The music industry is in complete disarray; the shift away from CDs is irreversible and most consumers simply expect music to be free. The recording industry’s hostility, arrogance, and litigation tactics have alienated everyone, making it harder for the industry to imagine a business plan that works – especially while it’s controlled by executives who freely admit they don’t understand these new-fangled Internet tubes.

It’s no surprise that many different plans for distributing music are under way, and it shouldn’t be a surprise that the reporting is frequently confusing or wrong. Let me give you the shortest of refresher courses so you can follow the headlines.

You’ll see the term “MP3” used freely and not always accurately. MP3 is a file format, one of the original formats for storing music that’s been compressed to make smaller computer files while still preserving much of the original sound quality. It’s not completely free – there’s a patent and license fees change hands – but it’s neutral because an MP3 file does not have any bits devoted to restricting use of the file. In other words, MP3 files are essentially not capable of being locked down by DRM restrictions.

When music first began to be played on computers and Napster was flourishing, almost all music files were in MP3 format.

The recording industry doesn’t like MP3 files. If you buy one, you can copy it, you can transfer it, you can use it in multiple ways (on a CD, on a handheld device), all without paying any more money. That interfered with the entertainment industry’s plan to reinvent copyrights to deliver unlimited streams of revenue by requiring new payments every time your use of a copyrighted item changes in any way.

The industry demanded files that could be controlled and the explosion of file formats began – Microsoft’s WMA, Apple’s AAC, and others – all devoted to playing music only if certain conditions were met.

  • Pay for the file and it plays for a week, or a month, or a year, then stops unless you pay more money.
  • Pay for the file and you can play it on your computer but not burn it on a CD or play it on your friend’s computer.
  • Pay for the file and you can play it forever on this computer but not on the computer you get to replace it unless you engage in a complicated wrestling match with licenses.
  • Pay for the file and you can play it on an iPod but not on any other handheld device.
  • And a thousand more variations that have been infuriating consumers for years.

The press typically refers to all of these files as “MP3 files,” in the belief that the term is synonymous with “music file.” It’s not.

There’s some momentum now towards delivering files that do not have any DRM restrictions, since consumers have become well-informed enough not to want them. Much attention was given to Apple’s announcement that it would begin selling DRM-free music in its iTunes store. Although the files do not have any DRM restrictions, they are still in Apple’s proprietary AAC format, which some software will not play and which cannot be used with any handheld device other than an iPod.

EMI and Universal were the first to open their libraries (reluctantly) for sale in MP3 format. Amazon took advantage of that as a marketing wedge for its music store selling genuine MP3 files – universal acceptance in all software and all devices and no DRM (and a clever bit of software that automatically adds purchases to your library if you’re using iTunes, making it almost as convenient as purchases from the iTunes store).

During next February’s Super Bowl, Pepsi and Amazon will advertise a massive year-long promotion where codes under bottlecaps can be exchanged for music downloads. The twist is that the downloads will be MP3 files from Amazon – and Pepsi will be distributing enough codes for 1 billion free downloads. That’s a lot of music, and a lot of consumers being introduced to Amazon’s music store!

Some analysts wonder if we are approaching a tipping point that will force the other labels to agree to distribute their music in MP3 format and leave ineffective DRM restrictions behind. WalMart is pressuring the labels to sell their catalogs in MP3 format, and Warner Music Group and Sony are considering MP3 tests, previously unthinkable.

All of this is good for consumers but not the whole story. The labels are getting enthusiastic again about subscription services, where a fixed monthly fee opens up access to all the music you want. Most recently it turned up in a breathless announcement from Universal about “Total Music,” a service to be bundled with cell phones and priced so low that carriers won’t even bill for it separately, giving the impression that the music is free.

“With the Total Music service, Morris and his allies are trying to hit reset on how digital music is consumed. In essence, Morris & Co. are telling consumers that music is a utility to which they are entitled, like water or gas. Buy one of the Total Music devices, and you’ve got it all. Ironically, the plan takes Jobs’ basic strategy– getting people to pay a few hundred bucks for a music player but a measly 99 cents for the music that gives it value–and pushes it to its extreme. After all, the Total Music subscriber pays only for the device–and never shells out a penny for the music. “You know that it’s there, and it costs something,” says one tech company executive who has seen Morris’ presentation. “But you never write a check for it.””

Swell! Except for the teensiest bit of ambiguity about DRM restrictions – but there was room for optimism. After all, Universal is already experimenting with MP3s, right? Why not generate some goodwill by giving consumers the format they want in this situation where a flow of income is guaranteed?

The optimism lasted about a month until the details became available. Universal’s “free music” will arrive in Microsoft’s WMA format, meaning the files can’t be played on iPods or Zunes. (That’s right – Microsoft’s “PlaysForSure” WMA is a format that Microsoft designed and promoted before abandoning it – its own handheld, the Zune, can’t play the files.)

Universal’s first partner is Nokia, and other labels may get involved. You’d be able to download music to your cell phone, which presumably will have the specs to be a good music player. The music won’t turn off when your cell contract runs out, which is good. But there will be DRM restrictions – you won’t be able to burn the music to a CD, for example, and it’s still unclear whether the tracks are transferable and playable by anyone else.

There may be a “tipping point” ahead but there’s still a long way to go before the recording industry stops trying to build its business around crippled products and concedes that informed consumers want unrestricted files in generic formats.

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