EMI's DRM-Free Talks Unlikely To Change Online Music Stores - InformationWeek

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EMI's DRM-Free Talks Unlikely To Change Online Music Stores

Steve Jobs and Apple's influence in the online music market is forcing some labels to rethink their strategy even though profit margins on CDs are higher than on music downloads.

If the record companies and online music stores are talking about heeding Steve Jobs' call for DRM-free digital music, it's doubtful that it would change the current way consumers shop, analysts said Friday.

EMI, the third-largest record company in the world, has been talking with a wide variety of online music stores to distribute songs in MP3 format, allowing consumers to copy the music they buy and to play it on any device, according to a Wall Street Journal report.

But despite what looked like progress in ending the use of digital rights management software that restricts how consumers use the music they buy, analysts do not believe the record industry is ready to launch a DRM-free market.

"The labels will still probably stick with a DRM universe, rather than move to a more open one," Joe Laszlo, analyst for JupiterResearch, said. "But [the talks] do show a degree of flexibility that would have been unthinkable a year or two ago."

While labels other than EMI have also floated the idea of offering unrestricted downloads, the reality is record companies' revenues are still driven by CD sales, and moving too quickly to a DRM-free format could cannibalize those sales, without making up the revenue loss, Gartner analyst Mike McGuire said. Profit margins on CDs remain substantially higher than on music downloads. "It's not easy to turn around, or stop, a big ship," McGuire said. "It's a very difficult transition for them."

EMI is apparently looking to make up the profit difference between CDs and downloads in the current talks. Part of the negotiations involve EMI seeking advance payments from retailers, who balked early on in the discussions at paying a "one-time, multimillion-dollar 'risk-insurance' payment," the Journal reported.

But online retailers are unwilling to pay a lot more for an unrestricted format, arguing that what they would be buying is just another music file, albeit without DRM.

"The bottom line is you're buying the same song, and what you're selling is equal to what people are buying on a CD," said David Pakman, chief executive of eMusic, an online store that sells only DRM-free music from independent labels.

Indeed, if retailers paid more for an MP3 file, then they would also have to charge more, which would be a tough sell to consumers, Laszlo said. While the technically savvy understand the benefits of an unrestricted file format, the average consumer who is used to paying 99 cents a song doesn't.

"It would be up to the retailer to make a convincing case that the non-DRM music is worth the additional price," Laszlo said. "It would take a little bit of time and require everyone in the industry to sign on."

Nevertheless, record labels won't be able to stick with the status quo forever. Total music sales, online and offline, are expected to decline to $11.5 billion in 2011 from $12.6 billion in 2005, according to JupiterResearch. While download sales are expected grow as CD sales decline, the increase won't be enough to offset the revenue loss. Online retailers argue that selling digital music that can play on any portable device would help drive the sales record companies need.

"From a strict financial perspective, look at your numbers and ask yourself how you can stimulate growth in the digital market, and one way is to offer consumers a digital product that has the same degree of flexibility as the CDs your are already selling," said one retailer who asked not be identified to avoid angering the labels. CD music can be easily copied and shared without DRM through a computer.

When it comes to DRM-free music, EMI is apparently ahead of some of the other major record labels. This was reflected in the industry's response this week to Apple chief executive Steve Jobs calling on record companies to drop their requirement that retailers use DRM software. The industry fired back by saying Jobs should license Apple's DRM technology, called FairPlay, to competitors, so they could sell music for the iPod. Jobs has refused to license FairPlay.

Record companies are wary of Apple's growing importance in the online music market. Not only does its iTunes store sell more downloads than anyone else, but its iPod accounts for three-quarters of the portable music players sold worldwide. EMI is talking not with Apple, but with its competitors, including RealNetworks., eMusic.com, MusicNet, and Viacom's MTV Networks.

EMusic's Pakman refused to discuss whether he was in talks with EMI but agreed to talk about the online music business in general. "We've been talking to all four of the labels for at least two years," he said. "We haven't had any success ... but the conversations continue."

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