Friday, February 09, 2007

Steve Jobs on DRM

Steve Jobs posted this week on the Apple site a letter in which he argues for the abolition of digital rights management (DRM) software for online music. If DRM were abolished, then any songs purchased from iTunes could be played on any device, and vice versa -- music purchased on any other sites could be played on iPods.

Not too long ago, I wrote a post on why it could be in Apple's interests to prevent iTunes songs from playing on other devices. My basic argument had to do with assumed pricing of songs on iTunes. I argued that Apple was pricing songs above marginal cost, but below the price they would set if they were not also selling iPods. Essentially, Apple was, I argued, trying to prevent new entrants into the portable music player market from getting the benefits of relatively cheap songs from iTunes. New entrants obviously would find entry into the device market easier with a full iTunes library at low prices ($.99).

So what might have changed, in order for Jobs to call for no restrictions on songs purchased on-line?

Three possibilities. One, if Jobs' description of the contracts with the music publishers is correct, then they could shut down the iTunes site within weeks of a determination that Apple's DRM has been hacked. That is a big albatross to have circling over one's head all the time. It is not clear that Apple will be able to stay ahead of the hackers. Jobs may have had to agree to this contract clause when nobody knew whether iTunes would take off, but I suspect he has a bit more negotiating clout at this point.

Two, with more and more online music sellers, we are likely to approach marginal cost pricing of songs. With marginal cost pricing, and more music available, the ability to deter entry into the device market by keeping iTunes songs only for the iPod disappears.

Three, I don't think the incentive to deter entry into the device market is nearly as strong as it was when the iPod was new. Apple has a huge lead, both technologically and in the marketplace, and it is moving on to a whole new competitive arena with the iPhone. The advantages to Apple of having (cheap) songs from other sellers able to be played on its iPods and iPhones outweigh the advantages to Apple of having its songs not be playable on other devices.

I predict that Jobs' recommendation will be accepted.


Jon Shea said...

Dean Hansen,

I'm a big fan of your writing. Thanks a lot.

There are two aspects of Jobs' announcement which I think you've missed. The first is that only days before the announcement Apple (Computers) Inc negotiated a settlement with Apple Corps Ltd (the Beatles' record label) over the name Apple. The settlement gave the name in its entirety to Apple (Computers) Inc, which then licensed it back to Apple (Beatles) Corp for many purposes. Before the agreement Apple Inc was explicitly prohibited from owning and selling music. With this restriction now lifted, Job's DRM announcement could be part of a whole new music strategy. It isn't hard to imagine, for example, Apple agreeing to distribute music for small-time, unrepresented bands.

Personally, I feel the the main trust of Jobs' announcement is a long term strategy against Microsoft. Microsoft's new operating system, Vista, was designed with DRM as a huge priority. A whole new generation of hardware and software will have to be built to deal with Vista's DRM model. DRM will be a centerpiece in Microsoft's business strategy in the near future. In this area, Jobs seems to be positioning himself in diametric opposition to Steve Ballmer.

Thanks again for your extremely insightful posts.

-Jon Shea (Thayer M.S. Student)

Robert G. Hansen said...

Jon Shea makes two interesting points. One is that perhaps Apple is preparing for a move into music publishing. Given Apple's proclivity for controlling the whole chain of computing, it would not be surprising to see an attempt at doing the same for music.

The second point is that Vista has been designed with DRM at its core. That may be true, and it would be great schadenfreude to do away with DRM just after Microsoft invests heavily in it. But I don't see any other benefits to Apple other than the irony, from this front.

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