DRM music goldrush is a race for losers says mp3.com founder

November 22, 2003

The founder of MP3.com gave its opinion that closed music downloads is not likely going to fully take off from where CDs left off. Currently businesses such as Apple which run legal download services are barely making a profit out of it and rely on their other means to make any sort of profit. For example, Apple uses their music store as an advertisement to boost their iPod sales. Users are not just paying for music downloads, but also for the DRM restrictions and the other 'strings' attached. Music from CDs or any free P2P networks such as Kazaa don't have these restrictions.

Even though Apple have well over half the market, it would appear that they could negotiate better royalty rates with labels, but as the Music industry is composed of thousands of publishers and five major record labels, it still makes it difficult to get them all to agree. Apple even has trouble getting certain content from the five labels such as The Beatles. Finally, attracting consumers to legal music services is another issue. Many think of whether to purchase tracks with conditions attached or download MP3's that are free of playback restrictions. GristyMcFisty and Quakester2000 both submitted the following article from The Register via our news submit :

Apple is leading a race of lemmings into the zero-profit business of closed music downloads, says the founder of MP3.com, Michael Robertson.

"It seems kind of crazy to me, the economics don't make sense," Robertson told us Thursday. "Why are all these guys like Microsoft and Wal-Mart rushing into a business where the industry leader says 'we cannot make money with the contracts that we have'?"

"This is a race where the winner gets shot in the head."

And William Tell-style, Apple volunteered to be the first into the firing range. Canny Apple has had to swallow the pigopolists royalty fees, and DRM restrictions, but it thinks it has a business because its closed business model sees downstream profits from iPods sales.

Robertson started MP3.com in 1998 and after a barrage of lawsuits, sold it to Vivendi Universal in 2001. Last week, after a night on the tiles, Vivendi sold the mp3.com domain name to CNET, leaving the million-song archive to the vultures. (Robertson is striving to find a host for this, and we shall have more news of this later today).

The computer industry traditionally opposed the copyright cartel, but Apple was the first snitch to cut a deal with the pigopolists. Was this wise, we wondered?

"If one company got a huge market share - say 50 per cent or higher - they could negotiate better royalty rates," notes Robertson. "But they forget something. The music industry is tens of thousands of publishers and just five major record labels. Getting all of them to agree is a real tough thing to accomplish even if you're market leader."

Without any Beatles songs, and with only one Roxy Music track on its music kiosk, Apple is currently in a position of begging the big five for content, rather than dictating the terms of the deal. It's the rebel without a clue. Can it turn the tables?

Well, there are several factors that ought to halt the wannabee players in the DRM goldrush in their tracks. A compulsory licensing scheme (which is now backed by the libertarian rights group the EFF) is one. But Robertson points to another: the decision by courts to permit KaZaA peer to peer-style sharing.

"It's the wild card," says Robertson. "KaZaA has been ruled legal, so why pay for restricted music?" he asks.

Read the full article here.

With Apple's iTunes success, the music industry should really think about doing something about online pricing or at least giving the online music services a better share of the track price. Any music download service that does not rely on 2nd sales plan such as selling hardware or offering purchasable 'plus' backs for their software are likely to go bust from running a profit-less online music store.

Even though the 99 cent typical online price per track seems cheap enough, the consumer gets less value than they would from purchasing a CD. First of all, the audio is encoded in a lossy format. For example, Apple's AAC suffers from slight voice distortion and WMA gives a metallic sound on certain pieces. Next, the consumer's audio is locked to their PC or portable player, although if they burn the tracks to CD, this removes the restriction but the sound quality does not improve.

Discuss and read more about legal online services and file sharing on our Music Downloads, P2P & Legal Issues Forum

Source: The Register