Jupiter Analyst: Interoperable DRM Won't Solve Music Industry Dilemma

Scott Fulton, BetaNews: The IFPI seems to be backing the Coral Consortium as a way of at least going forth, however slowly, with a single industry standard a la OMA. But the IFPI claims to represent the same people your study surveyed, and yet it appears the people in your survey are saying, "Yea, but..."

Mark Mulligan, JupiterResearch: Absolutely, and I think that's one of the things that's really clear from here: There's a really strong division of thought within the record labels themselves. For example, we looked at how the responses differed within each record label. Those are really significant variations. What that reflects is, the music market is bang in the middle of a very fast period of change, that is intensified by the fact that music revenues are declining, and therefore record labels are having to basically consider options that they've never been willing to consider before in order to try to turn around the decline in music sales. What that means is, sometimes decisions are made so quickly, it's before there has been unity within the label in terms of their position on certain issues.

As [evidence] of that, the day before Universal Music struck its deal with YouTube, one of the senior Universal Music executives went on record saying that he thought YouTube should be sued for infringement of copyright. And then the next day, the deal was struck. That gives you a sort of illustration of how much difference of opinion there is within record labels, let alone within the overall industry.

Scott Fulton: The CEO of Wurld Media, Greg Kerber, who runs the P2P service Peer Impact, frequently tells me that in the end, the record labels with whom he deals come to the conclusion that DRM is necessary because it's the only structural software you can provide which gives a latticework for online music operations to develop a business model for subscriptions, for downloading, for limiting terms of use. This implies that the Steve Jobs solution from last week - kicking all DRM aside - would eliminate that latticework, and not give the labels anything with which to structure a business model around.

Mark Mulligan: Three things I'd say to that: First of all, anything that happens with DRM now is not suddenly going to drive adoption of digital music. Interoperability issues are not holding back music adoption at the moment. It's simply not a consumer issue; despite that a lot of consumer groups have taken action, it's not consumers who are driving it. The very simple reason that isn't happening is because there's little or no reason for an iPod owner to want to buy music from anywhere else but from the iTunes music store.

It's not a consumer issue, but it will be sometime in the future, should an "iPod killer" arrive and give lots of people reason enough to want to have a device that isn't an iPod.

In terms of moving away from DRM, one side of the argument is that, until very recently, that's how the entire music industry worked. Vinyl, tape, CD - none of those had rights management on them. Home copying has been around for ages. Once the music industry lost its fight to stop having recordable cassette decks in in-home stereos, ever since then, the music industry has known and accepted that home taping is part of music consumption. People recording from the radio is part of music consumption. All of those things didn't stop the music industry having its strongest-ever decade of sales.

So you can make an argument that, well, selling online without any DRM at all would just be doing the same as selling a CD. But the difference with selling a CD is that the music industry is basically saying, "We trust you with this purchase. We know you're probably going to do a few things we'd rather you didn't," because in Europe, unlike the US, we don't have Fair Use, so it's not actually legal to be able to make a copy for your car or for your living room. "We trust you, but we accept the fact that you are going to go away and do some of the things you shouldn't do."

With digital rights management and digital downloading, it's actually a completely different ideological perspective. It's saying, "We don't trust you. However trustworthy you might be, we are not going to trust you. We are going to tell you very clearly what you can and can't do." There's a very different approach. It seems like digital rights management should be an absolutely fundamental part of the digital music market, but it's actually quite an alien concept in terms of overall music. You've seen how much backlash there has been from consumers, as those record labels have tried to introduce digital rights management onto CDs themselves. You've seen a massive backlash and move away from that.

But the final thing I'll say is: Jupiter isn't advocating a complete move away from digital rights management, but instead, an evolution of digital rights management to do exactly that: Rights management, not rights protection. There's many ways in which digital rights management can be used to manage and develop distribution of music, that enables it to a) give music fans the ability to do what they want with their music within reasonable bounds, and then b) develop and generate extra revenue on anything that happens beyond that. So for example, you can have music downloads that you buy once, you can burn onto CDs as many times as you like, you can put onto any of your registered devices. You could even send it to a friend, but if a friend tried to play it more than two or three times, then they have to pay for it. Those are sorts of examples of how digital rights management could be used in a creative way, that isn't just about restricting what people do.

Scott Fulton: Well, if Jupiter is, as you say, advocating more of the evolution of DRM, isn't that evolution only possible when the industry collaborates and agrees to a common platform?

Mark Mulligan: Not necessarily. What's fairly unique about the online music market is, with the concentration of so much important content within the major record labels, they are the gatekeepers. They have the ability to be able to dictate and shape what usage patterns the stores like Apple's iTunes can do with the music. That's how digital rights management came around in the first place.

Now, the record labels - should they want to - could say, "We will only license it to you on the following terms and conditions..." It can be actually implemented from the content providers themselves. And that is a very clean way of doing it, that doesn't require Apple being taken to court, it doesn't require some complex interoperable standards being developed.

What happened last time the record labels tried to stand up to Apple - about 10 months ago, with the negotiations about having variable pricing - they actually backed down and lost the negotiation against Apple. I think they learned a lesson that time, and there's a definite consensus that Apple's negotiated position is too strong, and the next time around that licenses are offered for negotiation, the record labels will take a much stronger stance. I would say that that's absolutely right, because however much Apple may be an important part of a digital music market, digital music itself is actually a really small part of the overall music market at the moment. You're talking just a few percentage points of total music sales. So that [could be the industry's tack] right now, to potentially aggravate one of the key partners, rather than setting in stone some usage patterns which are going to permanently inhibit the total potential of the online music market.

Next: Would an "iPod killer" change the public's mood toward DRM?