The word ‘capitulating’ somehow found its way into all of the stories published this week about Apple changing it stance on both DRM on its iTunes Music Store and offering variable track pricing.
But if this was an example of Apple giving in to ‘relentless’ record label pressure, it has taken its time. The first major public push by Record Labels to get Apple to toe their line was in May 2004. The US national newspapers at the time treated it like the deal was done and dusted, as the Labels leaked their campaign to bring Apple to heel. Headlines declared that all four of the big labels would pull their content from iTunes if it did not cave in. But it held firm.
In April 2006 the same headlines ran once more, and none of us were fooled because Apple was the labels’ one shining light in an otherwise pirated universe. Finally in April 2007 Apple took the limelight away from EMI when the UK record company talked about DRM-free tracks, but it was Apple’s CEO Steve Jobs who wrote the open letter to the industry talking about going DRM-Free, and was seen as a founding Father of the DRM-free music push.
Today all that Apple has done is offer that same premium 256kbps AAC high quality version of the EMI DRM-free tracks across all the major record labels and many of the independents. Apple says that it has 8 million tracks available DRM-free right now and will have the other 2 million by the end of March, making 10 million in total.
Apple has not so much capitulated, as seen that finally it has a market share in mobile music devices which is impossible to eclipse, and given that now it’s really in competition with phone operators and handset vendors like Nokia and Sony Ericsson, its competition has changed dramatically, and its strategy also needs to change. If people want to move their tracks to non-Apple devices, they still have to convert from AAC to MP3, with a potential loss of quality, so it’s still not a trivial adjustment for most users.
Also its pricing change is pretty much contained in the EMI deal of 18 months ago as well. The 256 kbps DRM-free tracks had cost $1.29 each and Apple is clearly now charging that for DRM-free tracks for everyone (we suspect it has to partly due to extra download costs from its CDN because the files are so much bigger), but it is also offering the same price to labels for premium pricing if they want to charge it. The only real change is allowing older favorites to be charged as low as 69 cents (30 cents more or 30 cents less than the older pricing). If long tail music is purchased at around the same frequency as recent launches (pretty much borne out by experience) Apple’s income from iTunes Music Store won’t change for the same amount of music sold, unless it goes up slightly due to the sale of DRM-free tracks.
The two major innovations that Apple has come out with this week are actually covered up by this announcement. The first is that 3G attached iPhones can be bought over the 3G network for the same price as downloading to a PC. This makes the iPhone iTunes experience far closer in service level to the Walkman and Nokia Music Store, which previously were actually better if anyone ever looked seriously at them. The software has had to change so that these new tracks now sync back to the PC rather than only one way to the phone.
The other significant offer is that entire libraries of iTunes music can be ‘upgraded’ to DRM free versions for roughly 30% of what the collection cost ‘ either individual tracks or albums. There won’t be many, but there will be some customers, which make the change ‘en masse’ for their entire collection, and that’s going to throw a lot of new money at iTunes Music Store in the coming months, as a one time charge.
It is still true that Apple makes more money out of selling an iPod than selling the captive music for them from iTunes, but over the coming two years this was bound to transition to a position where iPods sell less, because the iPhone sells more. Apple will still have much of its music tied into its devices through its Fairplay DRM, and most iPhones will sell on the back of that vast potential music collection. But doesn’t this open up its iTunes Store so that if Apple changes tack in the future, it could offer an iTunes application (DRM-free) on ANY phone, and partner with other major device makers, in low-end markets for instance, where cheap Indian, African and Chinese phones can download DRM-Free music from iTunes.
This is a long way from where Apple is today, and we’re not suggesting that Apple would embrace such a thing soon, but it at least opens the possibility.
Far from capitulating, this looks like Apple is adjusting its future model from a position of massive strength.