Apple's Steve Jobs and EMI's Eric Nicoli at the London press conference where they announced that they’re dropping antipiracy software for digital downloads and adding higher-quality tracks.
EMI on Monday became the first major label to rewrite the iTunes rule book, dropping antipiracy software from digital downloads and adding higher-quality, higher-priced versions of music tracks.
Digital Rights Management software, or DRM, has been used since the iTunes Store's inception in 2002 to limit the number of times a download can be copied. EMI will offer most of its catalog and new recordings free of DRM, at higher quality, for $1.29 starting in May. Lower-quality downloads of EMI tracks with copying restrictions will still be sold on iTunes for 99¢.
Assuming Apple continues to take 30% of revenue on iTunes, EMI will get about 90¢ per DRM-free download, compared with the 70¢ it currently receives.
Deal marks the first time a record label has successfully persuaded Apple to raise the price on music downloads and the first time a major label has allowed its songs to be sold without copying restrictions -- which many online retailers have requested for years and Apple topper Steve Jobs started advocating in a letter in January.
EMI was already talking to digital musicstores about dropping DRM in January, industry insiders said, indicating that Jobs' letter may have been as much a reaction to industry trends as a cause of EMI's decision.
One band not included in the deal is the Beatles, the prize jewel in the EMI catalog. The band has never allowed its songs to be offered digitally.
"We're working on it, and we hope it's soon" was all EMI chief exec Eric Nicoli said at a Monday press conference in London about the possibility that the Beatles catalog would come online.
Users who buy the DRM-free songs from iTunes will be able to play them on most, though not all, digital music players and music-enabled cell phones.
They'll also be able to email unlimited copies to friends and burn an unlimited number of CDs. Many music industryites have resisted dropping DRM because it will make it easy for customers who normally don't illegally download music to casually share songs.
"When you have a format that's unprotected, and you don't have the tools to provide an incentive for legal behavior, what you end up with is a huge amount of unpaid acquisition," Recording Industry Assn. topper Mitch Bainwol said in a recent interview about DRM. "Even if there is already illegal activity, the bet with moving to (no DRM) is that there will be more legal activity. That's a very significant bet to place."
Many critics have pointed out, however, that piracy has shown no signs of abating in the past few years despite the music industry's many attempts to crack down. In addition, because CDs ship without DRM, it's already simple to casually copy songs.
Perhaps most importantly, CD sales are down 20% this year, and while digital downloads are rising, they're not increasing fast enough to match the physical media dropoff. EMI is betting the higher price point and appeal of music without DRM could help change that.
"We expect sales to grow as a result of this and hope digital growth will outstrip the decline in physical sales," Nicoli said.
Deal will provide the first test of whether consumers are willing to pay more to get digital content that works on any of the proliferating number of digital devices, many of which don't play the same types of DRM-protected songs and video.
"There are two issues that need to be addressed to take digital music to the next level: interoperability and audio quality," Jobs said of the potential benefits of the agreement.
It will almost certainly be a boon for competing digital music companies like Yahoo, Napster and RealNetworks, which will also get access to EMI's DRM-free program. That will allow them, for the first time, to sell EMI songs that work on Apple's market-dominating iPod.
Apple topper Jobs said his company will "now reach out to all the other major and independent record labels to offer the same service."
The other three majors -- Universal, Sony BMG and Warner -- refused to comment on venturing into DRM-free waters; Warner Music CEO Edgar Bronfman Jr. has been the most vocal of any execs about not abandoning DRM software.
Numerous independent labels will likely take advantage of the offering. Many already sell their music DRM-free via indie musicstore eMusic.
Apple has been under pressure from several European governments and consumer groups to either license Fairplay, the proprietary DRM system on iTunes, to other musicstores, or drop DRM entirely. Fairplay doesn't work on any digital devices except the iPod.
By making the deal with EMI and offering the same terms to other labels, Apple has ended criticism that it is boosting sales of the iPod and iTunes by tying the two together via DRM.
Many insiders have noted, however, that now that it has sold more than 88 million iPods and stands atop the market, Apple can drop DRM on iTunes with much less risk to sales of its very profitable device than if it had done so soon after the iTunes Store launched.
EMI has previously experimented selling music without DRM, offering Norah Jones' single "Thinking About You" and Relient K's album "Five Score and Seven Years Ago" on Yahoo!; Sony BMG did a similar test last summer with Jessica Simpson's "A Public Affair."
As the smallest of the major labels, EMI is perhaps the most logical choice to start experimenting with the sale of songs without antipiracy protection. In addition, EMI, like Apple, has been working to stay on the good side of European regulators as it continues to position itself for a sale or merger.
In a bid to boost album sales, EMI won't raise the price of downloading a DRM-free album from the now typical price of $9.99. In addition, label will won't raise the $1.99 price for downloading its musicvideos as it removes DRM from them in the coming weeks.
EMI will keep DRM on songs downloaded via subscription services such as RealNetworks' Rhapsody. Under those plans, users pay a monthly fee for unlimited music, but the tracks disappear if they stop paying.
(Gordon Masson in London contributed to this report.)
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