Will the Apple-EMI Deal End DRM?

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He thinks the other majors will have to follow EMI's lead: "If you're a major that doesn't have DRM-free music, you look pretty challenged. This will put pressure on the other majors," he asserts. Pakman has been talking to major labels for years trying to convince them to distribute their music as unprotected MP3s to no avail. Suddenly, he says, the pace of talks on the subject has quickened. "Hopefully many other [online] retailers, including ourselves, will get licensed over time."

Rob Glaser, CEO of another Apple rival, RealNetworks (RNWK), which operates the Rhapsody online music subscription service, hopes to hear EMI knocking on his door soon. "This moves us closer than ever to the day when consumers will be able to buy their favorite music via Rhapsody and enjoy it on their iPod or any other music-playing device," he said in a statement. "We look forward to working with EMI and the rest of the music industry to bring DRM-free, interoperable music to consumers in the months ahead."

Testing the Waters

However, Warner Music Group CEO Edgar Bronfman Jr., who has over the years criticized Apple's firm stance on pricing, is said to be firmly against dropping DRM anytime soon. One major-label executive who asked not to be named told BusinessWeek.com that he believes Apple's motivation has little to do with compatibility and is more about selling iPods and fighting off the complaints by European regulators.

"If Jobs really believed in interoperability, he would have licensed FairPlay from the start," says the executive. "So what does he do to shake off regulators in Europe? He goes after the weakest, most desperate music company to help him promote DRM-free."

In the meantime, Sony/BMG and Universal Music Group are understood to be testing the sale of unprotected MP3s. One music industry source familiar with the testing says that Sony and Universal are discouraged by the example set by Pakman's eMusic, which hasn't managed to turn a profit. They also worry that selling unprotected tracks might cannibalize sales to consumers using mobile phones, a fast-growing segment of digital music sales. Additionally they're concerned that selling unprotected tracks will only add to the perpetual problem of music piracy.

The World After DRM

Not everyone involved is so worried. Bob Kohn, CEO of RoyaltyShare, a San Diego concern that processes payments to artists and other rights holders, says today's Apple-EMI pact will "double or triple the size of the digital download business…. I think EMI realized they could sell a lot of their back catalog by doing this and I think they're right."

Some of the companies that might be helped in a DRM-less world include would-be iTunes rivals such as Rhapsody, Napster (NAPS), and Yahoo! (YHOO), all of which could in theory be granted the rights to sell iPod-compatible music. And iTunes could easily lose much of its market share.

That's likely of little concern to Apple. The company draws only a thin profit over and above its operational costs to run the online store, while the iPod generally attracts a 50% gross margin. Having sold some 90 million iPods over five years and some 2 billion songs since 2003, the average number of iTunes songs sold per iPod stands at about 30. If the iPod and upcoming iPhone were universally compatible with all the digital music sold online, few people would argue that sales of those devices wouldn't be even greater.

Hesseldahl is a writer for BusinessWeek.com in New York. Burrows is a senior writer in BusinessWeek's Silicon Valley bureau. With Tom Lowry.