Tuesday, February 06, 2007

Thoughts on "Thoughts on Music"

Steve Jobs publicly posted his essay Thoughts on Music today, advocating that the music industry drop DRM (digital rights management) requirements for online music sellers, such as Apple's iTunes. DRM software protects copyrights for music purchased electronically, and is viewed as necessary by music companies and as a difficult maintenance challenge by online music/software companies. I am usually intrigued by public relations announcements such as this, since they are meant as a broad statement to sway those who might have influence in the issue, say politicians for instance, or music consumers. After all, if he wanted to talk to the record companies, he could have done that privately. No, he wants to talk to you. So, let's put him in proper context.

First of all, let's recognize his position in all of this. iTunes is a channel for media content. By that I mean that Apple acts in cooperation with music producers to help them get their products to consumers. Retailers and distributors are other types of channels as well. The music companies can also be thought of as channels for the real producer which is the artist, but in this case since artists work under contract, let's consider the music companies as the primary producer. The thing to remember is that channels and producers don't necessarily have congruent interests. A producer worries about effects that impact all of their volume and profitability. Channels worry about the extent to which a producers products move through their specific channel, and their comparative advantage with other channel competitors.

Now, let's think about the basic issue at hand: copyrights. Copyright is important. It's a form of property rights, and property rights are the basis upon which innovations allow profits to flow to the innovators. They are a form of legal justice if you will. Open source advocates who demand that because they listen to music should be allowed to listen to it freely and in any manner they see fit are not advocates of capitalism. The copyright is owned by the author, and he is free to set whatever terms he deems fit as to the use of his copyrighted material. You as a consumer are free to enter into this agreement or not.

In this context, let's look at what Jobs is asking for and why he is petitioning you, and not the music companies directly. He makes several claims in his essay that are interesting to dissect once you understand the context.

First, Jobs claims that the problem with DRM is that because of the constant threat of hackers "any company trying to protect content using a DRM must frequently update it with new and harder to discover secrets". This is true, but what it means is that from a channel perspective is that online venues bear the cost of maintaining DRM. This is the equivalent to a retailer putting anti-theft precautions into its stores, and Jobs is complaining that such efforts cost him money.

Next, in analyzing three different scenarios, Jobs claims that the status quo in digital music sales does not have an effect on locking consumers into one music player or another, because most of the music on players isn't purchased online. I find this debatable. One need not have a majority of their music be proprietary in order for it to be enough of a hassle to switch formats that the average consumer is effectively deterred from switching. Also, it is probably music purchased more recently that is in proprietary formats and so a user is more attached to this music and values keeping it more than older music. For example, I buy 100% of my music online today, but I would guess that only 5% of the music on my player is proprietary. Why? Because I transferred 15 years worth of CD purchases to digital format when I got my player. I researched players extensively before I did this because I didn't want to have to take the extra time to convert newly purchased formats should I decide to change platforms in the future.

So if proprietary music does in fact effectively lock users into certain players, why would Jobs want to dispense with it? The answer lies in looking at Jobs' competitive advantage relative to his other online competitors. What does Jobs have that his competitors don't? A head start and strong brand recognition, and an integrated player / storefront. His competitors, especially Microsoft, have only recently attempted an exact duplicate of Apple's business model with Zune. In fact, Apple would stand to be the least impacted by a shift to open standards, relative to its competitors. This is true regardless of whether music companies are impacted by the move.

Job's next claim is that it doesn't believe it can license it's DRM to other online store fronts and players and maintain protection of it's suppliers' music. Yet, this doesn't matter to music companies, if they can get non-exclusive distribution agreements with key online stores. A music company simply wants to get its music distributed in as many stores as possible as long as each store protects. Again, it is Apple that stands to lose if other online stores copy its model and take business away from it, not the music company. It Apply cannot effectively license it's DRM then it does not participate in any way in other online stores revenue.

Finally, Jobs final claim is that most music, sold as CD, is unprotected and that piracy is therefore not prevented by selling the small fraction online under DRM. This is true, maybe today, but not necessarily in the future. More and more music is moving to online purchase, and certainly it would be easier to distribute electronic media than it was previously to copy CD's. Music companies are justified in looking for improved security in what is to be its dominant future market, even if that future market today experiences leakage from older markets. However once the music industry makes the decision to go open source, it will be almost impossible to go back. Thus it is in the music industry's interest to hold out for increased security in future markets until such time as it is absolutely sure that it cannot compete in any other way than open source.

This essay, taken in its true context, is a plea by Jobs to move in a direction that favors Apple's interests over those of its competitors, regardless of whether such a situation would be good for its suppliers, or the industry as a whole. Artists and music companies would be right to resist such a plea, and so should you.

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