Labels Hopeful About Unprotected Music Downloads

After the demise of digital rights management, the deal with MySpace Music is one of several the major record labels are depending on to put them back in the black

by Catherine Holahan

Warner Music Group's (WMG) Michael Nash spent years trying to save digital-rights-management technology on downloads. Late last year, he helped kill it. "The definition of insanity is when you keep doing the same thing over and over again hoping to get a different result," says Nash, who heads WMG's digital strategy. "We needed to shift our tactics."

Nash's move may just save the major labels. Web executives say the January announcement that all four majors would sell DRM-free downloads through Amazon (AMZN) was a long-awaited sign that the industry is finally ready to embrace new digital businesses, rather than trying to squash them (BusinessWeek.com, 9/12/08). Since the announcement, the labels have struck several deals—including a joint venture with MySpace Music (NWS)—that promise to boost the music download market and provide new online revenue sources. "The fact that the labels are willing to sell unprotected MP3s, when 15 months ago they were doing everything not to do it, was a big move," says Hadi Partovi, president of iLike, the leading music service on Facebook. "They took a big risk."

It was a risk that Nash says was a long time coming. Just before last Christmas, he found himself heading, again, to a 30th-floor conference room in WMG's Rockefeller Center headquarters to discuss the fate of DRM on downloaded music. WMG had already held several such meetings. But this time, Nash knew the label had to take action. The year 2007 had been one of the worst yet for the recording industry and the company. CD revenues for the industry were declining faster than digital revenues were increasing. Warner, despite gaining share against rival recording labels, had still lost $27 million. "We had to make some dramatic moves to change the dynamic for consumers," says Nash.

How DRM Was Ditched

Nash's opinion carries weight at WMG. An industry veteran with rock-star hair and geek-chic glasses, Nash is the labels' bridge between the tech and music worlds. Perhaps more important, Nash is known as someone willing to let facts change his opinion. And the fact was: DRM wasn't working. The added distribution control it gave the labels had come at the expense of frustrating their customers and granting Wal-Mart (WMT)-like power to Apple (AAPL), owner of the only store that worked seamlessly with the iPod. Moreover, continued patience and the pressuring of technology partners had failed to spur a DRM solution capable of working across devices.

Even under Nash's sway, the meeting of more than a dozen executives went on for two hours. The majority had grown tired of DRM, but a few still believed passionately that DRM on downloads was helping the industry control piracy. In the end, WMG CEO Edgar Bronfman agreed with Nash and others. On Dec. 31, Bronfman announced that Warner would join EMI Group and Universal Music Group in selling DRM-free downloads through Amazon. Days later, Sony BMG, the last major label holdout, followed suit (BusinessWeek.com, 1/4/08).

For MySpace CEO Chris DeWolfe, the labels' shedding of DRM was a sign that they were ready for a deep partnership. DeWolfe had long planned for MySpace to enter the online music world aggressively. But, until the spring of 2007, when EMI and Universal announced they would sell music on Amazon's unrestricted MP3 download service, it had seemed the labels would be unwilling to support a new venture. Says DeWolfe: "I think that was definitely a signal."

Billions on the Horizon?

DeWolfe decided to forge ahead with his plans. He called music legend Jimmy Iovine, chairman of Interscope-Geffen-A&M Records, to seek advice. "We want to own music," DeWolfe recalled saying. "When people think about music, we want them to think about MySpace." Iovine suggested he get on a plane to talk to Universal CEO Doug Morris. DeWolfe booked the flight to New York the next day.

About six months and more than 75 meetings later, MySpace announced a joint music venture with Universal, Sony BMG, and WMG (BusinessWeek, 4/3/08), the three largest labels. The venture promises to bring in additional billions for the music industry through selling everything from online advertising on artists' pages, to digital downloads, to merchandise and tickets.

For Nash, MySpace Music's rise is proof that abandoning DRM was the right strategy to get to the future. "I don't think we would be able to use this construct of ad-sponsored music discovery and the integration of e-commerce…if we didn't have [unrestricted] MP3s," he says. "It was an important step for us."

Holahan is a writer for BusinessWeek.com in New York.