I wrote this for a class last week, before Steve Jobs made his comments. I should have posted it then, as it appears my predictions are right on target.
From the cold winds blowing down K Street, to the rains of the Pacific Northwest, one thing is becoming clear. The perfect storm the nay-sayers have long said was coming may be looming on the horizon. For those sailing the waters of digital music distribution, the visibility remains low. Undoubtedly, at least a few ships will sink before the clouds dissipate.
The 110th Congress has potential to hold a few watershed moments for the industry. The two big issues being ridden hard down K Street by industry groups such as the RIAA and CEA include changes to Section 115 of the Copyright Act, and the return of the push for the Broadcast Flag. The problems resulting from the technological change of the past decade have long passed the point where lasting solutions could be reached solely through court litigation. It’s become clear to all parties, that this is not simply a copyright enforcement problem, as much as it is architecting a paradigm shift within the industry. The first steps into legislating digital distribution were very cautious, and the time has come to tweak the law so it enables more players to get into the game, while still protecting the interests of the majors. It’s a very hard balance to strike.
Section 115 covers statutory licensing, which badly needs an upgrade to the digital age. If the statutory licensing regime is changed to cover digital downloads in the form of blanket licenses, a large number of players will jump into the scene. Many are poised and ready, and have their people on K Street too. Amazon is the perfect example. They have backed out of launching a music downloading service at the last minute several times now.
The Broadcast Flag has until recently been an issue associated with HDTV. The goal of the Broadcast Flag is to give content providers the technical means to stop consumers from time-shifting or making recordings of certain content with PRV/DVR devices like the Tivo, by making any devices that don’t obey the technical standard illegal. There has been no shortage of controversy over this, which has managed to tank all efforts so far to get a bill passed. The arrival of the next generation of XM and Sirius players has made this a music industry issue. Pioneer and Samsung now both make iPod like players that can record blocks of satellite programming and allow users to save individual songs. Like a standard MP3 player, users can also create playlists and transfer the songs back to their PC. The satellite providers have just entered the digital downloading game, and the RIAA is not amused. The lawsuits have already begun. This issue will undoubtedly become tied with proposed changes to Section 115.
If there is a thread that ties all of these issues together, it’s Digital Rights Management. These days, it’s becoming hard to find an article in any publication that has anything good to say about DRM that is not somehow tying it directly to Microsoft PR. So far, there are only three technical implementations of methods for securing digital downloads: Apple’s, Microsofts, and Real’s. Real can be written off, as Rhapsody is completely failing in the marketplace. Microsoft’s DRM technology is behind every other music downloading service aside from Apple’s iTunes. There are currently two implementations of Microsoft’s DRM technology, PlaysForSure, and the technology used by the new Zune player. So far, iPod accessories are outselling Zune, and Zune’s sales are not increasing. Napster, which is based on PlaysForSure, is rumored to be pondering calling it quits. Behind iTunes, the next biggest download service is the indie eMusic, which sells tracks that are not encumbered with DRM restrictions.
Both market leaders, iTunes and eMusic, are based on the ownership model, rather than the subscription model. All the subscription model services are floundering, and the labels are starting to notice. It has been widely covered recently that EMI is pondering breaking ranks with the rest of the pack and selling non-DRM’d MP3s of its artist’s tracks. Sony/BMG and EMI are testing the waters with limited promotions involving non-DRM’d tracks for artists such as Jessica Simpson, Jesse McCartney, Relient K, and Norah Jones.
In another development sure to play into both the public and industry perception of DRM technology, Microsoft Vista hits the shelves today after years of delays. Vista is built from the ground up with DRM in mind, and is a key part of Microsoft plans to get in the middle of the content distribution. However, it does not appear to be what the industry is waiting for. Consumers don’t seem to be asking for more restrictions on how they can use content they have bought. If Zune sales did not confirm this, attitudes toward Vista might.
The perfect storm could be a combination of new statutory licensing for digital downloads and the industry abandoning DRM. This would result in a new influx of services. Well established Internet companies like Amazon, Yahoo, and MySpace would stand on equal ground to Apple. The satellite radio companies would be the new subscription services, and likely to succeed where the download subscription services failed. Entirely new players with new business models would suddenly become able to serve a large market. A good example of one of these is indie online music retailer Amie Street (amiestreet.com), which has a starting price of 0¢ for all tracks, and increases the cost as demand rises. If the perfect storm occurs, and they started their download rate at 25¢ for licensed songs, they might have a workable business model.
This industry could use a good paradigm shift or two...