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

Posted by Christian Zibreg

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.