DRM Free Zone

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This is Celia Hirschman with On the Beat for KCRW.

A new day is coming for the digital record business and I can sum it up in two words. Real competition.

In the last few weeks, Warner Music and Universal have both abandoned the traditional digital rights management code (or DRM) on all their releases. EMI had abandoned the code early last year. Sony/BMG, the last holdout in the DRM death-watch, has announced they too will be offering at least some catalog and perhaps all of it without DRM by the end of this month.

In an era of declining sales, and with peer-to-peer free sites still relevant, why would the record labels abandon DRM on their product? One answer is that consumers hated DRM and wanted MP3 portability. But more realistically, major labels were more concerned about one retailer dominating their price and distribution negotiations. ITunes has been the market leader for the last five years in that department, and their domination of 80% of the market was unbeatable. That is, until Amazon.com. When Amazon.com launched their music-downloading site late last year, the major labels allowed Amazon to launch with "DRM free" tracks. Given the retailer's strong market penetration, when consumers sampled the delights of a "DRM free" download, many would never look back. "DRM free" was the way to go.

So where does all this leave iTunes? Apple encodes the iPod with its own proprietary DRM code called Fairplay. Steve Jobs has always maintained that he is contractually obligated to sell DRM music files, per his contracts with the major record labels. Now that the majors have abandoned the code for Amazon, one would imagine that they would want to do the same with their biggest online retailer, iTunes.

But critics of Apple claim that the Fairplay code is really just an Apple business strategy, to force consumers to buy iTunes music tracks on Apple iPods. The practice is known as tying, where the sale of one product is dependent on the sale of another. Through tying, Apple has made iTunes the market champion for online music sales.

Now, it appears iTunes has been backed into a corner. It will have to eliminate DRM code, just to stay competitive with the marketplace. And don’t be surprised if a price war ensues. Currently, Amazon charges .89¢ per track to the iTunes price of .99¢.

Why would the record labels put their biggest retailer in this kind of jeopardy? Major labels do not like to be dictated to about how much music can be sold. But Apple has been very clear on this point, refusing to allow artists to only bundle music for sale in album form. Whether it's the Beatles, Radiohead or anyone else.

In addition, with one retailer dominating the playing field, labels have had little leverage to negotiate on behalf of their artists. Instead, they were at the whim of iTunes' interests and schedule. Major record labels do not want to depend on one service dictating the terms of their artists’ marketing and sales.

So really, it was competition that fueled the end of DRM. And though the majors supported iTunes in its global domination, now that it rules the roost, I suspect they'd like to see some good competitive throw-down, for the benefit of their bottom line.

This is Celia Hirschman with On the Beat for KCRW.