's reasonable everyday usage, and is more lenient than anyone else's terms out there. But it's still there, and it still sticks in some people's throats. Sure, if the labels were to bless legal MP3 downloads, they might lose some business. But how likely is it to be any more than they already lose from people who have ripped their CDs to MP3s and put them online? If someone were to buy an MP3 from iTunes and then send it off into the P2P-o-sphere, how is that any more of a blow to the labels' profit margins than someone doing the same thing with a CD?
If we were talking about the labels suddenly starting to treat MP3 trading as as much of a nod-and-a-wink sort of thing as the big studios treat the intellectual property that fan websites use in building their multimedia galleries, then we'd see all kinds of tremors in the industry: ISPs would have to shoulder the burden of increased download bandwidth and server disk usage imposed by people sticking their favorite CDs on their MySpace pages, rather than leveraging the distributed computing resources of every participant in the P2P network, as it is today. Apple's iTunes Store business model would dry up, as people would be able to Google for a favorite Beatles song and simply download it for free from a Beatles fan site rather than paying a dollar for it to get it from iTunes.
But that's not what we're talking about, is it? Copyright laws are still copyright laws, and whole CDs of music represent a different IP footprint from DVD screenshots and 10-second video clips. ISPs would still be on the hook to smack users for hosting copyrighted content, whether it came from iTunes or from a CD they'd ripped. And iTunes would still be able to make its dollar per track for guaranteeing the browseable catalog, the download bandwidth, the technical support, the album art, the built-in premiums, and all the other infrastructure that makes buying from iTunes a more pleasant experience than prowling the P2P waves.
The big change would be that we'd suddenly be able to get our music from the iTunes Store and play it on our Zunes, or from Sony Connect and put it on our iPods. But who cares? Steve's numbers tell the story that while iTunes sales are great, they're nowhere near being a cash cow in and of themselves—what makes money for Apple is selling iPods with hundred-dollar margins. He can afford to be Barnes & Noble in a market with Borders and Waldenbooks holding down their respective corners, especially if Borders and Waldenbooks don't have built-in Starbuckses for pulling in the real money. He can even afford to sacrifice the revenue stream that iTunes provides, if it erases what some people see as the biggest strike against the iPod. Whatever keeps the iPods flowing is what's best for Apple's bottom line.
Now that Wal-Mart is entering the digital video downloading market, pundits are quick to speculate about the end of iTunes' dominance, no matter how many times they've done so before, or to how little effect. I doubt Wal-Mart's entry will much impact iTunes' market share. But neither do I think iTunes had much of a prospect in the movie segment to begin with. Too few titles, too compromised quality, too much to spend on a movie that takes up too much space on your disk and backup media and that you'll watch too infrequently. Wal-Mart will have exactly those same problems. And I think Steve senses that things aren't exactly exploding in that corner of the store. Otherwise there'd be a lot more titles showing up a lot faster.
But iTunes is a huge brand now—enough so that when the news reports that "the Beatles might appear on iTunes soon", they don't even have to bother explaining who or what iTunes is. Wal-Mart only wishes it had that much ubiquity in the digital world.
Wal-Mart, however, has no iPod to link into its business model. There's no WalPod. And as long as the iPod remains the thing that people actually want to buy—that people use iTunes because that's what supports the iPod, not because it offers a selection of digital downloads that nobody else has—Apple's business is sound. Indeed, Steve's appeal to Microsoft's decisions surrounding the Zune reveals his faith in the top-to-bottom model: you've got to control the store, the jukebox, and the player in order to provide a good user experience. DRM is pretty much irrelevant to that process. What matters is that those three things work together seamlessly. Among much else, Steve's acknowledging that the Zune is the first of the non-iPod players to really show an understanding of what made the iPod successful.
It certainly can't hurt to make oneself a martyr, to leverage your market-leading position to criticize the people everyone really hates: the labels. And being the first one to stand up and shift the blame in that direction is going to be an enviable power play, one that his competitors will wish they'd thought of first; rather than scorning the iPod as a tool of the Man, music lovers will be hailing Steve as a conquering hero. By taking the official stance that DRM is a necessary evil, Apple will capture the hearts and minds of the people who can only helplessly watch Vista installing red-light cameras all over their desktops. And by being forthright about what kind of computing world Steve would like to see in an ideal future, he'll be showing himself to be on the side of the consumers, not of the companies that treat consumers as criminals.
It's a good thing this guy doesn't have political aspirations, because he would be a dangerous, dangerous force if he wielded power over more than just my computer. And not one I'd want to have to go up against.
UPDATE: So Steve—does this mean Disney/Pixar is going DRM-free?
UPDATE: Don't miss Gruber's analysis and round-up of reactions. The labels don't like it, the pundits think he's bluffing, the RIAA thinks he's offering to license FairPlay, and Microsoft—as I guessed—is pissed that they didn't think of this first.