12 April 2007

The Death of DRM and Rise of Market Economics

As everyone is no doubt all to aware, EMI and Apple have jointly announced that, starting in May, DRM music will be available from the iTunes store - for a price. DRM free tracks will be $1.29 at 256 kbps while the 128 kbps tracks will remain DRM crippled at the old price.

Personally I share Ryan Block's view that this doesn't go far enough. The fact is that if they were committed to this they would have removed DRM from all tracks not just the more expensive ones. The fact is that there are thousands of 128 kbps tracks on the P2P networks already so adding some more will make no difference. Steve Jobs' answer to a reporter's question on the very issue was that he didn't want to make customers pay more unless they wanted too - a pathetic weak answer that dodges the issue; after all if the track is DRM free at the same price then the customer won't pay more, will they?

The question for me is who dreamed up this scenario for the 99c tracks? Was it Apple or EMI who decided that the 99c tracks must remain encumbered with encrypted crap? It's hard to tell. EMI's press release refers to "a variety of bit-rates" but still mentions "premium downloads" while Apple's release hardly refers to EMI at all.

Let us assume for a moment that EMI is living up to the "a variety of bit-rates" statement in their press release and that, actually, music stores will have the choice of any rate. Presumably the higher rates mean the retailer must pay a premium to EMI so. It also means that stores could offer 128 kbps DRM free tracks for possibly the same price as now.

Now, here's where the economics comes in (you were dreading this part weren't you!). Any good economist knows that one of the major hindrances to the smooth operation of the free market is its barriers. Barriers refers to those little things that get in the way of Adam Smith's "invisible hand" from coming in and ensuring the prices are at the appropriate level. It's those barriers that mean that (in most places) there are perhaps only 4 oil companies operating who can then jack up the prices in their oligopolistic market environment. Simply put, they prevent competition through such factors as the cost of entry to market.

For online music DRM has always been the entry barrier. Sure, anyone can have DRM - but they can't have the DRM. The FairPlay DRM that works with the ever popular little Apple branded digital music player (you know the one I'm talking about). Removing DRM smashes that barrier immediately. We can have music stores coming in from all over the place and offering DRM free iPod compatible music. This opens the way for much fairer competition.

Now to be reasonable we have to remember that one of the barriers still exists in the form of the record companies oligopoly-like contracts and prices. But these have largely already been established since there is a plethora of WMA music stores out there. If these music stores convert to DRM-free MP3s or AACs (which I think they will to make themselves iPod compatible) then we have the economist's ideal situation - monopolistic competition.

We will have a true market. Cheaper music? Sure. Higher quality music? You bet! If anyone's unhappy with iTunes' 99c DRM wall then I'm sure other providers will be quite happy to undercut them. In my opinion this is all highly possible. An example: BuyMusic.com was one of the very first online music stores after iTunes. Ever noticed they offer many tracks cheaper than iTunes and they are already at double the bit rate! Now imagine them DRM free.

The choices for filling your iPod might just get juicier...