Bang the DRM Slowly…

Two weeks ago on NPR’s All Things Considered I had a brief sound bite about DRM (Digital Rights Management) and the music industry. What you didn’t get to hear was the larger point I was trying to pull together – which is that DRM is not bad, nor is it good. It is like any tool, only as good (or bad) as it is implemented.

DRM has gotten a lot of press over the years as there is a quite vocal group who are politically/philosophically, perhaps even morally opposed to any restrictions on the use of content once disseminated. I call them the “Anti-DRMers.” They come in many forms – from scholarly archivists to Swedish anarchists. Cory Doctorow is perhaps one of the most famous anti-DRMers. Many believe that if a store-bought audio CD can be copied and burned onto a blank CD and given to a friend, or any book can be purchased, read, and passed on to a perfect stranger, ebooks should behave the same way. Anti-DRMers see DRM applied to an ebook or a digital music file as holding back violating personal freedom and jeopardizing viral sales growth.

On the surface, the anti-DRM argument looks somewhat reasonable. For example, I agree that viral marketing is enhanced when people can share content. However, when I delve into the details and the history, the overall anti-DRM argument loses effect. On NPR I noted that in the late 80’s the music and electronics industries decided not to use DRM on audio CD’s. Fast forward to the late 90’s where fat pipelines at universities enabled students to rip CD’s and connect to other students via software like Napster, freely trading songs as casually as we send emails today. Clearly the lack of DRM on CD’s nearly destroyed the music industry. It’s pretty hard to argue directly with that example.

While the lack of DRM on CD’s was a disaster, an equally disastrous move would be to suddenly retrofit the audio CD market with DRM. Badly implemented and poorly considered DRM was, and is, very bad business. That said, there were very important lessons learned from the behavior of consumers (university students in particular) that became much more important than DRM. Songs, as opposed to albums (yes, I am old and still call them albums), were valued in a way that hadn’t been seen in 20 years. Students were trading songs and some folks began to notice that there was an opportunity forming.

So what happened to the music industry, which Forrester projects will see half its income coming from digital-downloads? Did lawsuits against Napster and individuals engender a change in consumer behavior? Did universities crumble in the face of media conglomerate threats that they were enabling illegal file sharing by providing students fat pipelines? Did industry-wide standards and cooperation lead to new DRM-driven business models by the music companies? Nope, it was one simple and elegant device and the exclusive service it worked on, the iPod and iTunes. Apple forever changed the music industry.

Apple created the first truly universal, must-have, digital personal entertainment device. Better yet, not only was the iPod a killer device, it only worked with Apple’s proprietary music network, iTunes. When iTunes was released for Windows, the iPod became the only device that mattered and iTunes became the primary place where one could LEGALLY and COST EFFECTIVELY purchase SONGS. The business model of $0.99 per song was a throwback to the 1950’s – 1970’s when music stores were crowded with kids lining up to buy the latest radio hit on a single 45-rpm disk. Apple brought back a consumer favorite (inexpensive choice) that the music industry squashed years ago because it wasn’t cost effective or efficient.

Best of all, the songs purchased could only be played on the computer with iTunes or on an authorized iPod – which was the ticket to success for everyone. People coveted the world’s coolest device, they loved the software platform, and they were happy to buy music the way they wanted, legally. With all this success, a quiet phenomenon occurred – Apple had instituted really smart DRM and nobody cared or noticed. This year at Macworld, Apple announced iTunes Plus – the new “DRM-free” platform for songs. By the end of the year, all 6 million songs on iTunes will be available without DRM. The key from a business vantage point is that Apple has new pricing and file encoding (256 kbps AAC encoding) that go along with this new freedom. The price of DRM-free songs is 30% more than DRMed songs ($1.29 rather than $0.99).

This new option serves four very important purposes:
1. It establishes the concept that DRM done well is a business model, not software.
2. Apple, in an effort to please all customers and music industry partners, has created new price points (quietly announced along with iTunes Plus was a new 3-tiered pricing plan for regular iTunes where singles can be $0.99, $1.29, or $1.49). It also engenders more choice for consumers who can stay with DRM or pay more for DRM-free versions.
3. Apple also created one-click upgrading to DRM-free versions for all current iTunes customers. This gives the music industry (and Apple) a nice big upfront payment for upgrades. The music industry loves to find ways to charge consumers again and again for the same thing!
4. Finally, the new service creates larger files. This size difference not only creates better acoustics, it also makes it difficult to email the files. This may seem silly to most with any technical expertise and a desire to use pirate file-sharing services, but emailing a song is severely limited when you try sending files over 1MB. The 256 AAC encoding creates files from 2-10MB files. Cleverly, Apple has helped the music industry swallow open DRM by improving the file quality and somewhat limiting mass distribution.

The music industry has historically struggled with the digital age – first by not enabling DRM; then for all the same reasons that I cited in my last post (Why Ebooks Must Fail) that threaten the publishing industry – the lack of large upfront cash disbursements from retailers to cover the investment of creating new popular music. Apple, by leveraging the larger file size and offering the perception of freedom (no DRM), may have created a better way forward – premium pricing for greater freedom.

So where does this leave books? Well, what works for one industry doesn’t necessarily carry over to an other. Ebooks are not like music files for two key reasons. First (and perhaps foremost) consumers have shown virtually no interest in book parts – a book is generally best sold as a whole. There is no “song” model that will develop that undermines the way that books are produced. Second, ebooks have a very small file size. Emailing an ebook is a one-click operation that requires no special software, no deal-with-the-devil Pirate Bay membership – emailing an ebook to a friend is as simple as sending a report to a business colleague. Ebooks being simple text files are extremely small and are easily emailed to millions of people. This is the greatest challenge to the DRM-free folks – how do you protect what an author has produced if you have no DRM?

The book industry will need to find smart models and smart partners such as Apple to enable carefree and logical DRM. It’s already afoot – the Kindle has a brilliant new DRM that enables one to switch between reading devices (Kindle and the iPhone). Reading a book on your iPhone and want to switch to your Kindle, simply open the ebook on the Kindle and it will take you precisely where you left off. That is DRM – smart DRM, at work.

In my next piece I will follow up on this and my prior post in exploring models that combine smarter DRM and smarter publishing models that may (may) help book publishers move into the digital age – and survive.

9 Replies to “Bang the DRM Slowly…”

  1. I’ve always been under the impression that the music industry; that
    is, musicians, songwriters, etc., derived the lions share of their
    profits and money from touring? That is selling
    tickets plus tshirts, bumperstickers, and CDs *at their concerts*,
    rather than what sells at [Insert Record Store Name Here]? Not that
    distributed sales don’t count, but touring is where the money is, not
    in records sales.

    In light of that, all this talk about DRM and music sales and CDs are
    all mystification of the business model.

    Ultimately DRM makes the technology harder to use. That’s really
    simple, and really core to the nature of what DRM is. One can’t have
    DRM that doesn’t impinge upon the range of technological
    possibility.

    Because of that there’ll always be an incentive to break DRM. You buy
    your family’s sixth mac and can’t sync your music collection. You buy
    a music player that isn’t made by Apple, you buy DRM’d music from
    someone who isn’t Apple, etc. You choose to use Linux and can’t load
    iTunes. etc. And no DRM that lets you play back your media is
    unbreakable, and most methods of breaking DRM don’t resort to the
    “analog loop.”

    But all this is aside the point that concert attendance, not song
    sales, is what the music industry is about and has always been
    about.

    Evan Reply:

    Tycho:

    I have some personal experience that may perhaps help or shed some light. I am friends with a band that has been around since the late 1980’s, the Smithereens, and have enjoyed a role which they have referred to me a “consigliere” as I occasionally help with business issues in an impartial way as I have nothing to gain… in other words, I can be trusted as my only stake is friendship.

    What I have learned as I have watched their career is that the only real money in music comes from creating and owning original music “publishing.” Everything else we associate with music money making – records, touring, etc., are about building the “publishing” aspect of music. For a band, records pay out twice as they receive direct income for the sales of the album (although usually that is paid in advance and is very hard to earn out) and indirectly through mechanisms such as ASCAP where uses of the music such as on radio, etc, are paid out. The band is paid more for their version of the music as they get “publishing” and “performance” fees, but they also get paid when someone else records or uses their music but not their performance.

    Touring is set up to promote record sales – or promote the band itself which is trying to get a record deal. That said, mature bands such as the Smithereens have a following that can support them with 25 – 50 gigs a year. That doesn’t add up to very much, however, as touring is expensive – bands need transportation, they need hotels, they need to eat and drink and pay roadies or at least hire local sound and lighting tech’s, and they need to give the tax man a third off the top, a manager 10% off the tp, a booking agent another 10%, their accountant 5%, etc, etc etc… so even a high paying corporate gig for a 1 hour show $25,000 – 50,000 will net the band members 40% or $10,000 – $20,000 – and then they have to split that 4 or 5 ways (or more!). While $2500 – $5000 sounds like a lot, those are rare and far in between… so the reality is that after expenses the average take home is more like $1000 and at 25-50 a year, you are hardly feeling as if you are making your money off touring!

  2. As a swede – i had to say something *g*

    I think DRM in its current form is flawed because it doesn’t adapt to the changing environment of the end-user. DRM should be transparent; it should not be an inconvenience. Instead of putting anti-copy measures in place; why not turn DRM into a validation environment – is that a real CD you are extracting that song from? are you person X, trying to use item Y – on devices A, B and C?

    In today’s model; we are living in a connected world and digital signatures should rule the DRM scene. if the device isn’t sure your allowed to use it; make a network request and validate/generate a new digital signature. if someone copies the file; they’ll have to revalidate and hence, fail validation.

    One of the biggest issues is that the audio/video format’s were designed first; then DRM came into play. what needs to be done by these “giants” if they want to provide a fair-play environment is to re-design the audio/video formats so they include DRM. sony tried this; and failed. does this mean doom for anyone else who tries?

    i think the minute someone realizes they can make money of something; it’s just too late – proof of concepts are typically DRM free and they form the foundations of anti-DRM (once free, always free) 😛

    every DRM system will eventually be beaten – so, there is no ultimate solution; just a delay.

    // Aaron Ardiri

  3. I’m old like you, and personally think the recording industry is getting what it deserves. The DIY stuff that people are able to put out on a mass scale from their spare bedroom is amazing for its quality and variety and freshness.

    The only trouble is finding it, but I’m sure I will have less trouble with that without having 99.9% of my choices limited by overpaid small-minded A&R dinks in LA, NY, Memphis, or wherever. I’m actually hoping that Apple will ultimately fail, too, since their success simply means they will employ the same kind of people Atlantic and Virgin and Geffen and Mercury and Motown and the others did…er, do still, on a reduced scale, I guess.

    As for the Kindle, I’m old enough to refuse to buy one. The very many books I want to read before I die are nearly all off of anyone’s backlist, except for a few reprints of 19th-century theologians by specialty houses. (There simply are no good 20th- or 21st-century theologians, especially when compared with the older ones…but I digress.) It is nearly certain they will not make it to electronic format, and even if they do, I can get them cheaper from even older guys, with the benefit of whatever stray notes they may have left in them.

    Further, as long as there is sunshine or candles and matches, I can read an actual book even when the power goes out for a day, or a week, or a month, but all the Kindles and iPhones will eventually lose their charge in such an eventuality. (Couldn’t happen in America, you say? I would have thought so too, until (among other things) the president decided who the CEO of GM would be.)

    And don’t think I didn’t notice the sneer in the general direction of Swedish anarchists, by the way…

  4. What you’re talking about in this post is transparent DRM. That’s pretty much the holy grail for anyone trying to sell content protected by DRM. The ideal is that DRM should be so unobtrusive that consumers don’t notice it. To achieve this goal content publishers need to minimize friction during the initial purchase and media transfer process, and provide consumers with freedom to use their legally purchased digital media in a variety of ways. For Apple that meant allowing consumers to transfer songs to a certain number of devices and the ability to burn songs to CD. For Amazon that means the ability to transfer ebooks to multiple Kindles, and now to the Kindle iPhone app.

    The problem for consumers is that this freedom is illusory. DRM protected songs purchased from iTunes will only play on an Apple brand media player. DRM protected books purchased from Amazon will only play on the Kindle or Kindle iPhone app. Consumers are not only locked into a specific brand of device, they’re also locked into a specific marketplace where content may be purchased.

    The real challenge is not so much creating a transparent DRM scheme (Apple and Amazon have both demonstrated it can be done), but rather creating transparent and *interoperable* DRM in an *open* marketplace. The market leaders aren’t about to provide any assistance.

    Apple could have licensed Microsoft’s DRM for use on the iPod, but there was no reason to. Why willingly make your device compatibility with rival digital music retailers when you’ve already built the industry leading marketplace for digital music?

    Amazon could easily build support for Adobe DRM into the Kindle. They won’t. Again, there’s no reason for them to.

    The real reason iTunes went DRM free is because the recording industry eventually realized that the only hope of overcoming Apple’s dominance in the marketplace for digital music was to eliminate the one thing that locked consumers into iTunes — DRM.

    As publishers consider these issues it’s important to fully understand the many ways that DRM shapes the marketplace for digital content.

  5. I’m afraid I have to disagree with your assertion that the Kindle’s DRM scheme is “smart,” or that a “smart” DRM scheme is possible. Amazon has made it easier to read a book on multiple devices linked to the same account, but this feature is present in various forms in all the existing commercial e-book formats and viewers. The Amazon system is still DRM, and still contains the two fundamental flaws of DRM: (1) it inherently treats the reader like a criminal and attempts to lock the content into a system which prohibits legitimate fair use and uses possible with print books; and (2) it is inherently ineffective, providing no true barrier preventing actual pirates from decrypting the content and distributing it as they wish.

  6. Hit enter too soon.

    Forrester Research, which you have cited in your own article, has their own study regarding the habits of music downloaders. It would seem that those who download music, either through legal or illegal avenues, actually buy more music than those who don’t. Further than than that, I’ve yet to find a single independent study which suggests that piracy had any statistically significant and quantifiable impact on music sales. The argument typically made by record labels, sighting the number of people engaged in piracy and attempting to directly assert that pirated content is lost sales, is a logical fallacy.

    Someone who downloads content is not necessarily someone who would have otherwise purchased that same content. Not with the increased competition for the much vaunted entertainment dollar.

    However, this logic does convey in the opposite direction. That is to say, that someone who purchases a digital download is someone who might not have otherwise purchased an album. There is not yet proof that I have seen which says that a digital purchase actually hinders physical sales.

    The key to understanding how digital content has affected the music industry, which is acting as the true vanguard in this area, is to look at a much longer time line, and attempt to pull out as many lessons as possible.
    – Conglomeration was bad, as it lowered willingness to take risks while encouraging copycat behavior.
    – The digital medium has led to more people listening to music, and more avenues for sales.
    -The new medium does require some tighter general bookkeeping, but with the shift to digital, the new content can be produced less-expensively.
    – Digital distribution is significantly less expensive than physical, which could have empowered the labels, allowing the loss of the middleman.
    -The long tail means that back catalog can sell forever, which pushes sales from the front to the back, but allows for perpetual sales and even unexpected success.

  7. With all due respect to you(r) position, the belief that pirated content is the source of the decline in the music industry is a flawed one, and one that placing DRM on compact discs wouldn’t have helped. While the finger is often pointed towards Napster and the programs which followed as the cause of the decline, they are more accurately described as a harbinger of change.

    The rise of the CD represented the start of a bubble for the music industry in which many people rushed to replace their aging LP collection with a medium that captured the same sonic fidelity, or to upgrade their tape collection. This collector’s motivation was one of the key sources of increased sales numbers.

    A second noticeable increase was that the compact disc largely killed off a large previous sales leader – the single. Prior to the early 1970s, the concept of a “full album” was indeed a rare one, the multitude of bands recorded 45 RPM singles, while earning their income from touring. With the rise of the compact disc in the middle 1990s, there was no technical difference between a full length CD and a single, and so bands were encourage to put together entire albums consisting of two or three singles, while padding the rest together with filler material. While returning greater profits for the labels, the perceived value of the album was reduced.

    Putting together full albums, however, was more expensive for the record labels. Pair that fact with the number of labels shrinking into four global conglomerates, and there was a drastic reduction in risks that the labels were willing to take. This lead to cyclical trends where each label would push out copycat bands, pitting similar bands against each other in the media in order to enhance sales across the board. During the rise of the blond pop tarts in the late 1990s, it was actually common for a single label to have several essentially identical singers competing for sales. This lead to market place confusion for listeners and a further degraded the value of music.

    With the onset of a digital music, listeners were able to once again upgrade their music libraries, and had access to extensive back catalogs. However, this time around, music listeners were able to purchase individual songs, which left record labels footing the bill for continuing to churn out LP-length song collections which only contained a handful of songs which the listener actually cared about.

    The real harm which was done to the music industry was not downloading, or even the shift to digital, but rather the belief that the compact disc bubble would extend indefinitely, when since the dawn of the wax tube, music format shifts have been happening at an increasingly rapid rate.

    If the record labels had put DRM on the compact disc from it’s inception, one could make the argument that customers would have likewise been forced to repurchase all of their favorite music over again in digital format. However, as the real world has shown, music listeners have grown disinterested with the major labels willingness to pad singles into LPs, and given the option, will purchase just the single.

    The other major stumbling block for the belief that placing DRM on the compact disc would prevent people from ripping their own CDs is the very real fact that no DRM scheme has ever lasted. True, some require a certain amount of tech-savvy amongst the user, and current law makes the act of removing DRM a criminal one, but that has yet to stop people. Even the flaunted DRM schemes attached to the Blu Ray disc, claimed to be unbreakable, are broken with rapid success each time the format is updated.

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