Why the DRM-free iTunes Store is a rip-off

  • Opinion - Chicago (IL) - When Phil Schiller, Apple's chief of worldwide marketing, took the stage yesterday morning to deliver the Macworld 2009 keynote, DRM-free iTunes was one of  three key topics on the keynote agenda. The announcement was met with cheers and viewed as a big win for Apple. But was it Apple that ultimately won?

    Many deemed it as a sign that labels have given up nurturing rivals to iTunes just to undermine Apple's choke hold grip of the music market. In reality, it was Apple who finally had to bend to meet the labels' needs: a variable pricing model, thereby killing the uniform 99 cents a song deal that turned the iTunes Store into such a huge success.

    At the end of the day, both sides will profit from the new arrangement, unlike the consumers who will end up paying more for hit songs and get ripped-off for upgrading already purchased music into a DRM-free format.

    Consumer rights advocates have long been waiting for the DRM-free iTunes Store (iTS), and it isn't hard to see why they specifically picked Apple and its music store. Since opening for business in 2003, iTS has moved 6 billion songs. It now features 10 million songs from all four labels, along with thousands of independent ones.

    Last year, iTS zoomed past Wal-Mart to become the #1 music retailer in the U.S. - even though it only sells digital downloads. With 75 million credit card accounts enabled for one-click purchases on Macs, PCs, iPhones and iPod touches, iTS is now a ubiquitous place to get music online. Amazon, the nearest competitor to iTS, is a distant second.

    But consumer groups have been repeatedly pressing Apple for the fact that iTS music cannot be played on any portable music player besides Apple's, blaming Apple's stubborn refusal to license its FairPlay DRM technology to device makers.

    Yesterday's announcement of DRM-free iTS makes new purchases playable on any number of desktop computers and other devices that understand AAC audio encoding. It might also render aforementioned complaints obsolete and help Apple in class action monopoly lawsuits and several other legal complaints which have already been filed. But new iTS rules add a new layer of complexity which might ultimately provoke consumer advocate groups to file a new round class action lawsuits, albeit for different reasons.

    Uniform 99 cent song model is a goner

    A variable pricing model will kick into iTS this coming April. It will put the uniform 99 cents a song deal to rest quite possibly forever. Instead, three different price points will apply: 69 cents, 99 cents and $1.29. While 69 cents will make older songs cheaper, $1.29 will be applied against hit new releases to make them 30 percent more expensive than with uniform pricing model.

    We can only guestimate the exact percentage of the revenue coming from new releases in total music sales, but it surely isn't insignificant. Whichever way you choose to look at it, the fact remains: Hit songs = more cash for Apple, and less cash for consumers.

    The most expensive $1.29 price point isn't entirely new. Rival stores like eMusic and Amazon also charge more for its hit or newest songs. But the arrival of variable pricing to the biggest music store in the world is the ultimate test of the model for both labels and consumers. If consumers accept it, variable pricing will prevail and most likely accelerate digital sales. Some think it may do the opposite however, arguing it was the uniform 99 cents pricing that propelled iTS and digital sales because consumers deemed it a fair proposal.

    The theory has legs. Consumers will be forced into paying 30 percent more for hit songs come this April because Apple will no longer offer cheaper DRM version in 128 kbps encoding quality along with more expensive DRM-free version in 256 kbps. There will only be one choice for hit songs: DRM-free version with higher fidelity and a 30 percent steeper price tag.

    A rip-off: Upgrading existing purchases to DRM-free format

    Still, it would be unfair to call it a rip-off. After all, some songs will also cost 30 percent less than before. In addition, hit songs cost more on rival online stores as well and the same logic applies to physical CDs. What isn't fair is when Apple offers you to "upgrade" your existing DRM songs purchased on iTS so far to DRM-free format for "just 30 cents" a song or 30 percent of the price you paid for the whole album, essentially elevating every song you've ever purchased to the higher $1.29 price tag - a boon for Apple.

    Of course, you can always leave your existing purchases in tact, but the fact that DRM-free songs comes with twice the fidelity will lure some into the proposition. Others might just want strip their music of DRM in order to play it, for example, on Zune or some other music player/mobile phones besides Apple's.

    Final  thoughts

    Charging consumers just to strip DRM from already purchased content hardly constitutes a fair deal. More likely this will be the case for consumer advocates and class action lawsuits.

    The fact that iPhone song purchases are now allowed over cellular networks completes the puzzle. You may remember that carriers didn't allow this in the past for bandwidth and competitive reasons - since iTS would clash with carriers' ringtone and song sales on their own network. Could it be that Apple has miraculously made carriers change their mind? Hardly.

    Apple had to give up a little "something something" in return to make up for their lost sales. So, suddenly, a triangulated deal comes into a full view between labels, Apple and carriers. Labels get their variable pricing scheme that earn them more money, carriers get some percentage on every iTS song purchase over their networks and Apple gets its cut either way.

    So was it Apple that ultimately won? Not just Apple, but everybody involved (except the consumer) wins out in this deal. Somewhere in Cupertino there is one hell of an accountant who plotted such a scheme, and whatever Apple is paying this guy, they aren't paying him enough. And if this guy's name is Steve Jobs, then his $1 a year salary fits perfectly and ironically into the scheme.

    The opinions expressed in this commentary are solely those of the author.