Apple, Labels Focus on Copy Protection

The last time Apple Chief Executive Steve Jobs took on major recording companies, he refused to budge on his 99-cent price for a song on iTunes.

As a new round of talks ramp up this month, however, Jobs has opened the door to higher prices -- as long as music companies let Apple Inc. sell their songs without technology designed to stop unauthorized copying.

Jobs contends that would "tear down the walls" by allowing consumers to play music they buy at Apple's iTunes store on any digital music player, not just the company's iPods.

Although most of the major labels insist that safeguards are still needed to stave off online piracy and make other digital music business models work, one company has already struck a deal with Apple.

Last month, Britain's EMI Music Group PLC, home to artists such as Coldplay, Norah Jones and Joss Stone, agreed to let iTunes sell tracks without the copy-protection technology known as digital-rights management. The DRM-free tracks cost 30 cents more than copy-restricted versions of EMI songs and feature enhanced sound quality.

The other major labels -- Warner Music Group Corp., Vivendi's Universal Music Group, and Sony BMG Music Entertainment, a joint venture of Sony Corp. and Bertelsmann AG -- will be watching closely to see how the unrestricted EMI tracks sell.

"At this point, no one can ignore Apple or what Apple wants, given its position in the marketplace," said Michael Gartenberg, an analyst with Jupiter Research. "The fact that they were able to do this deal with EMI puts more pressure on some of the other labels to follow suit."

For their part, at least two of the recording companies will ask Jobs to sell a wider variety of content in digital bundles of songs, videos and other multimedia, according to two recording company executives familiar with their companies' plans. They spoke on condition of anonymity, citing the confidential nature of the negotiations.

Apple already sells some bundled tracks, but the music companies hope expanding those offerings will boost online revenue and help offset lagging CD sales.

Apple and the recording companies declined official comment on their negotiations.

Four years ago, the majors bought into Jobs' one-price-fits-all vision and agreed to such licensing terms at a time when online music services were failing to attract significant interest from music fans.

Since then, the popularity of Apple's iPods has swelled and the sleek devices now dominate more than 70 percent of the digital music player market, by some estimates.

While studies have suggested that only a fraction of the music on most iPods is actually purchased on iTunes, the service has ridden the iPod's coattails and helped cement its position as the top-selling online music service and one of the biggest music retailers overall.

That's given Apple considerable leverage in its dealings with the recording industry.

Last year, the main issue that dominated iTunes licensing talks was pricing, as some of the big music companies urged Jobs to entertain charging more for some songs than others.

The dispute percolated for months, but Jobs didn't budge, not wanting to complicate iTunes' simple pricing scheme for singles.

Eventually, the music companies each agreed to one-year deals, which expire this spring.

Now, Apple is facing pressure in Europe to license its brand of DRM technology to rivals so consumers can play the music they buy on iTunes on any digital music player, not just iPods.

Critics of the recording industry have argued for years that the labels are alienating customers by placing copy restrictions on legal music downloads, especially as many CDs have been sold without them.

The technology behind such measures differs, depending on the retailer and the music device. Apple, for example, has its own version, called FairPlay, that only works with iPods, making it cumbersome for consumers to transfer songs from iTunes across other portable digital devices. Likewise, DRM systems used at other online stores won't work with iPods.

Many music fans who don't want to deal with the hassle simply turn to online file-sharing networks to download no-strings tracks for free.

The recording industry has argued that copy protection software itself is not what makes some songs incompatible with some digital players, but the fact that there are different versions of the technology in use. The music companies have called on Jobs to license FairPlay to makers of rival devices.

Jobs has countered that the best way to get rid of technological barriers is for record labels to strip the copy safeguards from their music. He defends keeping FairPlay closed, saying that if it was widely available, it would become easier for hackers to figure out how to bypass it.

No matter what, Apple plans to continue selling standard, copy-restricted versions of songs for 99 cents each. With the EMI deal, Apple will this month start selling $1.29 premium tracks that are not only DRM-free but also of higher quality, compressed at twice the usual bit rate.

John Heard, an iTunes user in Santa Monica, said he would jump at the chance to buy no-strings downloads, even if it costs more.

"If I have the choice between something that doesn't have copy protection or it does, I'm always going to choose the thing that doesn't have copy protection," said Heard, 28, a television producer who spends about $300 a year on music, almost all on iTunes.

Buying a better-sounding track is appealing to David Sholle, 54, of Long Beach, a college professor who has purchased several hundred songs from iTunes.

"I'd be willing to pay for that," he said.

Anticipating a more competitive market, other companies are looking to break into online music sales. Online retailer Inc. first approached the major recording companies 18 months ago about launching an online music store.

A recent meeting prompted speculation that Amazon might begin selling unrestricted MP3s and other music downloads as early as this month. The company has declined to comment.

David Pakman, president and CEO of Inc., said the elimination of copy protection could help his company mine the rare, catalog recordings owned by major labels but not typically available on iTunes.

EMusic already sells music from independent labels in the MP3 format and boasts some 300,000 subscribers.

Pakman believes the major record labels will also eventually relent on requiring copy restrictions.

"We really think the market is breaking our way," Pakman said. "A noteworthy major will probably take some steps in this direction later this year."


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