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Apple and EMI: Can They Turn The Music Industry Around?

Steve Jobs did it with iPod. Steve Jobs did it with iTunes. And now he's doing it again with EMI. "It" is turning the music industry on its ear.

EMI
EMI

Apple and EMI announced plans today at a splashy press conference in London to make EMI's digital music catalogue available on the iTunes website sans anti-piracy software, so-called Digital Rights Management. That's the pesky program that prevents consumers from downloading iTunes songs and then playing them back on something other than their iPod. And while that "closed ecosystem" had the beneficial side-effect to Apple of simultaneously creating the world's most popular online music store AND digital music player, consumers and the music industry, as well as European anti-trust regulators have loudly complained.

Apple simply became too dominant.

At the same time, CD sales around the globe have been plunging and the writing is on the wall for the recording labels. The next level for the recording industry is here. Music is going digital. Consumers are going online. And Steve Jobs says DRM is preventing the music industry from enjoying real growth by continuing to saddle the sector with the most promise for the recording labels with Draconian software that at best confuses consumers, and at worst angers them.

In fact, Jobs threw kerosene on the white-hot debate back in February when he released his 1,800 word treatise on the Apple website entitled "Thoughts on Music." In that essay, Jobs called on the world's top four recording labels, which control an estimated 70% of the entire music industry's sales, to drop DRM all together. "Thoughts on Music" laid the groundwork for the announcement today. That, and EMI's standing as the world's Number 3 music label. Analysts say EMI really has nothing to lose by taking this "bold" step. And Apple and EMI have everything to gain.

In his essay, Jobs wrote: "In 2006, under 2 billion DRM-protected songs were sold worldwide by online stores, while over 20 billion songs were sold completely DRM-free and unprotected on CDs by the music companies themselves. The music companies sell the vast majority of their music DRM-free, and show no signs of changing this behavior, since the overwhelming majority of their revenues depend on selling CDs which must play in CD players that support no DRM system.

"So if the music companies are selling over 90 percent of their music DRM-free, what benefits do they get from selling the remaining small percentage of their music encumbered with a DRM system? There appear to be none."

Jobs says today: "90% of the music has been shipping without DRM, and that's music on CDs. There's no DRM on a CD. So if you're shipping 90% of the music without a DRM, why burden the 10% with a DRM when that 10%, the digital part, is hopefully the salvation of the industry, as the physical part, CDs, declines over time."

Point well taken, at least so far as EMI is concerned. The 90% of the industry that's plunging versus the 10% of the business that's exploding. Hmmmm, which one would you want to focus on? The past versus the future.

But now the bigger question is where this story goes from here. In his prepared comments, Jobs says he fully expects that at least half of the 5 million tracks on iTunes would be sold DRM-free by year's end. That would suggest that other labels, including Sony's BMG, Warner, and Vivendi's Universal Music Group would have to follow EMI's lead. Incidentally, EMI's CEO Eric Nicoli said during today's event that he expects 25% of his sales to be from digital downloads by 2010. And what's good for Apple could also be good for Microsoft, Yahoo, Real Networks and Google. And really good for you and me.

Says EMI CEO Eric Nicoli: "We think the best way to fight piracy is to make legal services readily available at good value and convenient. WE think that the net effect of launching these premium downloads, offering consumers a choice, offering them DRM-free, all the standard products, offer them higher quality or not, will be entirely positive."

There's another part of the story that's also critical in Steve Jobs' relationship with the recording labels. They've been clamoring for Apple to raise the price of songs sold on iTunes, saying the 99 cent download has hamstrung the recording labels' profits. Jobs today says that more than 2 billion songs sold on iTunes have generated more than $1 billion in profits for the labels. But DRM-free songs will be sold at a 30% premium, carrying a $1.29 per song fee. This could be the way Jobs and the labels reach a new kind of meeting of the minds, for higher prices, and open the door to other labels joining in the process. Though some analysts remain skeptical.

"Right now, I'd say it's not very likely, but if EMI, who's been struggling a bit recently begins to sell more music because their online sales begin to take off because they've taken away DRM, I think you'll see other labels follow up pretty quickly," says Andy Hargreaves, the Apple analyst at Pacific Crest Securities.

Gene Munster at Piper Jaffray says it clearly: "By taking DRM off of music, it should enable more consumers to embrace this digital lifestyle."

But the devil is in the data: six months from now we'll know whether Jobs was right or whether the recording industry, without EMI, was right. That's when we'll get an indication whether EMI's sales really saw some kind of benefit from going DRM-free. If that's the case, the music industry will line up behind Apple, again.

And $2 billion worth of download music revenue so far on iTunes could start looking like a drop in the bucket.

Questions? Comments? TechCheck@cnbc.com

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