Minority Report: Should Apple set its music free?

Apple's decision to sell music without DRM is certainly risky. But could it also be Steve Jobs' latest masterstroke? Seb Janacek explains...

In move that Apple CEO Steve Jobs described as the "next big step forward in the digital music revolution", EMI last week announced its huge catalogue of music would be available for purchase on the iTunes Store free of DRM restrictions.

EMI's decision to 'go commando' with DRM-free music is the first from one of the major four record labels. Speaking at the event, Jobs said he expected more than half the songs on iTunes to be sold without DRM, or digital rights management, by the end of the year, adding that the company will "reach out to all the major and independent labels to give them the same opportunity".

All EMI albums will now be offered free of DRM at the higher encoding quality and at the same price as before - an incentive the labels hope will encourage users to buy whole albums rather than cherry pick songs off albums at the higher price.

Who wants DRM?

Advocates of DRM-free music have applauded the move. The news is likely to go some way to placating the governments of EU countries such as France and Norway which have complained about FairPlay and threatened to introduce legislation to force the iTunes Store to relax its DRM restrictions to allow purchased music to be played on devices other than iPods.

EMI can now lay claim to be a pioneer in the global digital music market by dispensing with the DRM on content. The music label has long been rumoured to be toying with the idea of DRM-less tracks and trialled sales of a couple of such tracks in 2006.

Whether the other three labels follow suit will come down to sales. If EMI records a significant spike in revenues as a result of its decision to abandon DRM, they could be sorely tempted.

Digital rights technology may have had its day if recent research is to be believed. Almost 60 per cent of major label executives believe removing DRM from music would encourage users to buy more digital tracks, according to a recent study by Jupiter Research.

One would expect the independent labels, many of whom never wanted DRM in the first place, to jump aboard the DRM-free bandwagon.

Meanwhile, the EMI announcement represents an endorsement of Jobs' call in February for distributors to be able to sell music without DRM restrictions. The Apple boss wrote an open missive called 'Thoughts on Music' arguing that DRM technology in online music was neither necessary nor the deterrent to piracy it was considered to represent.

The 'open letter' was celebrated and criticised in equal measure, with cynics claiming music with DRM locks benefited Apple's business model by tying iTunes tracks to the company's iPod MP3 players. Apple sold a lot of iPods off the back of the FairPlay arrangement so it was in its interest to support DRM-locked content. Jobs was being disingenuous, went the arguments. Not so, apparently.

iPod faith

So what of the risks to Apple's iPod business? The company's continued surge in profits over the last couple of years has been fuelled by sales of iPods sold off the back of 2.5 billion downloaded iTunes tracks. The company makes little to no profit off music sales but earns big from iPods.

That Apple was prepared to advocate a DRM-less utopia is indicative of the levels of confidence the company has in the iPod.

Apple clearly feels iPod sales are sustainable and appears to have little fear that the ability to play iTunes tracks on other devices is a threat to that dominance. In the last quarter alone it announced record sales of the devices - more than 21 millions units shipped.

Jobs and co may also feel the next generation of the iPod is the iPhone, which will debut in June, as the music-playing mobile phone's star continues to rise.

Either way, the company remains in a position to convey a powerful marketing message that the iTunes-iPod party is the most integrated, user-friendly model for customers buying their music online.

Even if Apple loses a proportion of customers who will transfer their iTunes tracks to non-iPod devices, it appears to be banking on winning over a significant proportion of new iTunes/iPod customers who were previously discouraged from shopping on its music store because of the DRM restrictions.

Breaking the exclusive dependency between iPods and iTunes - which Apple developed to enormous success, resulting in sales of millions of iPods - is clearly a risk.

But it's also a rather nifty bit of manoeuvring by Jobs. Complain publicly about DRM at the risk of damaging your own business and become a consumer champion. Meanwhile, by increasing the price of tracks and moving away from the flat-pricing model, he appeases the labels clamouring for higher margins. A neat balancing act.