Steve Jobs vs. the music industry

NEW YORK (CNNMoney.com) -- The music business is in a funk. Everybody knows that.

The four big record labels are scared excrement-less about the impact of digital music piracy and the effect it will have on song and album sales.

Apple chief executive officer Steve Jobs is challenging the music industry to get rid of technology that makes it difficult for consumers to transfer digital downloads they've bought to various devices.

But the current solution to this problem is to load up downloads with cumbersome digital rights management technology that makes it tougher for consumers to easily listen to their music on any device they want.

Fortunately, there is somebody out there who is fighting for the average music lover. And he's kind of a powerful guy. You may have heard him. It's Steve Jobs, the chief executive officer of Apple (Charts), which makes the ubiquitous iPod and runs the popular iTunes store.

In a message titled "Thoughts on Music" published on Apple's Web site Tuesday, Jobs urged the big music companies -- Universal, Sony BMG, which is a joint venture of Sony (Charts) and German media firm Bertelsmann,Warner Music Group (Charts) and EMI -- to abandon DRM.

"Imagine a world where every online store sells DRM-free music encoded in open licensable formats. In such a world, any player can play music purchased from any store, and any store can sell music which is playable on all players," Jobs wrote.

"This is clearly the best alternative for consumers, and Apple would embrace it in a heartbeat. If the big four music companies would license Apple their music without the requirement that it be protected with a DRM, we would switch to selling only DRM-free music on our iTunes store," he added.

So now that Jobs has thrown down the gauntlet to the music industry, will his plan work?

It depends on what you think the motivation behind his manifesto really is. If it's to get the music industry, which is notoriously slow to adopt change, to give up on DRM immediately, don't hold your breath.

"In the near-term, this letter is going to have minimal impact. I fundamentally agree with much of what Jobs said. The record labels drive DRM adoption," said Michael Goodman, an analyst covering digital entertainment for Yankee Group, a tech research firm based in Boston. "DRM is not going away because the record labels aren't going to let it go away. They are too paranoid about piracy."

But Adam Grossberg, a spokesman for EMI, said that the company has been experimenting with selling music online without DRM. The company is selling a new single from jazz star Norah Jones through Yahoo!'s (Charts) music site that is in an unprotected MP3 format.

"It's clear that the lack of interoperability between devices is an issue for consumers," Grossberg said. "We are working with various partners on a solution. We are open to new business models."

A representative from Sony BMG had no comment about Jobs' remarks while representatives from Universal and Warner were not immediately available for comment.

Another analyst thinks Jobs will be successful in getting the industry to abandon DRM. It just may not happen overnight.

"Before the end of the year, there will be significant movement in getting rid of DRM. The industry doesn't want to admit a mistake but they will want to try and wait long enough to implement things so they can say Steve Jobs didn't influence them," said Phil Leigh, senior analyst with Inside Digital Media, an independent research firm based in Tampa, Fla.

Leigh predicts that the labels will start by offering back-catalog albums and songs without DRM first, i.e. older music that will appeal mainly to an older audience that isn't as likely to pirate music, before rolling out new releases without DRM.

But analysts said that it appears Jobs' main motivation is to sway public opinion and show that it is the record labels, and not Apple, that are the bad guys in this debate. Apple has come under fire from some, most notably in Europe, for its FairPlay DRM on iTunes.

"This is very much a public relations-related move. The fact that Jobs wrote this letter and published it is a PR campaign," said Goodman. "Apple is getting a lot of heat for being a closed product so part of the goal is to shift the pressure and emphasis on getting rid of DRM from Apple on to the record labels."

Goodman added that it makes sense for the music labels to listen to Jobs since digital rights management is not that effective in stopping piracy anyway.

"The reality is that DRM is essentially useless. It's repeatedly hacked on a daily basis. All you have to do is burn music to a CD and then rip it and then the files are unprotected MP3s again," he said.

But Leigh thinks that not all consumers are willing to take that extra step.

If the labels resist the calls to get rid of DRM, that could slow growth of digital music sales, which presumably could hurt Apple, which is increasingly relying on the iPod as a source of revenue and profits.

After all, digital music sales still represent just a tiny fraction of overall music sales -- 9 percent during the first half of 2006, according to the most recent figures from the Recording Industry Association of America. (This figure grows to 18 percent if you include revenue from mobile and subscription services)

Clearly, Apple has a lot to lose if growth in the digital download business grinds to a halt since this is still a nascent industry.

"To take digital music truly into the mainstream, music needs to be freely transferable from one device to the other," Leigh said. "The typical mass market consumer sees one error message and throws up their hands and they are not going to pay for a service that further complicates their life."

So the ball is now in the record labels' court. Steve Jobs has made a masterful move to make an industry that's already despised by many consumers look even more greedy.

If the big four labels stubbornly stick with the notion that DRM is needed for digital downloads, Jobs definitely will come out looking like the champion of music fans.

But if he can actually get the labels to drop DRM, Apple should benefit even though, in theory, a more open digital market for music could make it easier for people to use rival products like Microsoft's (Charts) new Zune player.

"Certainly Apple has used DRM to their advantage to help control the marketplace," said Goodman. "But Apple must be comfortable that it can maintain market share in music."

• Happiness is a warm iPod
• Neglected Napster: No buyer in sight
• CBS faces the music