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Why DRM Everything? - by David Pakman, CEO,
Saturday, December 31 2005 @ 01:55 AM EST

Why DRM Everything?
A Sensible Approach to Satisfying Customers and Selling More Music in the Digital Age

by David Pakman
President & CEO, Inc.; Managing Director, Dimensional Associates, Inc.

Worldwide recorded music sales are down more than 25% over the last five years. The music industry believes the primary culprit is file-sharing and other forms of piracy. Let's leave the debate as to whether piracy is truly the cause of the music industry's troubles for another time. The responses to consumer-based digital piracy have been numerous (artist-sponsored education campaigns, TV commercials advising kids not to steal), aggressive (suing technology providers such as Diamond Rio, Napster and Grokster as well as more than 15,000 customers), and, at times, draconian (the recent Sony BMG rootkit fiasco).

In general, the music industry response seems to fall into three categories:
1) Educate, predominantly by using lawsuits to bring to parents' and kids' attention that file-sharing is stealing

2) Widely license their catalogs in only copy-protected, restricted digital formats

3) Lock down the CD, often preventing personal copying, thereby stopping the use of a Congressionally immunized activity

At the same time, consumers are now bombarded with more competition for their limited entertainment dollars and leisure time than ever before: cell phone minutes, text message fees, DVD purchases and rentals, portable and console video games, downloadable games, MTV request lines, several varieties of ringtones, Java games, digital music downloads, music video downloads, premium online radio, satellite radio, broadband ISP charges, etc. At a time when potential music-buyers have more entertainment choices and have demonstrated a reduced interest in purchasing recorded music, does it really make sense to take away functionality and limit a customer's ability to enjoy the music they purchase? Is it truly prudent, when piracy still abounds both aboveground and underground, to make the legally purchased product inferior to the pirated (and free) one?

I sympathize with the plight of recorded music companies. Dimensional Music Publishing owns or controls more than 15,000 music copyrights and derives revenue from their commercial exploitation. It is the right of a content owner to decide on what terms to sell its content. If record companies choose to lock down the CD and the digital download in an attempt to prevent piracy, this is their right. But two problems have arisen as a result of these decisions:

1) Record companies are using technology to limit what was otherwise a protected fair use of the music by the consumer: namely, to freely make personal non-commercial copies, and

2) Customers don't like it.

At this critical moment, the music industry needs to cultivate as many new customers as it can, not drive away potential ones by making the music inconvenient, restricted, or, even worse, invasive. But whatever the major labels continue to do, why do their tactics have to apply to the entire music catalog? Understandably, recorded music executives may be petrified by the free market forces that rule a capitalist economy, especially that it is one's customers that ultimately call the shots that shape any commercial marketplace.

More than 25,000 new CDs were released in 2005. How many of them have you heard about? Probably 20-30, if you're the average consumer, and maybe as many as 100 if you're a music aficionado. So the music industry funnel problem of trying to get exposure for both new releases and back catalog is still a challenge. To this end, the industry has experimented with pricing for many years, making back catalog titles available at lower price. The industry should also recognize that, like higher prices, limitations in functionality and music files sold that are incompatible with the most widely used playback devices are disincentives to buy, and should thus experiment with easing restrictions on some portions of their catalogs.

For example, it might be essential to "DRM" the newest Eminem download. But why must those titles that sell very poorly in both physical and digital retail also be restricted? If it were possible to demonstrate that non-DRM'ed music encourages more sales, wouldn't it make sense for the industry to offer portions of its catalog as unrestricted MP3 files? It seems like bad business to bind every category of customer and every category of product with the same sales offering. Consumers are very comfortable with different pricing for different value propositions. In short, the industry should become more customer-focused, dreaming up ways to increase sales of their catalogs by offering music products in a variety of formats and pricing.

Fortunately, we have the answer available to us. eMusic, the world's number two digital music retailer, selling more than 3.5M songs per month, sells a catalog of 1M songs from the world's largest 3,800 independent record labels. Independent labels see the world differently from the majors. They want to do everything possible to encourage consumption of their catalogs, and as a result, eMusic's entire catalog is available as unrestricted, no-DRM, high-fidelity MP3's. These files download without hassle, never expire, and play on every hardware and software digital music device ever created, including your iPod! (In other words, they are not inferior to the CDs you've been buying for years.) And when compared to a restricted buying experience, customers consume far more music from eMusic than from digital stores like iTunes. At iTunes, customers are averaging purchasing between one and three songs per month. At eMusic, the average customer purchases between nine and 31 songs per month. There are other differences between the services (eMusic is a subscription service where customers pre-pay for their downloads), but a major reason customers subscribe to eMusic is because the songs are not restricted in any way, and play everywhere.

The majors should abandon the idea of locking down their entire catalogs. They should experiment with selling their jazz, blues, classical, classic rock, comedy and more obscure titles -- the "long tail" -- in unrestricted formats. A good place to start might be the out-of-print titles and those portions of their catalogs which have sold ten or fewer times on iTunes. Clearly those titles have limited commercial appeal to iTunes customers. But why not determine if customers are willing to buy more digital music that has no restrictions, just as they're willing to buy more CDs when they are discounted? The independent record labels have already proven this by licensing their entire catalogs to eMusic and allowing their sale without unreasonable restrictions. We know that eMusic customers purchase more music on a per customer basis than customers at the other well-known digital music services. We also know that their selections run deeper and wider, and that eMusic customers purchase music that doesn't sell elsewhere. In this model, hard-to-find cult titles and deep back catalog in traditionally under-selling genres like blues, jazz, and classical are likely to experience much stronger sales than their current business.

The majors appear attached to a value proposition that actually takes benefit away from the very customers they must satisfy and one which the marketplace has already rejected. For the market to start growing again, the oligopoly has to make their products available for sale on more customer-friendly terms, like universally-compatible formats with fewer restrictions. The market will obviously prevail in the end; the question to pose is not if, but when. How much lost revenue will it take to prompt the oligopoly to act in the interests of consumers, which, in a market-driven economy, benefits all stakeholders, including their own shareholders, artists, and employees? Failure to act does not signal the end of the industry, it simply creates a redistribution of power among hundreds of smaller players that will inevitably join forces over time to consolidate and create tomorrow's oligopoly.

If the majors would undertake such a strategy, it would have the added benefit of actually selling consumers what they want: a product not inferior to the free pirated copy - and available in seconds with a click of the mouse.

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