Music DRM's Final Days

But will higher sales follow?

Less than a year after eMarketer asked "Is DRM Doomed?," the answer is fast becoming "yes."

As The New York Times reported, Sony is the last of the big four music labels to offer music unrestricted by DRM for download from Amazon.com.

The move is important for several reasons, but music marketers will likely be most excited by the prospect of a larger online music market.

The problem is not that consumers aren't buying digital music. Indeed, digital track sales grew by 45% last year, according to the Nielsen SoundScan "2007 Year-End Music Industry Report."

Yet digital music sales are not making up for a CD sales slump, and online music consumption will have to be far more widespread than it is today to do so.

eMarketer and other firms have pegged DRM as one of the things keeping consumers from buying more music digitally. Why should consumers buy digital music, the thinking goes, if it lets them do less with their music than a CD, such as load music onto multiple computers and portable devices?

In this light, Amazon has made a bold entry into the music download wars. The company launched Amazon MP3 in September 2007, and already it has brought the largest music labels, which had previously been skittish about parting with DRM, together on the same service.

The move threatens to undermine Apple’s leadership in this area. It had gone essentially unchallenged since the emergence of the iTunes Music Store in 2003.

By one estimate, Apple controlled 70% of the US market for single-track downloads in 2006, and there is no evidence to suggest that Apple’s numbers have shrunk considerably since then.

Paul Verna, senior analyst at eMarketer, said that Amazon has a number of competitive advantages that may change the market share picture going forward, including:

• Historic strength in online retailing, a space the Seattle company helped pioneer
• Deep expertise in music retailing through years of selling CDs online
• The potential to link customers to physical product in cases where digital product might not be available (or vice versa)
• A time-tested customer-recommendation system that could easily be parlayed into a powerful music discovery tool

Regardless of who wins the market share contest, DRM is likely to play a role. Rhapsody, Napster and MSN Music all use Windows Media Player DRM protection, and all continue to struggle with low market shares.

Mr. Verna predicted that the elimination of DRM would level the playing field for the digital music industry.

"In 2008 and beyond, the winners and losers will be decided not by technological restrictions but by how they price and market digital music, and how successfully they build online communities around music," he said.

Link to eMarketer Article