Friday, April 06, 2007

Apple and DRM

Lot's going on with Apple and DRM. The EU is threatening antitrust action against iTunes, and Apple and EMI announced a new deal on DRM-free music.

Let's think about the EMI deal. EMI, with Apple's partnership, is going to make its library (ex-Beatles!) available on iTunes without DRM, and in close-to-CD audio quality.

The catch? Instead of the usual $.99 per song, EMI's songs will go for $1.29.

What accounts for the higher price? We have a few choices, not mutually exclusive:

1. Songs unencumbered by DRM are worth more, so the price is higher.

2. Songs of higher audio quality are worth more, so the price is higher.

3. Songs without DRM are going to spread more, reducing purchases by other users of the same song, so they have a higher marginal cost and therefore should sell for more.

4. As I pointed out in this post, Apple should be concerned that if iTunes songs are priced below their "stand-alone" profit-maximizing price, then entry by competitors into the portable musice device market is aided. From the perspective of pricing iTunes songs and iPods, Apple should be pricing songs lower than their stand-alone price, but above marginal cost. To eliminate the aid to entry, Apple has incentive to introduce DRM, preventing iTunes songs from playing on other devices.

If Apple drops DRM for some songs, then to maintain a deterrent to entry, it should increase the price of songs.

5. Last argument, it may be that EMI is simply charging a higher royalty to Apple for its songs (why?) and Apple is simply charging the relevantly higher price.

My choice of answers? A combination of all of these. Look at it from EMI and Apple's perspectives. Everything points to a higher price for the DRM-free songs (and by the way, the DRM-encumbered songs are still available at a lower price). "Let's try it and see what happens."

Based on my own recent experience in hitting the 5-machine limit, I would probably opt for the higher priced version. If there were no choice available, I would likely buy almost the same number of songs at $1.29 instead of $.99, when the higher price was for a higher quality and DRm-free version.

No comments: