Will Steve Jobs License Apple's FairPlay DRM?
¿Licenciará Steve Jobs el DRM FairPlay de Apple? (en español)
Steve Jobs’ thoughts on music presented an overview of Apple’s music business, the existing state of DRM, and presented three possible alternatives for the future of the digital music industry:
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•to continue with proprietary DRM systems. Apple’s FairPlay currently dominates online music by a wide margin over rival DRM from Microsoft and Sony.
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•for Apple to broadly license FairPlay. “Apple has concluded,” Jobs said, “that if it licenses FairPlay to others, it can no longer guarantee to protect the music it licenses.”
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•to abolish DRMs entirely. This would require the labels to allow sales of their music without DRM.
Readers largely took away from it what they wanted to hear. Casual observers with no horse in the race all celebrated the idea of no DRM. Who doesn't like freedom, apart from some caricatured enemies of the state?
Just Lock the Passenger Side
Of course, Jobs wasn’t saying that DRM itself was bad, only that its use in the music industry isn’t serving much of a purpose, because most music is already sold unprotected on CD. That’s like only locking one door on a car.
Jobs made no comments about the use of DRM on movies, which are not commonly available in an open format. He also made no reference to getting rid of the copy protection used on some Apple software, or getting rid of user accounts, or throwing away the keys that lock the doors of Apple’s retail stores at night.
Jobs’ comments on DRM weren’t nice sounding rhetoric; he actually had a point to make: Apple does not want to needlessly maintain a complex DRM system that is difficult to manage and police, and which serves little benefit in a market where the majority of music is sold on CD, without any DRM.
Labels: Yes, License FairPlay
Beyond the response of those in favor of ditching DRM, there was another contingent: those who feel they benefit from DRM. It isn’t hard to predict that the owners of music are as interested in protecting their assets as anyone else who has ever used a lock, a password, or put on a pair of pants.
To the music labels, the obvious solution wasn’t ditching DRM, but rather for Apple to broadly license its FairPlay. They seemed to miss Jobs’ comments to the effect that such a move would be problematic. Was Jobs just blustering? What’s involved in Apple licensing FairPlay?
Apple and Consumers vs Microsoft and Producers
Music label executive have a tense ongoing relationship with Apple and Jobs. Apple doesn't have to grovel to the music labels. It makes its money selling hardware to consumers, so Apple has more to gain in representing the desires of end-users than in kowtowing to content owning producers.
The labels would rather get their DRM from Microsoft, which makes its money licensing software. Microsoft licenses its DRM software to stores and hardware makers. The company has always been ready to sell out end-users’ rights to meet the demands of producers.
However, Microsoft’s focus on pleasing the music labels and movie studios over the needs of consumers resulted in the consumer market rejecting Microsoft's products as being too restrictive and complicated.
Consumers voted with their dollars for the iPod, leaving the labels with no other recourse than to license their content to Apple, on terms set by Apple, to suit the needs of the consumers that enrich Apple.
In the four years since, nobody else’s DRM has even come close to offering a viable alternative to FairPlay. Microsoft’s PlaysForSure has lots of licensees, but no customers. Without customers, there’s no music sales.
Why the Labels Like Licensing
From the labels perspective, the best solution would be for Apple to just keep its DRM working, and then license FairPlay to other companies so that Apple's market influence is watered down. They want FairPlay without Apple, but want Apple to do all the work to keep it going. 
For Apple, there are three potential areas for licensing FairPlay:
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•Licensing FairPlay to other online music stores
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•Licensing FairPlay to other music player manufacturers
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•Licensing FairPlay in other partner products
Each issue involves a different set of factors.
Licensing FairPlay to other Online Music Stores
Apple has no interest in licensing FairPlay to rival music stores.
Apple's own store only breaks even, and it is only run to deliver content for iPods and Macs. If Apple created competition for itself, it would only confuse the market and weaken its negotiation leverage with the labels to keep unit prices low and sales volumes high.
Label executives like the idea of ratcheting up the price of popular content to see what the market will bear, and Apple stands in the way of such a ploy. Apple wants high volume sales because it makes very little on every sale, and it likes to point out how many billions of songs it has sold.
Licensing FairPlay to other stores would also increase Apple's DRM development burden, requiring it to sync hundreds of millions of user keys among its own stores and its licensee stores, expanding the potential for FairPlay to be cracked with no real upside.
Since Apple only makes 4 cents on a 99 cent song download, there really aren't any profits to share. How much could Apple skim off the top of its licensee stores, and what stores would want to share Apple’s 4 cent profit?
There's simply no money in downloads, because music sales are a single source good.
Consumers wouldn't benefit from multiple stores selling the same music at the same price. There is no potential for competition, because nobody can offer a cheaper Britney Spears or a better quality Willie Nelson.
Music itself is a utility for running music players. It's the roads beneath the cars. It makes no sense to have competing, parallel highways that both go to the same destination, because there is really no money in building roads and charging access fees to drive upon them.
Essentially, the labels hired Apple to build a path after rivals were unable to construct a road that anyone wanted to drive upon, and now want to create artificial competition to Apple's highway because they fear Apple has become too powerful and controls too much of their distribution.
They should be happy Apple figured out how to build a workable road that brings them traffic, which nobody else has been able to do.
Licensing FairPlay to other Music Player Manufacturers
Apple has little interest in licensing FairPlay to rival player manufacturers.
Doing so would eat directly into Apple's hardware profits and require the company to support the designs of other companies. Licensing the Mac and Newton both failed for similar reasons. Apple couldn't charge its licensees enough to make direct competition worthwhile.
Apple's last effort in licensing the iPod was to franchise it for HP. Even when HP was selling the existing iPod through its own sales channels, it was unable to agree with Apple on its responsibility for unsold inventory and other details.
Imagine the complications of a hardware partner wanting to build its own iPod designs and make sure Apple's DRM completely supported everything they chose to offer.
Microsoft ran into similar problems with its hardware partners in trying to license PlaysForSure. It eventually gave up and began work on its own hardware, which was designed to be incompatible with existing players.
For consumers, the potential for a wider variety of devices and lower prices from more competition would be a benefit, but not if it resulted in killing the goose that lays the golden eggs.
That's exactly what happened in the mid 90s, when consumers jumped upon cheaper Mac clones and Apple's own sales flagged. With Mac clones, end users didn't really benefit from real competition, but rather just cleaned up at a fire sale that took advantage of a bad deal made by Apple.
The labels like the idea of broad licensing for FairPlay, because it ensures more manufacturers are involved, giving Apple less say in how music will be sold.
While Apple can stand up to the labels to prevent erosion of end-user rights and the raising of prices, it would have less ability to do so if more desperate manufacturers were willing to throw money at them. Microsoft did exactly that in agreeing to give Universal a “prepaid piracy indulgence” for every Zune sold.
Licensing FairPlay in other Partner Products
Apple does have some interest in involving more partners into its Made for iPod program.
In addition to simple iPod accessories, Apple has the opportunity to license FairPlay to others in ways that are mutually beneficial. For example, both parties can benefit from licensing FairPlay for use in product categories where competition benefits the iPod as an ecosystem:
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•file sharing devices like the Slim Squeezebox and Roku SoundBridge
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•DVR devices like the TiVo, Myth TV systems, and EyeTV
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•extended docks with displays reading protected AAC metadata
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•boom boxes and integrated systems such as car stereos and airplane systems
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•new, niche products that expand the iPod’s reach
While these devices also increase the possibility of complicating FairPlay, they at least offer some benefit to Apple at the same time.
Apple has been signing up licensees among auto makers and airlines, and was rumored to be expanding its efforts to offer more integrated products that can access information from and play FairPlay protected content.
The Trouble with Licensing
At the same time, even the iTunes technologies that Apple has licensed to third parties are subject to change. That can be problematic for third parties. For example, iTunes’ Bonjour-based music streaming feature, called the Digital Audio Access Protocol, was licensed to Roku for use in the SoundBridge.
DAAP involves no DRM secrets; it’s basically a Bonjour-based, local web server for streaming media. It allows copies of iTunes on the same local network to find each other and play music from each other’s libraries.
However, the changes in iTunes 7.0 resulted in compatibility problems for Roku. Every licensee Apple adds expands the potential for similar compatibility problems, and widens the amount of testing Apple has to do.
The more Apple relies on licensing its technology rather than delivering products of its own, the more it will begin to look like Microsoft, dragging a huge legacy net, dependent upon the whims of third parties, and unable to fix its problems with quick cleanup solutions.
Apple doesn’t want to be Microsoft.
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Tuesday, February 27, 2007
