EMI, Apple Remove Music's Copy Locks

The label led by Eric Nicoli is the first of the four majors to heed Apple CEO Steve Jobs' call to sell songs on iTunes without copy protection

Less than two months after floating the idea to strip copy protection schemes from digital songs sold online, Apple CEO Steve Jobs has persuaded the first major record label to go along.

EMI Music, No. 3 among the recording industry's so-called "Big Four," said Apr. 2 that it will make its entire digital catalog available for purchase on Apple's (AAPL) iTunes Store without Digital Rights Management (DRM) protection, beginning in May.

Rather than MP3, which has become the format most widely used by digital music pirates for use in file-trading networks, EMI and Apple will make the songs available using Advanced Audio Codec, or AAC, and at a higher bit rate—256 kilobits—than most songs available online—which are encoded at a rate of 128 kilobits. The bit rate refers to the amount of data that's removed from an audio file in order to reduce its file size. The higher a song's bit rate, the less data removed, and therefore, the better the sound quality.

Rush by Hardware Vendors?

EMI had been testing DRM-free tracks sold online. At an event at EMI headquarters in London, EMI CEO Eric Nicoli said after testing the higher sound quality, DRM-free format earlier this year, the company found higher quality tracks outsold regular digital tracks by 10 to 1. He said he expects to make them available later to other online music outlets.

Choosing AAC is an important step. While Apple's iTunes player supports most digital audio formats—including MP3, AAC, and several others—many other brands of players, including Creative (CREAF) don't include AAC support. But some do: Players from SanDisk (SNDK), Sony (SNE), and even Microsoft's Zune (MSFT), as well as phones from Nokia (NOK) and Palm (PALM) all support the AAC format. In effect, these players will, for the first time, be able to play songs purchased from iTunes. Previously iTunes songs had only been playable on one brand of portable music player, the Apple iPod.

Analyst Michael Gartenberg of Jupiter Research figures other hardware vendors will probably rush to add AAC support to their players, but in the end it won't matter, he says. "What was driving the market wasn't the iTunes Store, but the iPod. People weren't buying music from iTunes and then getting an iPod," he says. "It was the other way around. They were making their hardware choice, which in turn led them to the iTunes store."

"Very Big Victory" in Europe

Prior to this, Apple's DRM-protected songs available on iTunes were made available only in AAC format, protected by an Apple protection scheme known as "FairPlay," which limited the number of times a song can be copied. Those songs have traditionally been priced at 99 cents, and that price had been considered a sacred line by Apple, despite the pleas of many recording executives over the years, notably Warner Music Group's (WMG) CEO Edgar Bronfman, to consider a variable pricing structure.

Here Apple has shifted its stance, offering the DRM-free songs for $1.29, a 30-cent premium over the DRM-protected songs. But interestingly, the price of albums will remain the same: $9.99.

The move will also loosen pressure that had been building on Apple from regulators in the European Union, who have sought various legislative and legal actions against Apple. They have argued that selling songs on iTunes that are playable on only one type of portable player locks consumers into a particular system. Groups in France, Norway, Denmark, and Germany had all pressured Apple through various means to strip away DRM and thus make its songs compatible with other players (see BusinessWeek.com, 1/25/07, "Consumer Groups Wage War on Apple DRM").

"This is a very big victory. We wanted the businesses [Apple and music companies] to take this seriously, and they have," says Torgeir Waterhouse, spokesman for the Consumer Council of Norway. He predicted that other music labels might follow EMI's example, which could in time lead to Norway dropping its objections against Apple. Consumers in the U.S. had also launched their own legal fights against Apple (see BusinessWeek.com, 1/5/07, "Music Fans: Dismantle DRM").

Follows Jobs' Essay

The move by Apple and EMI comes after Jobs took the unusual step of writing a long, headline-grabbing essay entitled "Thoughts On Music" in which he said that Apple would be happy to drop the DRM protections from the songs sold at iTunes (see BusinessWeek.com, 2/7/07, "Steve's Music Manifesto").

Having been lobbied repeatedly by music labels to license its FairPlay DRM technology to other outlets since the launch of the iTunes Store in 2003, Jobs argued that licensing would require disclosing trade secrets to companies other than Apple, which would in turn open up the floodgates of Apple's secrets, giving programmers around the world the ability to create software to circumvent FairPlay.

He also said that since most of the music loaded on to iPods came not from the iTunes store—music sales from iTunes have averaged about 30 songs per iPod—consumers have not been locked into buying their music from a single source.

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