Under pressure to loosen restrictions on copyright protection technology, Apple's CEO turns the tables and puts the onus on the music biz
Leave it to Steve Jobs to go from controversy to PR coup in a matter of words—1,800 of them, to be exact. That's how many it took for the Apple (AAPL) chief executive to issue a dramatic about-face that could recast Apple's role in the long-standing debate over copyright protection software. His company is under increasing pressure from governments in Europe and consumers around the world to loosen restrictions on music downloaded from the iTunes music store and what songs can be played on the iPod.
In a carefully worded statement, Jobs took the onus for lifting those restrictions off his company and put it squarely on the music industry. At issue is the so-called FairPlay software that prevents iTunes songs from being played on non-iPod music players and keeps music purchased at other services from being played on the iPod. Apple embedded FairPlay into iPods and iTunes at the behest of the music labels, and now Jobs is calling on those companies to stop requiring digital music distributors like iTunes to use copyright protection technology.
Change of Heart
In the final paragraph of the essay, "Thoughts On Music," posted to Apple's Web site on Feb. 6, Jobs said that convincing music labels, like Viviendi-Universal (V), Britain's EMI and Sony-BMG (SNE) to allow their music to be sold online without digital rights management (DRM) technology would "create a truly interoperable music marketplace"—one that Apple would embrace "wholeheartedly."
The request couldn't be better timed, say industry insiders. While some critics in the music industry have carped about Apple's strategy for years, the industry as a whole has been showing an increasing openness to loosening at least some demands. The Recording Industry Association of America, which represents the major labels, wants changes that would let users play downloaded music across a variety of devices (see BusinessWeek.com, 1/5/07, "Music Fans: Dismantle DRM").
But before that effort could gain traction, Jobs has taken the upper hand, says Bob Kohn, who founded and later sold eMusic, the leading seller of non-DRM music, mostly from indie bands. Regardless of what direction the industry takes now, Apple can now claim the moral high ground. "He may be counting (on the idea) that the labels will still not give up on DRM," says Kohn, who's now CEO of RoyaltyShare, which processes royalties on digital tracks. That lets him "play the hero to consumers." Or if the labels do drop DRM, then Apple can claim credit, rather than be blamed, says Kohn. "It's a PR ploy, and he'll come out ahead either way."
Fear of Leaks
Arguing for the removal of DRM controls on songs sold online, which governs how many copies are made of a song and on what devices the song can be played, constitutes a change of heart—or at least a change in his public statements—for Jobs nearly four years after Apple first launched the iTunes Music Store in mid-2003. The backbone of the iTunes store is Apple's FairPlay, which allows customers who buy music on iTunes to copy songs to as many as five computers and to all the iPods that they happen to own.
Companies have lobbied Apple to license its FairPlay technology, saying that were it to do so, FairPlay might evolve into a de facto industry standard that all music and hardware vendors would adapt. Jobs said in the essay that licensing FairPlay might seem like a good idea at first and that Apple might benefit by charging a licensing fee to each company who chose to use it.
But licensing FairPlay isn't the answer, Jobs argues in the statement. Licensing would bring with it a number of problems. "The most serious problem is that licensing a DRM involves disclosing some of its secrets to many people in many companies, and history tells us that inevitably these secrets will leak," Jobs wrote. "The Internet has made such leaks far more damaging, since a single leak can be spread worldwide in less than a minute. Such leaks can rapidly result in software programs available as free downloads on the Internet, which will disable the DRM protection so that formerly protected songs can be played on unauthorized players."
Besides, Jobs writes, the vast majority of music on iPods comes from CDs, which typically allow consumers to copy music tracks to a computer for use on an iPod or other digital music player. Once on a computer, those tracks are not protected by any DRM technology. He notes that through the end of 2006, customers "purchased a total of 90 million iPods and 2 billion songs from the iTunes store." By his math, only 22 of 1,000 songs, or less than 3% of the music on the average iPod, is purchased from the iTunes store and protected with DRM technology. The remaining 97% of the music is unprotected and playable on any player that can play the open formats.
In essence, Jobs is making the same argument that many Apple skeptics have made—that while the iPod is a grand slam product, it's hardly caused a revolution in the way consumers buy music. Most of it is either ripped from music CDs or pulled off piracy sites. But in a PR flourish that few could pull off, by dissing iTunes, Jobs is positioning Apple in harmony with the predominant view in digital music circles: that ditching DRM would improve sales for everyone.
Closely held eMusic, which already sells music in an unprotected fashion, advertises itself as the only other music download service whose 2 million tracks—which come mostly from independent recording artists—are compatible with Apple's iPod. EMusic President David Pakman seemed to agree with Jobs, saying in a statement that "consumers prefer a world where the media they purchase is playable on any device, regardless of its manufacturer, and is not burdened by arbitrary usage restrictions. DRM only serves to restrict consumer choice, prevents a larger digital music market from emerging, and often makes consumers unwitting accomplices to the ambitions of technology companies," he said.
Hardware manufacturers have also chafed under the restrictions imposed by DRM. Microsoft's (MSFT) "Plays for Sure" DRM, on which it collaborated with manufacturers of several music players, including Samsung, SanDisk (SNDK), and Creative (CREAF), failed to gain much market traction. Microsoft then switched tactics when it launched its own player, the Zune, late last year, which closely replicates Apple's "walled garden" approach with its own online music store, tracks from which are compatible only with that player.
Record labels were nowhere near as enthusiastic as others were to Jobs' trial balloon. One executive who asked not to be to be named suggests that Jobs' essay surfaced just as regulators in Europe have started to turn up the heat on Apple. Last month regulators in Norway said they considered Apple's iTunes store to be illegal, because songs purchased from iTunes can't be played on other devices. The company has until Oct. 1 to respond to open its technology up to other companies or face charges in court (see BusinessWeek.com, 1/31/07, "Europe vs. Apple: Facing the Music").
"You have to look at the situation that would drive Apple to make this statement now," this executive says. "The European situation is something that could be driving this." Apple insiders privately dismissed that claim, saying that the time seemed right to "get Apple's thoughts out in greater detail," on the subject.
While Jobs didn't address the concerns of regulators directly, he did respond to the wider criticism that iTunes tracks lock consumers into a closed system of iTunes-iPod exclusivity. Saying that most music on the average iPod comes from CDs and not from online download stores, he wrote that "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. And since 97% of the music on the average iPod was not purchased from the iTunes store, iPod users are clearly not locked into the iTunes store to acquire their music."
Mike Bebel, CEO of Ruckus, an ad-supported music subscription service, concurs with the view that Jobs' essay is an attempt to shift the heat from Apple to the labels. "This is a way for Steve Jobs to take the heat off the fact that he won't open up his proprietary DRM," he says. "The labels have every right to protect their content, and I don't see it as a vow of good partnership to turn the tables on the labels and tell them they should just get rid of all DRM…. He is trying to spin the controversy. More power to him as a public relations guru, but I don't see it as a viable solution to the problem. DRM provides a comfort zone for the rights holders to feel they are not simply opening up the spigot and letting all their content be distributed at a very low cost."
Forrester Research (FORR) analyst James McQuivey says that record labels are unlikely to go along with Jobs' suggestion for now. "I don't expect the record labels to move very quickly in this direction," he says. "It would be very hard for the music industry to walk away from all the lawsuits they have filed against individual consumers, some against 15-year-olds, and say digital rights management is not a big deal."
"Apple is a great partner," says one record company executive. "But to some degree it's ironic that the guy who has the most successful example of DRM at every step of the process, the one where people bought boatloads of music last Christmas, is suddenly changing his tune."