Sony vs. iTunes

Nov 30, 2005 at 12:00 am

Somebody does you a favor, and this is how you treat them?

It’s true that Apple has done more for legalized downloads than a thousand RIAA (Recording Industry Association of America) lawsuits, but suddenly it finds itself engaged in a territorial pissing match with all the elements of a Sopranos subplot.

The major families, er, labels, whose stranglehold on radio and distribution has allowed them to lord it over the music business for a great many years find themselves in decline. For four of the last five years, CD sales have dropped (they’re down almost 20 percent since 2000, according to the RIAA’s numbers), and, after last year’s modest uptick, are down another 6 percent in the first six months of this year. Meanwhile, illegal downloading continues to grow despite the RIAA — the label-friendly trade group that represents the U.S. recording industry — campaigns of threats and coercion. What’s a major label to do? Find another piece of the pie.

Then they look over at Apple’s Steve Jobs with his stylish new kicks. Thanks to the marketing success of the iPod and Apple’s proprietary software, iTunes has sold more than half a billion songs since its debut in April 2003, and more were sold in the first six months of this year than all of last. It’s not surprising someone sized Apple up as ripe for a shakedown.

The first hint something might be cooking came in September when Jobs publicly complained at an Apple Expo in Paris that with the lower distribution and manufacturing expenses presented by digital, downloads were already lucrative for the labels. He rejected the labels’ suggestion of variable pricing, standing by the 99-cent price point. (Labels reportedly get two-thirds of the download charge.)

“If they want to raise the prices it just means they’re getting a little greedy,” Jobs said. “We’re trying to pull people away from piracy and say, ‘You can buy these songs legally for a fair price.’ If the price goes up a lot, they’ll go back to piracy. Then everybody loses.”

A few days later, Warner Music Group CEO Edgar Bronfman Jr. shot back, “Not all songs are created equal — not all time periods are created equal. We want, and will insist upon having, variable pricing.”

Of course it makes perfect sense for Bronfman and the rest of the major label-driven industry, given their focus on marketing flash-then-gone pop acts instead of developing artists, like they did in the 1970s. These days, if the labels can’t cash in on the two hit singles, what are they going to do, since most albums they sell are stuffed with filler and have limited shelf life? They don’t see any reason why they can’t charge the same $2.50 they do for ringtones of a tune.

The thing is, Jobs is no fool. He’s learned a thing or two from his tussles with Microsoft. In much the same way that Gates used the bundling of his software with cheap home computers, Jobs has leveraged his market dominance with the stylish iPod to establish his iTunes empire, by making it indispensable to the player.

The key is Apple’s proprietary software, which it hasn’t licensed to any other record label or digital player manufacturer, much like the Mac computer. When Apple controlled only 10 percent to 15 percent of the market as a PC manufacturer, it was afforded little advantage. But with iPod holding almost 80 percent of the market, it’s made iTunes an enormous success. Not only does it comprise almost three-fourths of all legal downloads, but a recent study found it tied with P2P (peer-to-peer) software Limewire as the second most popular music download network, illegal or otherwise, behind WinMX.

Apple’s success amid the labels’ troubles has been a frequent source of grumbling. Two of the four major labels — Sony BMG and Warner Brothers — failed to negotiate a license with iTunes for the opening of its Australian and Japanese music stores in September, a signal that when iTunes American licenses are up next spring, the deal will become contentious.

Analysts say the majors are worried.

“While [the major labels] are concerned about these falling revenues, they’re also concerned about Apple controlling this much of the marketplace,” says consultant and analyst Mike McGuire, of Gartner G2, a market research and consulting firm. “But the point is, they need to keep satisfying online folks who get their music this way.

“They kind of have each other by the short hairs. The labels need the legitimate online source, whether it’s iTunes or something else, to continue to grow. Remember, just four years ago the labels were the guys wondering who was going to help them out with this technology, hold back piracy and introduce these legitimate stores. Apple was the one who came up with the plan, not only with their product, the iPod.”

The label that’s most cantankerous toward iTunes is Sony BMG. The giant recently opened fire on another front with the embarrassing release of new copy-protected software on discs by Celine Dion, Van Zant and Alicia Keys, among others. These discs use a digital rights management (or DRM) system to limit the frequency and formats with which you can burn the CDs — Sony’s limits the user to three copies, and doesn’t support MP3s.

It doesn’t support iTunes, either, so the CDs can’t be transferred to an iPod. But the software has caused an uproar since its release. It began a couple of months ago when the manufacturing plant made an error in the pressing of Switchfoot’s CD, and the DRM wouldn’t allow a customer to burn any copies at all. (The disc was recalled.)

Soon, artists such as the Foo Fighters and Dave Matthews began expressing their displeasure with the software on their Web sites. Matthews’ label, ATO, which is distributed through BMG, wrote on its Web site, “Neither we nor our artists ever gave permission for the use of this technology, nor is it our distributor’s opinion that they need our permission. Wherever it is our decision, we will forego use of copy-protection, just as we have in the past.” Matthews and other artists posted workarounds to the software on their site, as did Sony eventually.

Then, two weeks ago it was discovered that Sony’s copy protection software installed an invisible “Trojan Horse” on the customer’s hard drive. It provided a potentially dangerous backdoor into your system that several virus-writers have already sought to exploit — and it couldn’t be removed. In an utter breach of privacy, the program also surreptitiously attempted to connect with the Sony servers when a connection was present. Antivirus companies designated it malicious code, and Sony distributed free “uninstall” software, which researchers at Princeton discovered “makes the computer even more vulnerable” in the process. (In a fitting bit of irony, the copy protection only works on Windows; discs burn problem-free on a Mac.)

About two weeks ago, Sony capitulated, announcing the recall of all discs with the offending copy protection software and suspending the further manufacture of discs with this scheme. Sony reported that it had shipped more than 4.7 million of the discs (49 titles in all) in the last eight months, and more than 2.1 million had been sold. (Lawsuits have been filed.)

Hopefully none of this obscures the real question — and answer: Why was Sony so anxious to put this copy protection out there that it apparently didn’t test it thoroughly? To try to pressure Apple to open its rights management for license, so someone else can get a piece of the iTunes pie.

Sony, we should note, also makes MP3 players and has its own download store, Connect, so it’s hardly a disinterested party. You’d think it would show a little more deference given all the prior ineffectual attempts to charge for downloads.

Not that anyone should worry about Jobs. The savvy folks at iPod have apparently cornered much of the market for flash-memory chips like those used in its new Nano, making it difficult for competitors to offer a Christmas alternative, and certainly not at a competitive price.

When spring comes, we may indeed see variable pricing of singles (albums already have it on iTunes), but don’t expect Apple to relent on its proprietary DRM software. Unfortunately, it’s the consumer who gets splashed in this little pissing match. Just hope they don’t sell you a Betamax.

Chris Parker is a freelance writer. Send comments to [email protected]