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Predictions for 2008, #4: Apple & iTunes Stumbles

Continuing my series of predictions for 2008 (also see number one, and number two, about boingboing and yahoo respectively, and number three about semantic apps): to balance out Yahoo’s prophesized resurgence, someone must fall - and I think Apple’s due.

Actually, this is two predictions in one: firstly, DRM will continue to wither, and the sale of naked MP3’s will continue to take off. From this follows my second prediction - that iTMS (iTunes Music Store) will stumble in sales growth numbers as the DRM-less revolution Apple kicked off allows competitors to sell into the iPod ecosystem for the first time.

The end of DRM’d music is a great boon for consumers, who now have legal options for high-quality, downloadable music that plays anywhere. Indeed, the downloadable music sector as a whole will continue grow (and CD’s will continue to gather dust on store shelves), but I’ll bet that Apple’s iTMS growth will underperform the industry - i.e.: new competitors like Amazon will get get a non-zero slice of marketshare for the first time.

That’s how I know Apple really loves consumers: they’re willing to break down their own ludicrously profitable walls for the betterment of the overall consumer experience. (see: Steve’s open letter)

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Unintended Consequences: The commoditization of music

One thing that I can’t help but think as I see the sudden rush to sell unprotected MP3’s is that music will become commoditized: that is to say, competition between stores can only be on price at any given quality level (given the digitally identical product offered at all).

When there’s no opportunity to differentiate a product offering, differentiation has to come from elsewhere - price being the first, easiest, and most natural source thereof.

There are some other factors - like the iTunes/iPod easy synchronization value-add - but fundamentally, a 256k/bit encoded song is a 256k/bit encoded song, wherever its downloaded from.

So - is the industry doomed to go to the retailer with the best cost structure, or the retailer willing to tolerate the lowest margins? Maybe. Expect to see some frantic “relationship building” taking place as drm-free retailers attempt to secure exclusive access to higher bitrate recordings, or specific artists or albums.

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Amazon to Go DRM Free… the Myth of the Information Wants to be Free Wonderland

By cosmic coincidence, while I was writing about terminally sketchy MPFree.com this AM, Amazon went and announced the forthcoming opening of their own DRM-free music store.

1. Amazon claims 12,000 labels have signed up to sell MP3’s, including EMI - interesting that APPL didn’t lock EMI to an exclusive.
2. Bezos summed up the value proposition: Amazon customers will know that their music will play anywhere without any difficulty.
3. The EMI CEO suggests that DRM-free will still be a “premium” offering - expecting slight price bump and higher quality, as per iTunes.

Analysis

Amazon lends credibility to the charge begun by Steve Jobs. The proof will be in the profits, however: regardless of how many names are behind the DRM-free agenda, the labels will need to see increased sales volume, increased margins, and increased profit to make it stick; anything less than the volume/margin/profit trinity will send them scurrying away again to try and come up with another way to make it happen.

Whether there is another way is debateable, of course, but that doesn’t matter to the industry execs - its the ability to put out shareholder-pleasing press releases about new bound-to-be-profitable technologies & business models that keep them motivated.

One unfortunate thing is that “DRM-free” has been elevated to a near-mythical ideal where gleeful customers shovel cash voluntarily at labels in a magical “information wants to be free but I respect artists” wonderland - will such a place exist? Only time will tell. The pessimist in me says no; how many people out there downloaded MP3’s from P2P services and then went to buy the CD out of respect to the artist? Zero. Respect for artists is balanced out against the ridiculuous wealth flaunted by upper echelon musicians - would the average consumer feel too bad keeping a few cents out of U2 or Madonna’s pockets? No. Do many people have artistic “respect” for Britney Spears? The “struggling-to-break-through” artists will be the most marginalized financially, but will enjoy the promotional boost of unfettered distribution….

…of course, struggling artists have other, better means of self promotion these days than signing with labels anyway.

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Apple + EMI: DRM-free Music Implications

Is this the beginning of a sea change, or another stab in the dark for the music industry? Whatever the case, its risky as hell: if EMI doesn’t show big gains with this move, the notion of DRM-free music will be poisoned for the rest of the labels. TechCrunch seems bullish on the concept, and with good reason:

1. EMI/Apple have put together a good “bundle of values” - no DRM and superior quality for what is in absolute terms a negligible increase in price.
2. EMI’s research indicates that even if the nuances of DRM-free music escape the average consumer, the ability to move music freely between multiple devices will not.

Ok - sounds good! There’s two questions outstanding in my mind, however.

1. Confusion: Some songs will have DRM, some won’t. Some will be moveable between devices, some won’t. Quality levels will be different. For many of us, were used to these issues already as we have a mix of naked MP3’s and DRM’d files in our iTunes library, but for those less technical, your purchasing experience and library management just got an added layer of confusion. How will consumers react to a different mix of prices, quality, and portability? Say what you will about iTunes and DRM, but the previous buying experience at least had consistency between song purchases.
2. Value Recognition: Will the average, non-technical consumer recognize the value proposition of DRM-free music? As far as they know, their songs cost 99 cents before and played fine in their iPod. Now some music is more expensive - does the marginal value exceed the marginal cost for the average, non-technical user?

Fine - neither of these are killers. But with this change, EMI and Apple need to set a powerful precedent to violently push the market in a new direction. If EMI sales stagnate because consumers don’t understand or recognize the value of DRM-free music, the whole concept will be permanently poisoned.

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