February 7, 2007

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Jobs's New Tune
Raises Pressure
On Music Firms

A movement to pressure the music industry to drop its primary weapon against online piracy has gained a high-profile convert: Steve Jobs, the man who helped build the market for selling music via the Internet.

MORE ON DRM

 

• Read the full text of Steve Jobs's open letter¹, titled "Thoughts on Music," in which he calls on the music companies to sell digital music without anticopying restrictions.
 
• Reply All: DRM Protects Downloads, But Does It Stifle Innovation?²
6/20/06
 
• Walt Mossberg: Digital Media Protections Go Too Far in Curbing Consumers³
10/20/05
 

In an 1,800-word online essay, Apple Inc.'s chief executive said the world's major music companies should consider allowing Apple and others to sell songs unfettered by anticopying software that prevents them from being shared or played however a consumer chooses.

Mr. Jobs contends that the recording industry isn't solving piracy with the technology, and could spur the market further if music lovers could buy music online without the restrictions. Many consumers resent the curbs on how they can listen to what they buy from online stores. Songs from one company's catalog, for example, won't work on another company's player -- a gridlock that has frustrated some consumers. Getting rid of the antipiracy software could make downloaded music as widely compatible with digital players in the market as compact discs are with CD players.

While Mr. Jobs is positioning his proposal as a consumer-friendly step, it isn't clear whether the biggest music companies -- Warner Music Group Corp., EMI Group PLC, Vivendi SA's Universal Music Group, and Sony BMG, the joint venture of Sony Corp. and Bertelsmann AG -- will embrace his recommendation. Allowing online music sales without anticopying software would amount to a radical about-face for the recording industry, which several years ago viewed the technology as a remedy to rampant online piracy through file-sharing networks like the original Napster and Kazaa. Music heavyweights have long required Apple and others to use the technology -- known as digital-rights management, or DRM, software -- if they wish to sell their songs online.

QUESTION OF THE DAY

 

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Would you pay more for legal digital-music downloads without copy restrictions?⁵

Nor is it clear whether such a shift would deliver a further blow or a potential boon to the music industry, which has endured a spiral of declining sales and rising piracy since the advent of Internet-enabled copying and transmission of music. According to the Recording Industry Association of America, the value of recorded music shipped to U.S. retailers plunged 16% from a $14.5 billion peak in 1999 to $12.2 billion at the end of 2005 -- a slide the industry blames in part on online piracy. Record companies decided that one way to keep this from worsening was to let legitimate companies sell music in a format whose distribution could be more tightly controlled.

Apple quickly took the lead several years ago by selling music through its iTunes Store for 99 cents a song. The digital music files are essentially padlocked by a layer of software that makes them playable only on iPods and on computers using iTunes software. Other companies use competing copy-protection software, though, limiting users of digital-music players to purchasing songs online through compatible song catalogs.

Yet for all the limits such software places on copying music, Mr. Jobs said, the technology doesn't effectively deter piracy because more than 90% of music world-wide is purchased on CDs -- which don't contain antipiracy software and are therefore easily copied to a computer and then traded online.

In his essay, posted yesterday on Apple's Web site, Mr. Jobs suggests the music industry might see better growth by abandoning its protective approach. "If such requirements were removed, the music industry might experience an influx of new companies willing to invest in innovative new stores and players," he wrote. "This can only be seen as a positive by the music companies."

Sales of digital downloads have continued to rise, but at a slower rate than in previous years. That, combined with an accelerating downturn in CD sales, has meant the music companies have been harder pressed than ever to find new sales wherever they can. Some executives in the technology and music industries have argued that sales of digital music are being held back by the lack of compatibility between hardware devices and music services. These people believe the market could grow more strongly if iTunes competitors can sell music that can be played on iPods.

Aside from sales, dropping the technological barriers also could also eliminate pressure Apple is facing from consumer-protection agencies in several European countries. They want Apple to modify its two most popular music products -- iPods and iTunes Store -- to make them compatible with online music services and hardware offered by others.

And since Apple thoroughly dominates the market -- with more than 85% of online song sales in the U.S., and more than 70% of digital-music-player sales -- many consumers have chafed at the problems associated with using the company's hardware and music store with offerings from competitors. Those limitations have helped spawn a growing movement within the technology and entertainment industries against the use of DRM.

Ken Hertz, a prominent lawyer who does extensive work in the digital-music business, said Mr. Jobs's letter could be viewed as "a cynical attempt" to place the blame for incompatibility of hardware and services on the music industry, rather than on Apple itself. Some executives have suggested that the Cupertino, Calif. , company has used encryption technology to deliberately lock consumers into its music products by discouraging those with large iTunes music collections from switching to new gadgets that won't play their songs.

"Apple has been more of a beneficiary of DRM than a victim," Mr. Hertz added.

Mr. Jobs discounted such criticism, estimating that 97% of the music on most iPods is from sources other than the iTunes Store, such as personal CD collections. "It's 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," he wrote in his essay.

One of the more vocal opponents of the technology, Terry McBride, chief executive of the management company and independent record label Nettwerk Music Group, said the support of Mr. Jobs will significantly increase the potency of calls to abandon it.

"If anyone can make this happen, Steve can," said Mr. McBride, whose clients include the music group Barenaked Ladies and singers Avril Lavigne and Sarah McLachlan.

Music companies said it is too soon to say how and whether they would respond to Mr. Jobs's essay, but a few acknowledge some of the consumer issues the Apple CEO described. "The lack of operability between a proliferating range of digital platforms and devices is more and more becoming a real issue for music consumers," said Jeanne Meyer, an EMI spokeswoman.

The digital revolution has caused big problems for music labels. Because music on CDs is recorded in digital form, without anticopying technology, Web sites that enable people to share copyrighted songs illegally have cut into profits.

Mr. Jobs helped change the situation, brokering deals with major record labels to allow their songs to be sold on iTunes for 99 cents each. As part of those negotiations, he says, the labels insisted that Apple use software that prevented their songs from being played on unauthorized devices.

Apple developed software known as FairPlay, which works with iTunes and the iPod and enforces certain restrictions, such as allowing consumers only to play protected recordings on up to five computers.

Other companies such as Microsoft Corp. developed their own solutions to the antipiracy requirement. So while CDs represent a standard format -- playable on hardware made by a wide array of companies and sold by countless retailers -- there is no single DRM standard. Copy-protection systems have been developed by many companies and, in some cases, are tightly integrated with specific devices and online services -- leading to incompatibility problems.

The music industry has begun to experiment with the online sale of unprotected music using the popular MP3 format that works with virtually all digital music players, including Apple's iPod. Yahoo Inc., for instance, has sold MP3 songs by Norah Jones, Jessica Simpson and other artists. Another music-retail site, eMusic.com, offers more than two million songs for sale in the MP3 format from independent music labels, which means they can be played on iPods and other music players.

Most popular music from major recording companies, though, hasn't been available without anticopying software. David Goldberg, general manager of music for Yahoo, said the company is making progress in discussions with major music companies about offering songs without DRM and, by Christmas, expects to have significant portions of Yahoo's catalog of two million songs available in the MP3 format.

Mr. Goldberg said he was pleased to hear Mr. Jobs propose that music companies abandon the antipiracy protection. "We've been vocal about that, and we're glad to hear it from him," he said.

Ms. Meyer of EMI added that the response from fans to EMI's limited MP3 sales has been "very enthusiastic."

Mr. Jobs proposes three paths the digital-music business might follow, including its current course of using multiple incompatible anticopying systems. A second option, he said, would be for Apple to license its antipiracy system so other companies can make their hardware and online services work with Apple's music products.

Mr. Jobs said that scenario -- which competitors and music-industry executives have proposed before, and Apple has resisted -- is problematic because sharing its encryption software with others could compromise the security of the system and slow Apple's ability to repair breaches of the software.

Mr. Jobs made it clear in the essay that he favors a third scenario, abolishing the use of DRM, in large part because he says it doesn't prevent piracy.

Besides worries about European regulators and record labels, Mr. Jobs's letter could reflect a desire to counter more-credible competition from Microsoft, said Talal Shamoon, chief executive of Intertrust Technologies Corp., a DRM software maker that is jointly owned by Sony, Philips Electronics NV and Stephens Bank. Microsoft has long offered its own antipiracy software to other companies, and now is emulating Apple's formula with a proprietary format tied to its new Zune player -- which could become stronger as Microsoft exploits connections to its new Vista operating system and Xbox 360 game console, Mr. Shamoon said.

This isn't the first time Mr. Jobs has launched a public broadside against the music industry, in an apparent attempt to sway public opinion. In 2005, amid calls from record labels for iTunes to sell music for a wider range of prices than 99 cents per track, he blasted the labels as "greedy."

Mr. Jobs's suggestion yesterday was applauded by rival Rob Glaser, chairman and CEO of RealNetworks Inc., owner of the Rhapsody music service. He recently called on major labels to drop DRM for digital-music purchases. "Doing so would be the right thing for consumers and would also be good for everyone in the industry," Mr. Glaser said. "It's great to see other industry leaders support this message."

Write to Nick Wingfield at nick.wingfield@wsj.com⁶ and Ethan Smith at ethan.smith@wsj.com⁷