Steve Jobs' Snow Job

All along the blogosphere techies are hailing Steve Job's open letter on digital music and DRM published yesterday on Apple's website like it's the Emancipation Proclamation.

Fred Wilson, who is a great guy in part because of his broad optimism, calls Jobs "our hero" for openly advocating for the demise of DRM. Fred writes:

I thought Jobs was using DRM to build a monopoly on digital music. Either I was wrong or Jobs has changed his mind. Doesn't matter.

Fred's reaction is typical. I'm sure Fred thinks I'm too cynical, but that cynicism--or more accurately, skepticism--is an instinct that served me well in my career as a journalist, and like Peter Parker's spider sense, my skepticism sense is tingling like crazy now.

Why would Jobs write a letter of this sort at this time after Apple has benefited so enormously from a DRM scheme that locked iTunes music buyers into the iPod platform?  Fred doesn't care, but I think it's salient to consider whether Jobs has had a road to Damascus moment on DRM, whether he was secretly anti-DRM all along, or whether there are some other motives behind his broadside.

It's reasonable to believe that Apple embraced proprietary DRM deliberately and gladly. After all, locking buyers into its platforms and hardware has ALWAYS been Apple's strategy. It hasn't always worked of course. The company's decision not to license its OS opened the door for Wintel to dominate PC market share. But Apple's iPod/iTunes strategy (DRM, non-user replaceable battery) always reflected the same thinking.

Embracing proprietary DRM has worked fantastically well for Apple, as Thomas Hawk succinctly summarized:

Steve Jobs made the deal of a lifetime when he launched iTunes. He basically told the music industry, I will give you all of the profit for the music, and I will take all of the expense of the distribution, if you'll only do a licensing deal with me. The music industry scratched their heads unable to figure out why anyone would make such a bad deal and then said, sure, why not. They were seeing their business eroded by pirates anyway and maybe at least this could stop the bleeding a bit.

But it didn't. The bleeding continued and by legitimizing the iTunes store they allowed Steve Jobs to push forward with the most successful tool for pirated music since Napster. The iPod. And of course Steve made much, much more on iPods than the music industry made on their 2 billion songs and he laughed about it (secretly inside) all the way to the bank. And Apple's stock price soared. And anytime anyone mentioned piracy, Jobs could just point to the iTunes store and their best efforts attempts.

In fact, pointing his finger seems to be one of two motivations for Jobs' letter yesterday.

Knowing that many consumers are frustrated with Apple's DRM, Jobs uses the letter to tell consumers to blame the labels not Apple. Canny marketing perhaps, but Jobs' own argument is inconsistent. At the same time that he blames the labels for DRM he notes that the labels sell most of their music on unsecured CDs. Blame the labels who are selling most of their music unwrapped (but in a format that maximizes their profit) or blame Apple selling DRM-wrapped music? Of course record companies are using DRM to discourage buyers from choosing digital formats. Still, it hardly follows that the companies that sell most of their product unwrapped are more to blame for DRM than Apple (especially when the biggest legal problem with  and biggest business advantage of Apple's DRM is its proprietary nature).

Jobs' scapegoating of the record companies may be partly accurate, but it's also partly inaccurate and entirely distasteful--like a kid pointing to his friend and saying "I threw the pitch but he hit the ball that broke the window."

Jobs' other motivation seems to be legal. In the United States, particularly under the current administration, consumers have little legal leverage to enforce their fair use rights in the face of corporate lobbying. Not so in Europe where there are official processes designed to protect consumers.

Last month, after a petition from that nation's Consumer Council, Norway declared Apple's Fairplay DRM system to be illegal. Said Torgeir Andrew Waterhouse, senior adviser to the Norwegian Consumer Council:

As a direct result of The Norwegian Consumer Council complaint, iTunes Music Store must remove it's illegal lock-in technology or appear in court! .... It doesn't get any clearer than this. Fairplay is an illegal lock-in technology whose main purpose is to lock the consumers to the total package provided by Apple by blocking interoperability.

And consumer councils in France and Germany have joined the Norwegian led effort.

As Jobs notes in his broadside, Apple's arrangements with the record companies allow those companies to pull their catalog from iTunes if its DRM is compromised. With its DRM scheme declared illegal Apple will be faced with the choice of violating its label agreements in order to sell music to its European customers--leading labels to pull catalog from all of iTunes--or facing criminal prosecution in Norway (and perhaps soon Germany and France).  As much as anything Jobs' letter is a cover-your-ass memo designed to demonize the record labels. Blame them when iTunes goes dark.

Of course Apple could license it's DRM scheme, thereby skirting the European argument over interoperability. In his letter Jobs says that Apple won't because licensing would make the system insecure again possibly creating a violation of Apple's agreements with the record companies. I'd like to hear from record executives about the nature of those agreements. If Apple licenses its DRM system and that system is cracked would the labels have the right to pull their music from iTunes? Furthermore, would they in fact pull their music from iTunes? Did J-Hymn lead to a massive record company retreat from iTunes? Not that I remember. Yeah, Apple's cost of business goes up when it has to continually re-engineer the DRM in the face of creative crackers. Boo-hoo. Isn't that an inherent part of any software business?

In the end Jobs' open advocacy for an end to DRM is a good thing. But if there are heroes here they are the Norwegian Consumer Council and Ombudsman, not the man who re-invented Apple by exploiting proprietary DRM and now wants to play both sides against the middle.

UPDATE: Fred has three excellent suggestions for actions that Apple could take today to help push the music industry towards a DRM-free world.

Comments

[Slappy]

If iTunes went dark, it would be a far bigger blow to the record labels. If said countries can not accept Fairplay, they probably wont accept any other form of DRM. (Microsoft's DRM and Zune are more restrictive than Fairplay.) Will anything but unwrapped music be legal in parts of Europe? Probably not. If your DRM music will play on any piece of hardware available, well then it is no longer DRM music. When DRM is tried with CDs, it fails because DRM is linked to the hardware playing it. (i.e. Zune) And supporting a single DRM scheme on the variety of CD players out there is impossible.

If you think the Norwegian Consumer Council is the hero here well so be it. But Apple did not make the rules and has done more than anyone to make legally purchased online music available to the public. The Norwegian Consumer Council will never accept any DRM music. The argument/blame isn't with Apple but squarely with the labels. Or the blame is with the Norwegian Consumer Council if you feel the labels have a right to sell DRM music.

The labels have far more to lose but they are too locked in their ways. Jobs is trying to push them in the right direction through public pressure. Of course the motivation is monetary. Unwrapping online music would sell more iPods. And hardware is where Apple makes its money.

[Jason Chervokas]

Slappy,

Sorry, but the logic just doesn't hold up.

First, the very same labels supposedly demanding DRM-wrapped music sales online sell non-DRM wrapped music on CD--this is the primary source of music on peer to peer nets. iTunes et al has almost nothing to do w/ that. The labels want online DRM to make online music less convenient in order to drive consumers to CD. The last thing they want is for the biz to be all about selling $1 singles instead of $16 disks.

Second, the legal problem in Europe is not w/ DRM per se, or even the playback restrictions (tho' I believe they violate consumer fair use "rights" here, which, according to case law, should allow for consumer-made copies for personal use), it's w/ non-interoperability, which is seen, rightly I believe, as an anti-competitive biz practice, or at least an anti-consumer biz practice in those countries that still care about protecting consumer interests, not just corporate interests. If Apple's DRM system allowed play back on any device of the consumer's choosing--even w/ restrictions, say, on the number of copies that could be made--it's unlikely that Apple would be facing a problem in Norway or elsewhere. (And of course it would still be DRM.) That's technologically doable. It's just not Apple's (or any other company's choice). These companies are still locked into the old PC platform war mentality. Apple doesn't want to license it's DRM system because it wants iTunes/iPod to become a market monopolizing consumer music platform like Wintel in the PC biz.

Jobs sees the end of DRM coming, both because of legal challenges in Europe and because of label interest in non-DRM music--the WSJ had a story this week about EMI looking at selling its catalog online w/o DRM. But the labels are looking to extract upfront payments from music retailers like iTunes of something above $100 mil for the right to sell non DRM music from their vaults (this on top of whatever revenue split there is on per unit sales.) Jobs' letter is all about positioning in those negotiations. He doesn't want to pay anything (and I wouldn't want to either, particulary given the fact that the labels already sell non DRM music in other formats, both on CDs and subscription services like emusic).

Apple absolutely DID make the rules w/ respect to non-interoperability. In fact, just this week Edgar Bronfman gave a speech saying that his group at least loves DRM, but would also welcome interoperability--a shot back across the bow at Jobs. Apple wants iTunes buyers locked into iPods, plain and simple.

Finally, the idea that online piracy is the primary reason for music biz contraction is just wrong. Demographics (post-boomer market contraction), changing psychographics (music isn't as central to the cultural lives of post boomers as it was for boomers), and increased competition for entertainment time and dollars (including more music titles available) are all more important factors than online piracy. If labels were really concerned about online piracy they'd stop selling CDs and sell only DRM wrapped online music!

Finally, unwrapping music might sell more iPods, might not. Might sell more Zunes, might not. It's hard to say. According to all consumer research 90 percent of the music on portable players today comes from ripped CDs not iTunes, not P2P nets. But offering non-DRM music would almost certainly sell more online music--for example to all the potential iTunes customers who are not iPod owners--and I suspect do so without changing at all the amount of online file sharing--anyone with a CD and a computer can rip a file and post it, and all it takes is a single seeder to get the ball rolling. Given that online sales represent the only growing part of the music biz, and that the pace of that growth is slowing, it stands to reason that labels would be interested in selling non DRM music.

As long as non-DRM wrapped CDs exist DRM will be completely meaningless w/ repect to online filesharing; as long as non-interoperable DRM systems exist there will be a drag on online music sales.

[Slappy]

I doubt Apple dictated the rules of DRM and interoperability when trying to convince the music biz to sell their songs online. The music biz would be holding all the cards in this negotiation. Apple is hardly the only outfit capable of selling music online but the music biz is basically a monopoly.

Interoperability IS tied to hardware. At least to make it work right. When DRM was attempted with CDs it failed. The CDs were not compatible with all makes of players. And most CD players probably have more in common with each other than MP3 players do. Much harder to keep any DRM scheme workable across the sea of MP3 players out there. (OS, chipsets, etc)

When you say music biz contraction I assume you mean the selling of less music. I don't attribute this to online piracy. Online piracy probably doesn't help much but I think its a minor issue. But thats a whole other discussion I feel.

But still I do think the labels are concerned. Even with this concern there would be no way to add DRM to CDs. The format allows for no DRM and it is already too entrenched of a standard. When it was tried it failed. But if CDs were a new technology today with the internet in existence, CDs would most certainly arrive with some attempted form of DRM.

And the music biz in no way could stop selling CDs. That would be complete financial suicide so removing DRM CDs from the shelves is not an option available. But someday...

I make no argument for DRM. I would never purchase a song from iTunes. But Apple deserves none of the blame for this DRM mess. The format they use for iTunes is in fact an open standard (AAC). Apple's DRM is more liberal than most if not the most liberal. One can easily convert an iTUnes song into a DRM-free MP3 file with no special software crack. SImply burn to CD and re-rip using the same iTunes software.

The music biz was well aware of iTunes songs being locked to iPods for play back. They signed off on it. Keeping the DRM stable requires hardware dependency. Europe's fight is with the music biz, not Apple.

I doubt Apple is scared of competing head to head with other hardware makes with DRM music. They entered the market when it was already saturated with MP3 players. It didn't take long for the iPods superiority to win the fight. They entered the market knowing they could do it better, not because no body else was doing it. Jobs has more incentive to have DRM-free music than keep iTunes locked.

Apple deserves more credit than blame. That's my overriding point.