Apple-EMI deal considered 'beginning of end of DRM'

Other labels pressured to respond

EMI is the only major label so far to pursue a DRM-free strategy, but the move increases pressure on the other majors to offer their catalogs in a similar fashion.

Apple CEO Steve Jobs said the company is reaching out to major and independent labels to sell their music DRM-free. He estimates that more than half of the 5 million tracks offered through iTunes will be available for sale without DRM by year's end.

"The right thing for the customer going forward is to tear down the walls that preclude interoperability by going DRM-free," Jobs said.

EMI's move was met with a string of "no comments" from reps for the other major labels. But privately, sources at rival major labels are expressing annoyance that EMI is "recklessly" jumping headfirst into a DRM-free environment without what they view as adequate research and testing about the impact on sales, piracy or consumer demand.

The other major labels remain concerned that selling music sans DRM will cannibalize sales. Some label sources also are expressing dismay that EMI's effort undercuts the industry's ability to correct the security problems that have plagued the CD format by creating a completely secure commercial environment for digital music.

"They're completely wrong," said Barney Wragg, head of digital for EMI Music worldwide. "This is about creating more opportunity in commercialized music by providing the right product to people who are prepared to pay for it. … We think it's going to significantly increase the size of the market."

EMI is adopting DRM-free formats after Norah Jones' "Thinking About You," Relient K's "Must've Done Something Right" and Lily Allen's "Littlest Things" were made available for sale in the MP3 format in trials held at the end of 2006.

The other three majors have tinkered with selling DRM-free music in limited tests. The results of those trials have largely been viewed to be inconclusive.

But market observers said that it's only a matter of time before the other majors ditch DRM.

"This breaks the logjam," said David Pakman, president and CEO of eMusic, one retailer lobbying the majors for DRM-free content. "This is the beginning of the end of DRM in music."

The wild card is how long the other labels hold out. Retail sources are estimating that it could take anywhere from three months to two years to persuade the rest of the industry to drop DRM. Conversations between Apple and EMI heated up a few months ago.

Apple's embrace of DRM-free music comes as the company is facing increased pressure in Europe to make its digital music platform interoperable with offerings from rival device makers and music retailers. In February, Jobs released an open letter to the major labels that called on them to drop their DRM requirements.

"From an iTunes perspective, we don't think most of our customers are hitting up against the limitations of the DRM," said Eddie Cue, vp applications at Apple. "But the ability to know that the files could be used in the future without having to burn and rip a CD is an insurance policy that is worth a lot."

The emergence of a mixed-rights environment in which some but not all tracks are available for sale without DRM creates new merchandizing challenges for Apple, which prides itself on the simplicity of the iTunes shopping experience.

In cases where consumers have the option of choosing between lower-cost DRM music or premium-priced unprotected tracks, iTunes will have customers select a preference of what type of content they want to buy so that only one configuration is listed when shopping for songs in iTunes Music Store. All of EMI's retailers are being offered the ability to sell tracks and albums in the DRM-free audio format of their choice, including MP3, in a variety of bit rates up to CD quality. However, other retailers have thus far been at odds with EMI as to how much they are willing to pay in upfront fees for the right to distribute tracks without DRM.

Apple paid a $5 million advance to EMI for the right to sell music without DRM, one source familiar with the situation said.

The move away from DRM will give consumers of DRM-free tracks the ability to play music from iTunes on a variety of digital music players and music-enabled phones that are not manufactured by Apple.

Should other retailers ultimately join Apple in selling EMI's music sans DRM, iPod owners will now have the ability to shop for music from a wide range of third-party retailers.

The adoption of a DRM-free standard applies only to EMI's a la carte download stores. The music it supplies to digital subscription services, time-out downloads and other viral distribution offerings in development will continue to employ digital rights management.

Brian Garrity is a senior correspondent for Billboard.
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