[3 April 2007]
San Jose Mercury News (MCT)
It’s taken more than 10 years, but the music industry is finally starting to make peace with the MP3.
In a groundbreaking move, EMI Group announced Monday that it will let digital music retailers to sell songs from its catalog in unprotected formats, starting with Apple’s iTunes store. Consumers will be able to copy songs they’ve purchased from those retailers without restrictions and play them on any digital music player - precisely what they’ve been able to do with MP3 files from file-swapping sites or CDs.
EMI and some of the other major labels have experimented with selling unprotected song files in recent years, and eMusic has long sold MP3s from independent label artists. But EMI is the first major label to take this step, although analysts say the others likely will come around soon.
“This is a very, very important step,” said Michael Gartenberg, an analyst with Jupiter Research in New York. “Once the door is opened, none of these companies is going to want to be the company that ... only offers music in protected formats.”
For Apple, offering unrestricted music has the potential to boost sales through iTunes and, more importantly, of its iPod music players if it leads consumers to purchase more digital music. It also helps Apple answer claims by critics, including some European regulators, that it is illegitimately or even illegally locking consumers into its iPod-iTunes platform.
“We think our customers are going to love this,” Jobs said at the press conference.
All the major music labels are facing the same pressures as EMI, analysts note. Sales of CDs have plummeted in recent years. While the digital music market is growing, it hasn’t yet come close to offsetting that decline.
Many in the industry have blamed that on piracy resulting from unprotected songs being traded on the Internet through file-swapping programs such as BitTorrent. Thus the industry’s long-standing opposition to selling unprotected songs online.
But others have long argued that the piracy explanation has been overblown. Instead, they say, what’s holding back sales has a lot to do with how the legitimate digital music market has evolved.
Some consumers have resisted purchasing music with copy restrictions, analysts say. The digital industry is also focused on selling $1 singles, not $12 albums, they note. So while consumers may be making as many music transactions as ever, they are spending a lot less money.
Meanwhile, to date, legally purchased online music from iTunes will only play on Apple’s iPod, the dominant MP3 player. That tie between iPod and iTunes has inhibited sales by other digital music retailers. By allowing all retailers to sell the same unprotected files - which will work on iPods and just about any other MP3 player - the labels could potentially break that link.
And that could allow for all kinds of new business models that could potentially juice sales, some analysts say. Instead of having songs for the iPod that are available only at a fixed price, for instance, some retailers could move toward the variable pricing that the labels have long wanted online, charging more for popular songs and albums and less for less popular ones.
“The recording industry has a problem: They can’t grow their business selling songs at 99 cents,” said Eric Garland, CEO of BigChampagne, a market research company focused on digital media. EMI’s move “is really a first step in process that the major labels hope will lead to a rich and varied marketplace.”
Under the plan announced Monday, EMI will allow digital music retailers to sell songs from its digital catalog of 150,000 to 300,000 songs, depending on the market, without any restrictions. Retailers will charge a premium for the songs, which include tunes by Norah Jones, the Rolling Stones and Coldplay, but their sound quality will be higher than the typical music download today.
Apple plans to begin offering the unrestricted EMI songs in May at a price of $1.29 a song. However, iTunes customers will be able to purchase an entire album full of unrestricted music for the same $9.99 price the company charges for restricted music albums today.
iTunes’ rivals applauded EMI’s decision, saying they planned to pursue similar deals with the label and press the other majors to go the same route.
“This is an important step forward for the online music industry,” said Rob Glazer, CEO of RealNetworks, in a statement.
The move could also potentially open up competition in the market for music players. iPod competitors have long charged that because iTunes songs will only play on iPods, purchasers of those songs had a disincentive to switch players. Regardless of the reason, iPod competitors such as Microsoft, Creative and SanDisk have long trailed behind Apple.
A representative for Microsoft, which offers the Zune player and integrated software, said the company has been working to strike similar deals as Apple did with EMI.
“Consumers have indicated this is important to them,” the representative said.
But even if the music industry hopes to open up competition, few analysts expect Apple to be dethroned anytime soon. The fact that the iTunes music store and the iPod are so closely linked is only a small factor in Apple’s dominance of the digital music business, analysts say.
“Ultimately, Apple’s winning because they’ve got a superior elegance of design and an easy-to-use platform,” said Mark Kirstein, vice president of multimedia at iSuppli, a research firm.