Universal goes back to the future with DRM-free music

4 minute read

Reading one of Bob Lefsetz’s latest letters recently I found out about Universal’s plan to offer digital music in a DRM-free format (although not through iTunes). Lefsetz takes a somewhat jaundiced view of the situation, and in particular makes the point (which I mostly agree with) that the key issue for music buyers is price, not DRM. Hypebot takes issue with his pessimism and (among other things) sees abandonment of DRM as key to enabling more experimentation in music retailing. I agree with this too, but I also remember: Haven’t we seen an experiment like this before?

Let’s hop into Doc Brown’s DeLorean (before Universal sends it to the junkyard) and travel in time back to July 9, 2002:

EMusic.com Inc., a part of Vivendi Universal Net USA (VUNet USA), and Universal Music Group (UMG), a division of Vivendi Universal, today announced the availability of approximately 1,000 UMG albums through EMusic's downloadable music subscription service (http://www.EMusic.com), as part of a consumer trial program. EMusic will feature tracks from a cross-section of UMG’s back catalog, which spans a variety of artists and genres. ... Designed for the avid music fan, EMusic allows its 50,000+ members to download as much music as they desire for one low monthly price. Because EMusic uses the popular MP3 format, members can easily burn their music to CDs and transfer it to portable MP3 audio players, such as the SONICblue Rio, Apple iPod or Creative Nomad. ...

In other words, not only did Universal previously experiment with releasing DRM-free tracks, it did so under a scheme that in terms of pricing was essentially identical to Bob Lefsetz’s oft-repeated proposal for monetizing P2P: ten dollars a month for all you can eat, unprotected MP3s (to quote from his April Fools story about Jimmy Iovine leaving Universal to go to Limewire).

Unfortunately the eMusic/Universal experiment ended fairly ignominiously, and its demise may hold some lessons regarding both Bob Lefsetz’s call for lower prices and Hypebot’s call for more experimentation. As noted in a Wired News story later in 2002 (about the major labels desire to support streaming-only services),

Even EMusic.com, which built its business selling downloads as a subscription service, is being forced to reconsider its business model after some users started downloading 2,000 tracks per month—roughly 165 albums—according to general manager Steve Grady. ... EMusic's solution was to limit the number of tracks users can download. If it hadn't instituted a cap, it would have lost money on the most frequent downloaders. EMusic subscribers pay $120 a year. But a subscriber who downloads 2,000 tracks a month costs the company $140 in licensing fees to music publishers, Grady said.

In practice eMusic didn’t impose a technical limit on downloading; instead it sent warning letters to customers who downloaded more than 2,000 tracks per month, and kicked at least at least some of them off the service. (Thus began the infamous 2K Club, still memorialized in some eMusic subscribers’ message board nicknames.) Eventually the unlimited download plan was discontinued when Dimensional Associates bought eMusic from Vivendi in 2003, just over a year after the Universal experiment started. Universal pulled all its releases from eMusic at that time or shortly before. (I haven’t been able to find an authoritative reference for the date.)

As implied by Steve Grady’s comments quoted above, the need to pay mechanical royalties to music publishers (amounting to 7 cents per track in Grady’s example, from 5-10 cents per track according to other sources) made it unprofitable for eMusic when (some) people took full advantage of the unlimited nature of the service. After ending the unlimited download plan eMusic in effect set a floor on the per-track prices paid by subscribers, by limiting the total number of tracks per month; initially this minimum price amounted to 25 cents per track for the lowest-price plan (40 tracks for $9.99), and has since been raised to 33 cents per track for the corresponding plan in eMusic’s current pricing (30 tracks for $9.99).

Even with these higher prices eMusic has had some troubles in its dealings with independent labels over the issue of per-track payouts, with Drag City being one of the most recent labels to defect. What does this say for the possibility of new pricing experiments in selling digital music in DRM-free formats? Larger corporations like Amazon might have more clout to demand better pricing and/or more money to treat digital music as a loss leader for other products. However I suspect that (nearly a decade after Napster) neither major labels nor independents are yet ready for a new world of ultra-low music prices, with a major sticking point presumably being per-track fixed costs in the form of mechanical royalties and other contractually-obligated payments. Until that changes I suspect that major innovations in pricing will not occur. Of course, as Bob Lefsetz continually and correctly repeats, the world is not waiting on the labels to get their act together, and in the meantime people will continue to take matters into their own hands on the P2P networks.

UPDATE: For some good commentary on Universal’s refusal to sell DRM-free tracks through Apple, see the post Dinosaurs with Jetpacks (found through Daring Fireball). The author’s premise that Universal is engaged in a grand (but doomed) scheme to hurt Apple is perfectly believable.