Music Fans: Dismantle DRM

New lawsuits are using antitrust law to challenge media giants' music download policies, claiming they unfairly restrict users' purchases

When it comes to legal action over downloaded music, the defendants are often individuals: The lone user downloads one too many copyrighted files and Big Media goes on the offensive. But now, the little guy is turning the tables.

A fresh crop of lawsuits filed on behalf of individuals argue that it's the big companies that are ripping off the consumer.

Melanie Tucker, a San Diego resident, says Apple Computer (AAPL) unfairly restricts how its iTunes Store customers can use legally purchased music. Apple uses its so-called Digital Rights Management, or DRM, software to prevent iTunes songs from easily running on media players that compete with its iPods. (The files can be converted but the process is time-consuming and can be confusing.) Apple's brand of DRM software, called FairPlay, also prevents music purchased through services other than iTunes from playing on the iPod.

Tucker maintains that the company, which controls between 70% to more than 85% of the legal music download market and perhaps a 90% share of the digital music player market, is behaving like an overly aggressive monopoly, stifling competition in violation of antitrust legislation. "Apple has monopoly power in both markets through iTunes and iPod and they have made a conscious decision to disable people from freely using other formats on their iPod and vice versa," says Andrew S. Friedman, one of Tucker's attorneys. Friedman is seeking class-action status for the suit.

My Tunes vs. iTunes

Tucker's suit comes on the heels of a March, 2006 class action filed by Scott Ruth against music industry players including Sony BMG Music Entertainment (owned by Sony (SNE) and Bertelsmann Media), Universal Music Group, Time Warner Music Group (TWX), and EMI (EMI). Ruth, an Arizona resident, argues that the labels are violating antitrust agreements by using DRM to prevent music from being sold by a variety of retailers, thereby stifling competition that could keep prices down. Both Ruth and Tucker's suits seek compensation for music download customers as well as a change in the restrictions.

The arguments in Ruth and Tucker's suits are not particularly new. Consumers have long complained that legally purchased songs cannot be played on all their devices in part because of restrictions on the number of devices that can hold a license for a song at any one time. Traditionally, the record labels and download services have argued that the restrictions are necessary to combat piracy and ensure artists are compensated. Seeing few alternatives, many music lovers have begrudgingly accepted this answer—or opted for illegal downloading.

But the lawsuits show customers are no longer willing to accept the status quo. Some DRM opponents have begun arguing that DRM restrictions are actually fueling piracy by forcing users to choose between buying music that they will only be able to play on a limited number of compatible devices or stealing music that they can play anywhere. "Right now the fact is that pirated music and pirated movies are actually worth more than the movies and music you buy," says Rob Enderle, principal analyst with the Enderle Group. "I can't think of another product that is actually worth more stolen than if you purchased it."

Music Biz Ready to Play

The music industry is showing signs of softening. While record labels aren't changing their tune on the need for DRM to prohibit piracy, the Recording Industry Association of America, which represents the major labels, wants changes that would let users play downloaded music across a variety of devices. "We are focused on interoperability," says RIAA President Cary Sherman.

Over time, the recording industry has gradually shown other signs of flexibility. It has allowed music subscription sites to license music and has enabled services that give songs away for free in exchange for exposing customers to advertisements. It has even enabled users to put rented songs, obtained through subscription services, on portable devices—long a sticking point between the industry, the services, and the users who did not want to get subscriptions without the ability to take their music with them (see, 9/5/06, "Meet the iTunes Wannabes").

Interoperability Is Key

Much of the change in attitude has resulted from consumer backlash and the music industry's growing frustration with Apple, which has refused to give the industry more control over pricing (see, 12/19/05, "Apple May Be Holding back the Music Biz"). The trouble is, Apple is opposed to interoperability and labels don't have a choice but to do what the Web stores want. "How powerful is a company when they are negotiating with Wal-Mart (WMT)?" asks Sherman. "Want Wal-Mart to carry your stuff, your prices are going to come down. Record companies have to negotiate with Apple because they are the dominant player."

Both Apple and Microsoft (MSFT), maker of the Zune music player, have said they have not made their products interoperable because people want a seamless experience between download store and device. The more media player manufacturers and download services are involved, the more difficult seamless interoperability becomes. Microsoft experienced this with its "PlaysForSure" technology, which was used by Samsung, Creative Labs (CREAF), and others with only varying degrees of success. That's one of the reasons why, in releasing Zune, Microsoft opted for a system that didn't have to work with products it didn't control (see, 11/12/06, "A Method to Microsoft's Zune Madness"). Calls to Apple and Microsoft representatives were not returned.

However, such interoperability issues would likely not exist if the companies just did away with DRM altogether, allowing users to download music and then copy it to as many devices as they want. Several download services such as eMusic and Amie Street have developed businesses around nonrestricted music files and flexible price models. And eMusic, which focuses on independent label artists similar to Amie Street, has been particularly successful. In the three years it has been in business, it has sold more than 100 million songs. "Paying customers will stay paying customers and people looking for free music will continue to look for free music," says eMusic president and chief executive officer David Pakman. "We challenge the notion that [DRM] is a requirement in order for the industry to grow."

New Business Model

What's more, eMusic has seen steady growth. It is now the No. 2 music service after iTunes, based on volume of songs sold (Apple sells about 1.8 million songs a day). On average, eMusic customers buy 20 songs a month, spending about $168 a year on songs, says Pakman. The average iPod owner buys fewer than 15 songs a year per owned iPod (see, 11/21/06, "Online Music's Elusive Bottom Line").

Pakman sees the number of songs his customers buy as evidence that songs can be progressively priced in a way that reflects demand for particular songs and discourages piracy. Elliott Breece, co-founder and CEO of Amie Street, concurs. Songs at Amie Street start free and then become gradually more expensive as they start to sell. Prices are capped at 98 cents, a penny less than the price for each iTunes song. Amie Street has sold more than 70,000 songs since its October launch. Breece says that Amie Street wouldn't be able to compete if users couldn't download songs and play them wherever they wanted. "People want to buy and own stuff," says Breece. "In a lot of ways DRM isn't really natural."

The protections, however, are a way to secure loyalty among customers. After all, why would a longtime iPod user want to buy another, comparably priced music device if doing so would require spending hours to convert files into the appropriate format? Thus, barring an anti-Apple court decision (which even Friedman concedes would be a couple years off at the earliest), there's no real reason for Apple to change. Unless, of course, consumers start voting with their pocketbooks by purchasing music through non-DRM services and listening to it on non-iPod players.

An Open-Format Future?

Michael Bebel is CEO of Ruckus Network, an advertising and subscription-supported music download service that is focused on college students and uses Microsoft's PlaysForSure technology. Bebel says he can see a future with no DRM—if consumers stand up in big enough numbers. "I think that at least the calls for change are going to reach a critical point this year," says Bebel. "But change never occurs as rapidly as one might hope or like."

The labels could help speed the change by refusing to license certain songs to iTunes in order to bolster less restrictive forms of DRM. But they would risk losing sales from frustrated fans who might not want to purchase an actual CD to get an individual song on their iPods. If in the unlikely event labels drop DRM altogether, Apple would still be able to affix its own restrictions when selling through iTunes. That's why music sold through iTunes from labels such as Nettwerk Music Group, which does not use DRM, still cannot be easily played on non-Apple media devices. "Our whole motivation in the digital world is to not try to control the consumer experience," says Brent Muhle, Nettwerk's general manager. "So if a consumer is a rabid iTunes user and they want to buy from iTunes we want them to have a media file to buy. If they want to buy directly from us, we are going to give it to them in as open a format as possible."

Still, no one tech service remains dominant forever. Remember when Microsoft ruled the world? It still has the most dominant operating system, but it is facing accelerating competition and has been forced by courts to play nicer with rivals. And the lawsuits certainly hurt Microsoft's public profile and emboldened the competition.

Apple could suffer a similar fate, eventually relaxing its stance on interoperability. After all, France is suing the company because of its reluctance to open up the iPod to other music services (see, 3/21/06, "Apple vs. France"). That suit, coupled with Tucker's potential class action and others, could make Steve Jobs think harder about making the iTunes Store or the iPod more compatible with competing devices or stores. But, short of a court order, don't expect a change of heart any time soon.

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