Tuesday, April 3, 2007

Digital music revolution Phase II

Are we entering the phase II of the Digital Music revolution ?After releasing the iPod, launching the iTunes Music Store and capturing almost 80% of the digital market, Apple(NMS:AAPL) is now answering some specialists scepticism on digital music by releasing free DRM music on iTMS (iTunes Music Store). Is it just an evolution or the era of a new revolution ?

EMI just announced they will be releasing a major part of their catalog through a free DRM system on iTunes Music Store from May. The songs will be sold at a more expensive price ($1.29 instead of $0.99) but will be encoded at 256kpps AAC instead of the regular 128kbps for the other songs.

Is it the start of the Digital Music revolution, phase II ?The first wave started in November 2001 when Apple introduced the iPod. It was the first time a company really understood consumer needs and introduced a music player, made for consumer by 'people-thinking consumer' to answer one need : listen music seamlessly without reading a 10 pages owner's manual.

However, it is only in April 2003 when iTunes introduced for the first time a seamless approach for digital music download that the 'in depth' revolution has started.This ecosystem mastered not only the software (iTunes), the hardware (iPod), the OS (Mac OS X) and the content (the music). Consumer were finally offered a viable choice to download digital music without violating the law and the artist rights.

April 2007, almost 4 years after releasing the iTunes Music Store, the consumer will now be able to pay for 'free music' without protection. What are we talking about ? From a technical point of view, the DRM is a digital locker, requested by record companies, to protect the song from being copied between multiple computers and multiple devices.

One could argue the system does not make sense, that the music is free when it is posted on internet and we should not pay for it. We must not overlook the fact that without the DRM system, consumers may not have add the opportunity to enjoy legal on line music.This DRM system does not differ from any other locking system that is applied from industry on various formats or technologies.All music store have unique DRM and for the inconvenience of the consumer, they do not share the same lock. Music bought on a specific store is not compatible with another store and same goes with the player. Even the latest released Zune player for Microsoft(NMS:MSFT) is not compatible with the in house initiative 'Playsforsure' that tried to unify the DRM around one camp (digital player manufacturers + music content + Microsoft) against the iPod-iTunes alliance.By removing this DRM, consumers will be able to share content with anyone else, regardless of platform or devices. It means people will be able to buy music on an iPod and, play that same song on another device (but not through iTunes).

Is Apple taking a risk ? No, Apple is again leading the revolution. This move could see increased revenue for the company while its competitors continue a price war. Most importantly, it will benefits the market, the consumer and the investors. This abolishes the views of many critics on the closed Apple - iPod - iTunes ecosystem.

Now, there will be questions that still need to be answered.

1) Will it be available to other regions ? When ?We can expect this to be introduced to US market first. Music rights are usually managed locally, so how will the other regions be impacted and at what cost ? Let's not forget that there are still many regions not covered by the iTunes Music Store to date. At the same time, there are some regions which do not have the full service (for example video download).

2) Other labels ?EMI has opened a hole in the DRM fortress, we can bet that other labels will follow. They will not only see the opportunity for additional revenue, but the ability to be closer to their audience. Most probably, they might not have other choice than to follow the others in that battle.

3) Consumer reaction ?What now will be the consumer reaction ? Is he going to spend more money for having a free DRM ? iPod - iTunes users are divided in two categories. The first one are the 'Apple fans'. Whatever happens, they will remain loyal to the brand. They will probably upgrade some of their songs, to try the system, promote it and listen to the sound quality difference. Not only AAC is already more qualitative than MP3, but doubling the bit rate to 512kbps will definitively make a difference.The second category is the mass market. Progressively, they will prefer to buy non protected songs because they will like the freedom.4) Video impactWill this system be adopted by the video industry ? Probably yes but not in the short term. The video market download is really immature today. Consumer have a different attitude compared to audio. You normally listen to music multiple times whilst you hardly watch a video as often. Secondly, listening to music can be a passive activity while watching a movie requires full focus.There are more reasons that will prevent to movie industry to follow the same system immediately. For example, the size of the file and the financial impacts related to Cinema, DVD, Blue Ray Disc and HD DVD are many hurdles that need to be overcome.

The above points are not part of a natural evolution of the digital market. A complete new revolution is now happening. Selling free DRM songs a couple of years ago was just not possible. Let's not underestimate the impact it will have on the market, on the industry and the consumer.

The revolution of the digital market phase II is on and is not over.

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