02 April 2007

Apple: Confidence vs. Protectionism

Today Apple announced that all songs from EMI will be available free of DRM (digital rights management) limitations. In the past it was like this for EMI music on iTunes:

  • $0.99/song
  • $10.00/album
  • AAC at 128 kbps
  • All music with DRM (only playable on 5 computers, can't burn in same playlist over 7 times, only playable by Apple applications or devices)

    Starting in May 2007, all EMI music will also be available as follows:

  • $1.29/song
  • $10.00/album
  • AAC at 256 kbps
  • No DRM

    This affects not only music but music videos. From the press release:

    iTunes will also offer customers a simple, one-click option to easily upgrade their entire library of all previously purchased EMI content to the higher quality DRM-free format for 30 cents a song. All EMI music videos will also be available in DRM-free format with no change in price.

    Famous business man, Warren Buffett once said: “In business, I look for economic castles protected by unbreachable ‘moats’.”

    "In days of old, a castle was protected by the moat that circled it. The wider the moat, the more easily a castle could be defended, as a wide moat made it very difficult for enemies to approach. A narrow moat did not offer much protection and allowed enemies easy access to the castle. To Buffett, the castle is the business and the moat is the competitive advantage the company has. He wants his managers to continually increase the size of the moats around their castles.

    When looking to purchase a business, Buffett pays careful attention to a business he understands not just in terms of what the business does but also of “what the economics of the industry will be 10 years down the road, and who will be making the money at that point.” He is “also looking for enduring competitive advantages.” This, in a nutshell, is what makes a company great: the width of the moat around the company’s core business."

    Apple has decided that the enormous moat it has in DRM is not as valuable as making customers feel unlimited by their technology. This is like Apple sending forth from its impenetrable castle and scheduling a battle, say next month on the open valley, Apple against everyone, all sportsmanship like. This kind of courage and confidence is something unique indeed. So what of Buffet's moats and competitive advantage analysis? I think it still holds, it's just that Apple's sustainable competitive advantage is their deep trust in the inherent value of their products and the experiences they provide. Almost no one has that these days.

  • 9 comments:

    Jack said...

    I think you have to be careful when referring to Apple's DRM as a "competitive advantage". Whilst the DRM did pose significant lock-in, there was always the analog hole which iTunes happily allowed.

    It is debatable but I've always thought the presence of DRM on the iTunes store was a compromise that Apple made so that it could have access to a great library of songs.

    I think the competitive advantage of the iTunes store was 1) the tight integration with all iPod models and 2) the presence of an analog hole rather than a complicated DRM system with arbitrary usage limits. I believe the real unbreachable moat is the iPod (and when I say unbreachable, I mean about as breachable as the Walkman was during its heyday).

    jpmuk said...

    I think this really shows Apple's confidence in their product and it also stops forever the chance that Microsoft can own this market by their usual 'lock-in' practices.
    Apple is willing to go head to head with everyone using only their easy to lose current lead. I think they are either pretty mad or they have some terrific products just round the corner (second option is more likely...).

    RONDINI said...

    'All music with DRM (only playable on 5 computers, can't burn in same playlist over 7 times, only playable by Apple applications and devices)"

    not really true, as once it is burned, the DRM is removed, hence playable anywhere, on any device that can read the disc and file format you chose.

    Anonymous said...

    >only playable by Apple applications AND devices

    I think that should surely be OR.
    iTunes on Windows plays back protected content just fine, and also allows burning to CD for playback on any device. You can currently pay Apple a mere 99cents for one track and create a CD on a Windows machine with that track on it.

    Otherwise, I agree with your sentiments entirely!

    David Weiss said...

    Changed from 'only playable by Apple applications and devices' to 'only playable by Apple applications or devices.' Thanks!

    Massive said...

    The price of albums isn't increased for DRM-free ones?

    David Weiss said...

    Correct! So if you buy albums, there's no reason not to go with the higher quality no-DRM versions for EMI music.

    Jough said...

    I've owned some iPod or another for three years now but have never purchased a track at iTunes due to both the DRM and quality issues.

    Now that they've solved both of these problems at once, I'll be far more inclined to use the ITMS.

    Of course, for the moment that means finding some EMI artist that I actually want to listen to that I don't already own on CD or in some high-quality mp3 (which is an oxymoronic expression to some, I know).

    Blain said...

    (I'm not sure if my comment got through the first time, but...)

    It's confidence, true, but it's also a moat that nobody ever thinks about. ITMS's biggest and strongest competitor is not Microsoft. It's not Real, nor Creative, nor any subscription services. The real competition is Limewire and Bearshare. In other words, "piracy".

    In that sense, price isn't the moat. DRM isn't the moat either. Both of those have been used by other services in competing with almost no success. Remember playsforsure? The 79 cent songs? They're horrible moats, not even knee-deep!

    The real moat is ease of use and quality. The 99 cent iTMS price was first pitched as cheaper than 'free' because of the time saved as opposed to searching for a good recording to download. And by removing steps in the way of moving songs about between computers and players, that moat just got a whole heck of a lot wider.