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Opening up iPod
French parliamentarians finished drafting a law on Friday that would open up Apple's market-leading iTunes online music store to portable music players other than its popular iPods.
The new law, now set for a vote on Tuesday, would allow consumers to circumvent software that protects copyrighted material -- known as digital rights management (DRM) -- if it is done to convert digital content from one format to another. Using such software is currently illegal in much of the world.
This is expected to pass, here is the article.
My take: The French are probably still at the point where the songs aren't making money but rather serve as loss leaders for the hardware. A legally forced unbundling could induce Apple to leave the market, if only to send other governments a message.
More generally, song prices are relatively low early on to induce people to lock into the technology. If you forbid lock-in, early period song prices and indeed hardware prices will be higher than otherwise (think of market exit as the limiting case). But will forced unbundling make prices lower in the long run, due to the growing competitiveness of the market? My guess is no. Something better than iPod will come along within five or ten years, so the relevant form of future lower prices is "higher quality." Allowing monopoly profits, rather than confiscating them, is the way to get there more quickly and more decisively. By enforcing interchangeability at such an early stage in the process, the French will more likely get a lame rather than a cool version of a universal access platform. How's that for lock-in?
Posted by Tyler Cowen on March 20, 2006 at 06:46 AM in Music | Permalink
Comments
"A legally forced unbundling could induce Apple to leave the market, if only to send other governments a message."
I don't think so. Apple depends a great deal on good will--on being perceived as purveyors of cool, the good corporate citizen, the anti-Microsoft. Only if Apple were ordered to open up iTunes so that other manufacturers players could be plugged in and supported directly would I see any possibility of Apple choosing to exit the market.
"More generally, song prices are relatively low early on to induce people to lock into the technology."
Relatively low? How so? At $.99, song prices are roughly what they were when sold on CDs as albums. Albums at $9.99 are cheaper than retail. And with movies on DVD being sold at Best Buy on sale for as little as $4.99, I don't see song or album prices going *up*.
Also the lock-in is pretty leaky. The majority of songs on iPods, by FAR, weren't bought from the iTunes store--they were ripped from CDs. And it's always been possible to circumvent iTunes DRM and load the songs onto any player by burning them onto a $.10 CDR disc and re-ripping them to whatever format you like. There are also software hacks out there that will bypass the DRM without physical burning and re-ripping. So the French law won't actually do much, as far as I can tell. Apple does fight circumvention efforts, but I believe they do so primarily because their record companies partners expect it. If Apple were able to say to the record execs, "Sorry, guys, but the French government won't let us go after these hackers", Apple might actually be happier.
That's because the iPod advantage doesn't really depend on iTunes store songs being playable only on iPods (they aren't). The advantage depends on the whole 'ecosystem' -- not just that the songs come from the iTunes store, but that the iTunes software is used as the interface with both device and iTunes store (and the French law wouldn't change that). And THEN, a big part of the iPod advantage lies in the accessory market--there is an enormous array of iPod accessories many of which don't work with other players. And Apple has scaled back the premium that they charge for the hardware, so there's not much room for hardware competitors to win on price--only around $50 a unit, I'd estimate. You can still find great deals on other players--but generally by looking for discontinued models of manufacturers bailing out. When Dell gives up (as they did on hard-disk based jukebox MP3 players), that tells you something.
Posted by: Slocum at Mar 20, 2006 7:53:38 AM
Apple is barely breaking even on 99 cent songs--most of that goes to the recording industry. But iTunes songs do not serve as loss-leaders for the hardware; everyone wants the hardware with or without the iTunes store. In fact I imagine most iPod owners do not buy music from iTunes. iTunes DRM does serve to lock you into the iTunes/iPod platform, as it is irritating to circumvent DRM to keep your music library (even if you're willing to be a criminal--it's scary kids). The iTunes store is less about Apple's current profits than its goal of long-term domination of the digital music market.
So the lock-in factor may help keep song prices low, though it is by no means the only factor in play (competition from CDs, other online stores). Being able to break DRM (without being a criminal) provides value for a consumer other than being able to switch platforms, including not having to use iTunes software to play her songs. (I like my iPod a hell of a lot more than I like iTunes as a player/song organizer and would welcome competition along that dimension.)
Posted by: gundryggia at Mar 20, 2006 8:40:48 AM
Also: If you can't get around DRM by changing things to .wav and then reencoding them as .mp3 using some freeware you can get on the internet, then perhaps you don't deserve to move your music around.
Posted by: Timothy at Mar 20, 2006 9:13:32 AM
My recollection is that the French had an early, government sponsored form of on-line information system ('minitel' -- 'minitex', something like that... ) which was neat and advanced for 1985, but not for 2006. So your prediction is historically plausible. Do you conclude that governments can't do anything that protects consumers?
Posted by: Matt at Mar 20, 2006 9:15:11 AM
Interesting... while at MIDEM in Cannes (the annual music industry professional get together)... the majority were signing Apple's praises... it is quite a good deal for the major recording companies – they get 70 of the 99 cents, if not more for each song sold… Apple loses money on each song sold if you were to include marketing, however (God bless accounting) they can shift marketing to the iPod, which they make a killing on.
The bigger issue is still choice and price – I do not know anyone that is going to pay $10,000 to fill up an iPod. $.99 x 10,000 songs it can hold (less one dollar). iTunes offers a vending machine concept that will not last forever and is merely a fat kid sticking their finger in the dyke. The subscription basis is much better, however it’s current flaw isn’t with the price but with the underlying artist/label contract payment terms. The typical subscription is priced at $15 per month – would take 55 years to pay $10,000 and you would have access to millions of songs.
The long-term answer is to rework artist contracts and charge less to the consumer. This is what we are working towards at SoundGreen. Paying an artist a fair wage that allows them to focus all their energies on creation and not working part-time to support a hobby.
Cheers,
cannon
www.soundgreen.com
Posted by: cannon at Mar 20, 2006 9:29:03 AM
Short history lesson: The DRM in iTunes was mandated by the record companies. Sure, it has been good for Apple, too. However, as gundryggia points out, most people tend to buy iPods because they are good-looking, have a nice feature set and are competetively priced. iTunes integration is also nice, but I rather doubt that iTunes exclusivity is a selling point. Cracking the DRM does not hurt Apple one bit, but it may hurt record companies.
To be more precise: Apple is not a record company. Its business model is not about selling music per se. Apple is a hardware company that would be perfectly happy to give away or bundle the songs, if copyright laws would allow it (this is more or less how their mac business model works).
This move is directed towards the record companies.
Posted by: Dan K at Mar 20, 2006 10:13:33 AM
Second Dan K
This move isn't aimed at Apple--it's aimed at the record companies (remember that source-protecting CD's is much more common in Europe than in the US). It's the anti-DMCA. And long-term, what it will mean is that there's a source for legal, well-monitored translation software, which is currently hard to find since DMCA made it illegal in the US.
Posted by: SamChevre at Mar 20, 2006 10:18:50 AM
I thought that the DMCA already had this very exemption, which the decss people tried to invoke--they were just trying to play dvds on linux.
Anyhow, it is certainly true that Russia has a similar law, but the US prosecuted a Russian for a program he wrote in Russia. Is it worth it to French programmers to lose the right to visit the US?
Posted by: L at Mar 20, 2006 11:42:16 AM
why do people think that a way around DRM is to burn a lossy file (aac) to audio and then rip that back to a lossy file (aac or mp3)?!?!?
these are not substitutes. quality matters here. i am no audiofile with thousand dollar stereo equipment, but c'mon. it's bad enough that the songs for sale at iTMS are lossy already but don't make them worse.
also i would love to know how emusic and iTMS do with the tracks they have in head-to-head competition.
i agree with the folks who think that iPod+iTunes+iTMS is a coherent experience that apple is selling. and it is that experience that is better than what anyone else is offering right now.
the fact that you can buy music from other sources (emusic, ripped CDs) and use the songs from iTMS outside of the ipod (ie on your computer with iTunes) suggests to me that the goods being bought from apple are plenty open. i don't think a DRM scheme could exist that is much more open than the one that Apple is pushing.
Posted by: tof at Mar 20, 2006 1:26:17 PM
As far as I'm aware the prices of iTunes songs are almost entirely set to be low enough to compete with file swapping services, not to set up some sort of lock in.
Lock in occurs with the iTunes software itself, once an appreciable number of songs are organized the difficulty in transitioning that database to another platform make it unlikely that the user will purchase a non-iPod music player in the future. Incidentally this presents some difficulty for pulling Rhapsody users into iTunes, but the lack of a dominant player on both the software and hardware side of the music player market on Windows makes that problem small.
On the other hand, should Apple be forced to allow bypassing of the iTunes Music Store DRM, they would probably no longer be able to buy songs from the major publishers and Music Store sales would immediately shrink, but not go to zero thanks to the Long Tail. Note that it's Apple who pays the publishers for the right to sell DRM'd songs not the end consumer. As has been pointed out the ITMS is profitable, as it has been since its first year online, and Apple's costs and percentage of profit are a tiny fraction of a song's price. The majority of major label costs which it charges to Apple are for marketing activities which would be unnecessary if all music was sold through iTMS and so that portion of a songs price is irrelevant. In short, if there was no need to prop up the current CD market and the posters/shwag etc. that goes into it iTunes could sell songs for considerably less than $0.99 and still keep the major labels and Apple profitable.
Posted by: Ssezi at Mar 20, 2006 2:18:35 PM
The move is largely symbolic. Nominally-illegal software already exists to circumvent these protections and any savvy iPod owner/iTunes user knows where to get it. Converting the files takes place in the privacy and comfort of your own home and so the existing legal arrangment is 100% unenforceable. Making it nominally legal would simply sanction it culturally, and allow distribution of such software in stores.
The primary beneficiaries would be users in other countries who could then illicitly acquire high-quality commerical circumvention applications produced in France.
Posted by: Noah Yetter at Mar 20, 2006 2:28:44 PM
Hmm. Tyler, I can't think of a single example of a product which was withdrawn from market to "send a message to government" despite continuing to be both profitable and legal in a country. Can you?
It won't be Apple that withdraws, but it might be the record companies, who have most to gain from people being forced to repurchase music if they switch platform or suffer hardware loss.
As others have pointed out, it's the iPod which is profitable and the music is almost a loss leader for it, not the other way round.
"Allowing monopoly profits, rather than confiscating them, is the way to get there more quickly and more decisively."
Ah, but whose monopoly profits? Not Apple but the record labels are the ones truly making monopoly profits, to a great extent from their back catalogue. Granting monopoly on monopoly (by legal protection of otherwise-useless DRM systems) to them is not going to further innovation or reduce prices.
"By enforcing interchangeability at such an early stage in the process, the French will more likely get a lame rather than a cool version of a universal access platform. How's that for lock-in?"
This is vague analysis that ignores the nature of the technology. I'm not sure what you mean by "universal access platform"; one reading is that we have one already in the MP3 format, the other is the mirage of some future universal access DRM system. Universal access DRM is inherently impossible - the whole end of DRM is to restrict access and use.
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