iTunes' Death Knell

In 1999, around the time Napster had the music industry up in arms for allowing anyone to "sample" an entire song for free—without anyone's permission—I had a heated discussion with my friend Dave. My argument was that Napster's service was, in essence, theft... meaning its users, then, were thieves. "A musician standing on a street corner is asking potential customers to sample their music, for free," I said (I later learned the term for this—'busking'), "but when users listen to music for free without the musician's permission, or the record label's permission, it's theft." Over the years, Dave's retort has never wavered—even if my argument were true, even if you call illicit music sampling theft, record sales have not diminished as a result and, to the contrary, users can now discover music in ways they've never been able to before. For instance, in the 1950s, you could go down to a record store and listen to a record for free to see if you liked it. What was so different about Napster?

Unfortunately, Napster was quite different. People weren't merely sampling—they were looting the entire store and not overtly leaving any tips. There was no established method to make money off of this radically new model. And like all new technologies that threaten the status quo, the Powers That Be freaked out. They acted fast and shut Napster down.

My discussion with Dave continued over the months and our banter eventually concluded with what I thought was the ideal business model to appease both disparate groups: customers wanted to freely sample music and not feel gouged by having to buy an entire album to get only a couple of songs; producers wanted to be paid for providing content. I remember sitting in Dave's computer room and saying, "Someone needs to create a system where anyone can listen to any song for just 30 seconds, for free, and buy only one song if they want—not necessarily the entire album—for only one dollar."

Later that year, Steve Jobs announced iTunes. Customers could listen to 30 seconds of any song and buy individual songs for only 99¢. iTunes has sold over 1 billions songs to date.

***

Whatever happens in the music industry eventually hits the movie industry. Music execs were worried about pirated MP3s until Apple found out how to make money with iTunes. As bandwidths increased, more data could be streamed and now movie executives faced the same problem the music industry faced in 1999—how do you make money when more people pirating your DVDs or streaming your content online?

I struggled with this question for a long time. I've always felt Napster enabled music piracy, but I could see Dave's point, too—sampling isn't inherently bad if it allows more customers to see your product. If it takes seven touches to a sale, you'd actually want to promote your product as much as you can and piracy is astonishingly efficient at that. Simply from "word of mouth", piracy adds more value to the product. Eventually, Steve Jobs also reached that conclusion, which is why Apple has positioned itself to dominate the market for distributing digital entertainment.

Here's what most people don't get: Apple isn't selling music or movies. It's selling convenience. When it becomes easier and safer and more legal to download music or movies from a legitimate source, 99¢ is a small price to pay to save yourself all the anguish of searching for and downloading a song and relabeling its tags, etc. For many years, there wasn't any alternative like iTunes, but people just wanted to listen to music. So when everyone suddenly broke into the store, there was no believable legal threat to make them stop. Apple offered up a much cleaner solution... and the market responded.

Unfortunately, the iTunes model is still imperfect. Let's say I want to buy a music album, but then my hard drive crashes. Unless I've backed up my data, I've now lost my music forever. Yet the technology exists to let me re-download my album (if I want to go to the trouble to prove I lost my data). And that's where we're at: property-based digital ownership. I can buy a DVD, but if it gets scratched, I'm hosed. I can download an entire season of 24, but if I delete episodes off my hard drive to save hard drive space, those episodes are gone forever. Perhaps the worst problem is all the proprietary restrictions: if I buy a song or movie for my iPod, I can't play that same song or movie on another MP3 player (what if my iPod doesn't work in my car so I want to burn my MP3s onto a CD for my car? Nyet.)

About four years ago, Dave introduced me to Steam. If you play any kind of games on a PC, you're bound to hear about Steam at some point. Steam is an online gaming platform which takes an innovative approach to software ownership. If you buy a game on the Steam platform, you don't own a physical copy, but a license of that game. This means you can download the game, play it, delete it, then download it again whenever you want. Forever. In fact, you can download the game from anyone else's computer and play it there. Because the software will only work when you sign in under your own account, the game is uniquely tied to you. Forever. Unsurprisingly, Valve, the creators of Steam, are branching out into offering music and movies through Steam.

It didn't take long for me to connect the dots: the way of the future is license-based ownership. In the future, we'll buy a license for music, movies, software... even books. Wherever we go, we'll be able to watch or listen to or read whatever we want whenever we want—we won't need to lug around DVDs or CDs or books. Even better, because computers will be everywhere, we'll just sign in with our unique username and password and access everything we own.

From that viewpoint, iTunes' model is still archaic. So imagine my surprise when Josh told me about movie studios joining together to create a new "rights locker" called DECE. Consider these forward-thinking features:

• Participating devices and services will be interoperable regardless of differing brands or corporate provenance. A TV episode, for instance, could be just as easily accessed on Microsoft's Zune as it would a Philips broadband-enabled TV set.
  
• DECE would allow an unlimited number of copies of a video to be created or burned onto a disc.
  
• The consumer would even have the option of not storing the copy at all, but rather streaming it from a server-based "rights locker" that can be tapped from any location.
  
• DECE would create open standards whereby any company that chose to create contents or services can do so to available specifications.

Apple is not yet included with DECE and that's a big problem for Apple. They're currently the dominant provider of digital content but the market will change if other providers allow better features than iTunes.

I suppose one could still argue piracy is theft. Technically speaking, of course, it is. Nevertheless, piracy has forced the market to (finally!) start offering content the way users have always wanted it—content bought in one format never has to be re-bought in another format. Consumers will get content how they want it and producers will have a way to get paid for it. With results like that, piracy may still be called theft, but is there anyone left who really cares anymore?

Full article follows:

LOS ANGELES (Hollywood Reporter) - Hollywood is challenging the hegemony of Apple in digital distribution. A consortium of major studios -- excluding key Apple ally Walt Disney Co. -- is teaming up with leading retailers and consumer-electronics firms to essentially transform the paid download into an experience akin to buying a DVD. The goal is letting video purchased at any outlet be played on any device worldwide.

Known as the Digital Entertainment Content Ecosystem (DECE), the consortium brings together Warner Bros. Entertainment, Fox Entertainment Group, NBC Universal, Sony, Paramount Pictures and Comcast Corp. with retailer Best Buy along with tech giants Microsoft, Hewlett-Packard, Cisco, Philips, Toshiba and Verisign. Each company has an invested an unspecified sum in the endeavor.

"When we start to bundle these digital rights together, we believe we can actually develop and deliver a product to the consumer that's better than free," said Mitch Singer, chief technology officer at Sony Pictures and the lead architect of DECE.

All together, they are mounting what may be the most radical redefinition yet of digital rights management. In its current form, DRM largely confines content to a limited number of devices depending on the source of that content. For instance, a song purchased on Apple's iTunes can be accessed on no more than five different computers and can't be legally played on a portable device beyond the iPod.

If DECE takes hold, it would institute several precedent-setting principles:

-- Participating devices and services will be interoperable regardless of differing brands or corporate provenance. A TV episode, for instance, could be just as easily accessed on Microsoft's Zune as it would a Philips broadband-enabled TV set.

-- DECE would allow an unlimited number of copies of a video to be created or burned onto a disc.

-- The consumer would even have the option of not storing the copy at all, but rather streaming it from a server-based "rights locker" that can be tapped from any location.

-- DECE would create open standards whereby any company that chose to create contents or services can do so to available specifications.

Freeing up digital content would also offer a marked distinction from the rights offered by market leader Apple under its Fairplay system. Apple's dominance of the digital marketplace also affords it considerable leverage in licensing negotiations over many of the studios involved in DECE.

"While we haven't yet had conversations with them about joining, we'd love to have them," said Singer, who added that DECE has reached out to Disney. "We're going in a slightly different direction than Apple by offering more choice in terms of storefront and device."

Other prominent companies not named to DECE: CBS Corp., Amazon, Walmart and leading telcos such as AT&T and Verizon. While not every company that hasn't joined has even been approached yet, those that have aren't necessarily opposed to DECE, according to Singer.

"If I had to characterize it, it's more of a wait-and-see mode than something they don't want to be involved in," he said.

But DECE is aimed just as much at providing an alternative to piracy as it is competing with Apple. Rampant illegal downloading has long been seen as an outgrowth of today's fragmented digital marketplace, which stymies consumers by requiring content providers to tailor their product for each distributor.

DECE represents yet another ambitious attempt by Hollywood to avoid the fate of the music industry, which has largely dropped DRM altogether. The consortium aims to give digital distribution a shot in the arm. For all the success of iTunes, XBox and Amazon, their collective sales haven't matched the growth curve experienced by DVD.

DECE plans to announce a brand name and logo, as well as a more detailed plan, at the upcoming Consumers Electronics Show in January. It also expects to name more companies to the consortium in the coming months.

Singer said he has began developing DECE inside Sony Pictures six years ago, constantly changing the formulation to meet the latest technologies. Outreach to other companies started in 2006. Link.