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Friday, February 09, 2007

Really, How Much Sales Will Licensed Fairplay Drive?

By now, you have read Steve Job's note on DRM and the music industry's response.

And of course, the RIAA bureaucrats being bureaucrats focused on one area and smugly responded they would love for Apple to license Fairplay and everything will be resolved - ignoring the rest of the letter and of course, their presumption that we're morons - nothing new for them.

But let's take them on their word for that - what if Apple licensed Fairplay - how much more money would the record labels make OR would we pretty much be selling the same amount of digital downloads?

The iPod has about 75% of the DAP (Digital Audio Player) market and about 75% of the online digital music market (#2 is eMusic with about 12%). On the hardware side, the owners of non-iPods are either bargain hunters or simply hate Apple and/or would never buy an iPod. Other than the Zune and eMusic store if Napster, Yahoo, Rhapsody, Walmart, Sony and/or others switch to Fairplay - what would that prove? How much more would the market actually expand? We already know that the average iPod owners already buys less than 25 tracks. So while the DAP market is still growing but it's pretty clear that people know how to put tracks on their DAP's without having to buying it online - what is really holding people back? A great hue and cry from ipod owners to buy EXACTLY the same tracks at the Sony or Yahoo store? We even have some evidence that it won't make a substantial difference as Rhapsody advertises all their Fairplay tracks or Apple's can be "fixed." Their market share? <2%.

If the 5 online stores changed to Fairplay, wouldn't it be the essentially the exact same pool of dollars for the online market but just switched around a little? Some Napster user might now buy an iPod and buy tracks at iTS and at Napster while another iPod user might start buying a few more tracks at Walmart.com? We already know that the average iPod owners already only buy less than 25 tracks - what is the RIAA counting on here? ... That sales will double if you can buy the EXACT same tracks at WalMart.com and save about $3 dollars?

It wouldn't really solve anything as clearly eMusic and Zune are not coming onboard so it's not like the RIAA can say - now, all online music is the "same." All it will really do is throw some turmoil into Apple's financial projection spreadsheet ... which the RIAA would applaud, why? Because they seem to take glee at the misfortune of others? But then would it really? Wouldn't Apple actually sell more iPods since people don't think they're locked into iTS?

Why doesn't Apple want to do it? Of course, Apple has its own agenda - what corporation doesn't? Or for that matter, don't most people look out for the interest of themselves and their family first? Sure, the security thing is an issue. It should be pointed that Steve Job's mentions that if their DRM isn't secure enough, the record labels can pull their tracks so again, it circles back to the RIAA. It's clear if you distribute your code to others it will less secure - perhaps not substantially less secure but less secure nevertheless so now instead of just fixing Fairplay for your store when it's broken, you are responsible for getting tracks pulled by the RIAA if security is broken at Napster ... What would Apple hope to gain? Not much for more work.The royalty versus the penny they make on each track would probably even out. And what else? People would cry unfair unless Apple designed iTunes so you could switch stores so that if you clicked in iTunes on STORE, it would auto launch whatever other store you chose? Yea, that's likely to happen.

So, wouldn't the simplest solution be to sell DRM free Mp3's?

The member record labels of the RIAA already sell DRM free CD's that can become much higher fidelity mp3's with ONE CLICK of a mouse so why are online digital mp3's so much more difficult to swallow?

Money? A wholesale CD sells for around $12.99-$13.99. A digital "album" sells for around $9.99 but no one really knows the "wholesale" cost - probably around $9.50 but let's just say $9 to cover everything. So,there's a $4-$5 difference ... But ... A CD price includes the manufacturing, copying and printing of the CD - not to mention the booklet, the jewel box, warehousing, shipping, signage at stores, advertising co-op (to stores for displays, in Sunday circulars, etc ...) and of course, returns. It's different for each CD but it costs the record label approximately $6 to get each CD to the store. (I'm not counting studio cost, advertising or royalties since a digital versionwould have to include that cost also). EMI just shipped 1.6 million copies of Norah Jones "Not Too Late" to the stores this week so they have spent about $9.6 million so far on the CD. How much do you think it costs to encode an album to sell on the iTunes Store? A couple thousand? $10,000? My guess is somewhere in between and maybe even less - encoding takes minutes and someone has to listen through it and verify it's all okay and then off to Apple via a secure T3 line ... then it goes to a jukebox that will automatically re-load itself.

So, what exactly is the problem? There are no physical returns (they also pay the postage for the return), nothing to manufacture ... while Norah Jones will probably sell all 1.6 million shipped, it's not un-heard of returns to exceed 1 million units if they guess really poorly ... What exactly is wrong with digital? They don't seem willing to embrace the digital format - why is that? If you ask software manufacturers, they would be more than happy just to sell you digital downloads and a PDF manual ... video game companies are also willing to make it an online world - saving them on the annoyances of retail ... of course, it's not going to happen overnight but they seem eager to try and move the bar forward - music & movies? What are they afarid of? What is the RIAA afraid of?

The evidence seems pretty clear. They already sell an DRM free format (CD's). People clearly know how to convert these tracks to mp3's. But their clear intent is to protect CD sales (an open format) at any cost - why? Money? If that's the case, why not say so? People would be willing to accept an increase if it was an open mp3 ... But they've never field tested that concept, have they? Or is there another hidden agenda? Is it because digital sales are transparent? That Apple can provide you sales to the minute? But CD sales figures can be easier to fudge? In transit to warehouses? Out-transit? Promotional giveaways (record club CD sales are counted as promotional in many cases)? Being returned?

These are the questions the RIAA should answer. Why do they favor an 'open' format like CD's above all else - at any cost - of all else?

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