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Good News For Apple Means Bad News For Music

Yesterday Apple beat expectations with a whopping 85% increase in sales in the second fiscal quarter powered in large part by increased iPod sales.  The great news came only a day after federal Applelogo
investigtors signaled that a probe into stock backdating was essentially over leaving a few execs scarred but the mighty Steve Jobs unscathed.

These victories only strengthens Apple’s hand just as they sit down with major labels for a round of important renegotiations. Labels had hoped for concessions from Jobs including variable pricing and better track and product bundling.  Some execs had even boasted that they were going to demand a royalty on iPod sales similar to one they receive from Zune.

Now, none of what labels sought – or at least none that Jobs wasn’t planning anyway – is likely to happen according to sources.  And why would Jobs give in when he controls an 80% Stevejobssmile_2share of the digital music market?

Apple is in such a strong position that he can publicly berate important content providers for not dropping DRM while in actuality doing little to drop copy protection from his own iTunes store.  As Hypebot pointed out earlier this week; there are more than a million indie music tracks available for DRM downloads on other services today. Why doesn’t Jobs offer those tracks DRM free? 

(Two posts in our comments section of the earlier Apple article claim that iTunes is asking for tracks to be re-delivered DRM free at higher bit-rates hinting at a pending move.  But we could not find a single provider who had been asked by Apple to also take the essential and time consuming step of revising their contracts to allow DRM free sales onIpod iTunes.)

Jobs also sits on the board of Disney which controls Hollywood and Disney records.  If he cared about a DRM free music world, those tracks could be unleashed in days.

But Jobs and Apple don’t really want DRM free music.  Unprotected tracks means that downloads bought at other stores would finally play on iPods; thus opening the closed iPod/iTunes loop which Jobs so masterfully created.  With sales souring and record labels on their knees begging for help; why would Apple change course?

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12 Comments

  1. Um, Apple is changing course. In May EMI will be having just about all of its music on iTunes and DRM-free. Perhaps one of the conditions for the deal was that EMI had to be first on iTunes (we all know EMI needs the PR), and then any other record label can post DRM-free music as well.
    Just because Apple hasn’t done it yet doesn’t mean they won’t. I am sure there is a good reason indie labels don’t have drm-free music on iTunes and it is not because Apple doesn’t want DRM-free music.

  2. Apple is likely waiting to finish negotiations with the major labels before springing the indie stuff and Disney stuff. Finalizing a indie deal would only help the labels, since they will be able to pinpoint a price point, and work up from there. Meanwhile, after working over the major labels, he can peg the indie and other deals at terms appropriate to the fact that they are smaller, and ought to be dealt with second in priority (financially speaking). Jobs knows how to brass knuckle deals.
    When Apple’s competitors started making “iPod killers”, it actually helped their market, since they all used the iPod as their reference, validating it’s superiority in the market. I believe Steve understands that iTMS going DRMless should have that same effect. Market expansion and adoption will outpace any loss of business to other stores/players. The value proposition of the iPod/iTMS/iPhone system will trump all other players for the time being. Jobs not only knows how to do business, but also understands more of what the customer wants…I doubt anyone else has the $$, balls (personality), and financial/business acumen to make something like this happen. Not Wal-Mart, Amazon, eMusic, TiVo, Sprint, Verizon, Napster, et. al.

  3. I agree with the other commenters. I think the fact that Apple’s position is strengthened by this news, only makes it more likely that iTunes will go completely DRM-free. Apple is likely just waiting to negotiate with the indies, until after they nail down some deals with the majors. They look at it top down. Unlike eMusic, Apple needs the majors, so why worry about the indies right now.
    And why would they make the EMI deal if they weren’t serious?
    Also, Apple makes much more from iPods than music sales. Major label DRM-free music, would help Apple whether they’re the ones selling the tracks or not. More digital music sold = more iPods sold.
    And the threat of Amazon jumping in certainly has to make a DRM-free future more likely.

  4. Apple News: Subscription model, DRM-free music, iPhone

    Apparently, Steve Jobs hasnt changed his mind on the subscription model, yet. Never say never, but customers dont seem to be interested in it, said Jobs, to Reuters. People want to own their music.
    Um, yes,…

  5. These are great comments and valid opinions – please keep ’em coming.
    But I believe (and hear) that Jobs made the EMI deal only because EMI was offering their catalog DRM free to many services (and still is) after an advance payment; and Jobs did not want another service to beat him to the punch.
    And I’m not sure that I buy the “wait for indies until the majors come” argument. Indies make up 20-30% of the overall CD market and maybe more in some download genres. If really you want DRM-free start selling the indies plus EMI and that would make the leftover majorlabels look bad to the consumers.

  6. These are great comments and valid opinions – please keep ’em coming.
    But I believe (and hear) that Jobs made the EMI deal only because EMI was offering their catalog DRM free to many services (and still is) after an advance payment; and Jobs did not want another service to beat him to the punch. – Bruce Houghton/Hypebot
    And I’m not sure that I buy the “wait for indies until the majors come” argument. Indies make up 20-30% of the overall CD market and maybe more in some download genres. If really you want DRM-free start selling the indies plus EMI and that would make the leftover majorlabels look bad to the consumers.

  7. Interesting points Bruce. I’m still a little confused, though.
    At first it seemed like you were saying that since Apple has captured so much of the market, they couldn’t be pressured into dropping DRM. But then you said that since EMI was essentially offering up their catalog DRM-free to anyone that wanted it, Apple was pressured into being the first store to drop DRM. It seems like those two points contradict each other.
    I agree with you that Steve Jobs likes the “closed loop” he has had with iTunes and the iPod, but I also think he is smart enough to recognize that DRM will never work, so he’s changing course.
    And it is big news if the indies move to DRM-free on iTunes (eMusic alone has made that abundantly clear). It just doesn’t seem like it would be tops on the list right now.

  8. Thanks again for all the recent comments.
    My overall point – which I may not have made clear enough – is that I believe that Jobs does not really want DRM free music to come to the marketplace any faster than it has to because it destroys his masterful iPod/iTunes loop. And I believe his actions bear that out.
    He’s sly enough to talk the talk his manifesto)and to even walk the walk when the marketplace forces him (not wanting to be second to have EMI DRM free product. But if he was serious about ending copy protection I believe that there is much more he could do – like add DRM free indie and Disney/Hollywood product ASAP.
    Thoughts from others? Inside info?

  9. “Yesterday Apple beat expectations with a whopping 85% increase in sales in the second fiscal quarter powered in large part by increased iPod sales.”
    Hi, Bruce. Apple posted a 21% year-over-year increase in sales.
    The revenue increase was due to higher Mac unit sales and a whooping 44% increase in Mac revenue compared to the year-ago quarter. iPod sales were up 25% year-over-year but the iPod revenue was slightly down (-1%) presumably because of the product mix (lower-cost iPod shuffle).
    http://images.apple.com/pr/pdf/q207data_sum.pdf
    Net income increased 87% year-over-year to $770 million.
    http://images.apple.com/pr/pdf/q207fin_statements.pdf

  10. just because a desperate EMI is offering no DRM is not reason enough to assume the other major labels will be on board…… has anything EMI done lately changed anybody’s thinking at WMG ?

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