Winners, losers in the Apple, EMI digital deal

By Brian Garrity

NEW YORK (Billboard) - EMI Group Plc and Apple Inc. sent shockwaves through the music industry with their announcement Monday that they would begin offering commercial downloads without digital rights management (DRM). As the dust begins to settle, Billboard breaks down the winners and losers in the latest round in the fight over the anti-piracy technology.

WINNERS

Consumers. People who actually pay for digital music finally are free to playback purchased tracks wherever they want, however they want. And they're getting better audio quality to boot. But improved usage rights and sound performance don't come for free: EMI is charging a higher wholesale rate for DRM-free tracks, a cost that is being passed on to the customer. iTunes will charge $1.29 for DRM-free downloads.

Apple. The market leader in digital music grabs the moral high ground in the debate over interoperability and DRM. "The right thing for the customer going forward is to tear down the walls that preclude interoperability by going DRM-free," Apple CEO Steve Jobs says. It also avoids having to license its FairPlay DRM to rival technology companies, something it was loathe to do. As a bonus, a move to higher-quality audio files will drive the need for iPods with greater storage capacities (at likely higher price tags). And the company benefits from timing its announcement to overshadow word of an European antitrust probe into iTunes pricing.

Digital retailers. Rivals to the iTunes Music Store like Rhapsody, eMusic, Napster and Yahoo suddenly have the ability to sell downloads compatible with the iPod--provided they can strike DRM-free deals with EMI and indie labels. "It's in EMI's best interest to get any retailer with credibility in the market out there selling music," eMusic president/CEO David Pakman says. Retailers with subscription offerings also win, with iPod-compatible downloads that can draw consumers in for an upsell to all-you-can-eat plans.

Device manufacturers. Makers of MP3 players and music phones not built by Apple now have the ability to support tracks purchased through market leader iTunes. "It will eventually remove the issue of iTunes lock-in," Jupiter Research analyst Michael Gartenberg says. "But if sales don't take off, it will be clear that it wasn't lock-in that prevented their success."

Variable pricing proponents. In pricing DRM-free downloads at $1.29, Apple has effectively endorsed variable prices for iTunes, something the company has previously resisted. The shift to two pricing tiers opens the door for labels to push harder for a more dynamic pricing environment.

AAC (the Advanced Audio Coding format used by Apple). Retail sources estimate that less than 10% of music devices support the AAC format. But with Apple choosing to support unprotected AAC over MP3, device manufacturers are expected to ramp support for the format. Microsoft's Zune, San Disk's Sansa and Sony's PlayStation 3 are among the select devices that already do play AAC files.

Independent labels. Never sticklers for DRM, indie labels will see a spike in iPod-friendly retailers of their content.

LOSERS

Rival majors. Universal Music Group, Sony BMG and Warner Music Group now face increased pressure to follow EMI in adopting DRM-free downloads despite reservations about the uncertain impact on digital profitability and piracy. Rival label executives are privately complaining that EMI has recklessly embraced its new strategy without adequate testing. Some label sources are also 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.

DRM patent holders. While still a must for subscription services and try-before-you-buy ad-supported offerings, DRM is fading in the biggest part of the market.

Microsoft. A move to DRM-free music is another nail in the coffin for third-party device and retail support for its WMA (Windows Media Audio) standard. The company also loses on capitulating to DRM demands of content owners when designing the Microsoft Zune and Windows Vista -- moves that have been unpopular with consumers.

Publishers. Songwriters and publishers are dragged into a DRM-free environment with little to no say in the matter.

ON THE FENCE

EMI. EMI chairman Eric Nicoli wins points in the short run for progressive thinking on DRM by making the first move to break the interoperability log jam. But the company is taking big risks on its long-term digital profitability and stock price. If the move does not increase digital consumption, the results could be disastrous. EMI execs are adamant they are making the right move.

"This is about creating more opportunity in commercialized music by providing the right product to people who are prepared to pay for it," says Barney Wragg, a Universal Music veteran who took over as London-based head of EMI's worldwide digital operations last year. "We think it's going to significantly increase the size of the market."

Reuters/Billboard