Why Steve Jobs Is Right And Europe Is Wrong, Part One

Why Steve Jobs Is Right And Europe Is Wrong, Part One

Prelude, or A High Level Overview of How We Got Here

The 1990’s, along with almost every preceding decade, caught the music industry completely off guard. In the 70’s, they weren’t prepared for the cassette tape. In the 80’s during the MTV video boom, it was the VCR. In the 90’s, they were slammed with widespread consumer acceptance of household computers, CD-Rs and the information super highway. Put simply, the RIAA can never be accused of being forward-looking, and their response to any technological advance has always been the same. Rather than embracing technology and finding new ways to innovate, they choose to sue and legislate. And, fortunately for them, there have always been politicians willing to take their money and pass bad laws.

After they successfully sued Napster (who tried in vain to work with the RIAA and monetize their service) into oblivion, the RIAA began dealing with licensing issues for the “new era” (aka, the current day). And, for reasons which will forever be unknown and therefore attributed to their incompetence, they decreed that the licensee would be responsible for digital rights management (DRM). They would license the right to sell music in a digital format as long as the buyer (licensee) ensured that the music was locked down and “protected” by DRM.

And this is most confusing part to me. The RIAA either did not recognize or refused to shoulder their responsibility to establish a standard for DRM. According to their website:

The Recording Industry Association of America (RIAA) is the trade group that represents the U.S. recording industry. Its mission is to foster a business and legal climate that supports and promotes our members’ creative and financial vitality. Its members are the record companies that comprise the most vibrant national music industry in the world. RIAA members create, manufacture and/or distribute approximately 90% of all legitimate sound recordings produced and sold in the United States.

It’s clear that developing a standard for DRM would have allowed the RIAA to retain control of distribution, which is directly in keeping with their mission statement. However, they insisted that the licensee implement the DRM. Shifting the responsibility to each individual licensee resulted in a splintered market with no clear standard. Ultimately, this meant that Microsoft became the gatekeeper for all music encoded with their DRM and Apple became the gatekeeper for all music encoded with theirs. If Apple closed up shop tomorrow, any songs purchased from the iTunes Music Store would no longer be playable. More importantly, it meant that if one company came to dominate the market, the balance of power would shift dramatically. Suddenly, the RIAA and its members would be beholden to one very powerful company.

And this is exactly what the RIAA let happen. So much for fostering a business climate that supports financial vitality.

It’s important to note that, at the outset, the digital music market was a fairly level playing field. No one had a clear advantage. However, by the time Apple entered the market in 2001, several companies had a leg up. Or should have. The original iPod was Mac-only, which was a fairly small market. Almost every other MP3 player relied on Microsoft’s Plays For Sure DRM. In an attempt to bring some sort of standard to the chaotic and splintered market, Microsoft, being a software company, had developed Plays For Sure for the purpose of licensing it to MP3 makers. Apple developed their own DRM which they dubbed FairPlay. The iPod wasn’t an instant success. The iTunes Music Store was introduced in April 2003, at which time they introduced FairPlay, Apple’s privately developed DRM. From 2001 through the end of 2003, approximately 1.7 million iPods were sold. It wasn’t until 2004 that it began gaining traction and showing real potential and growth. Between the fourth quarter of 2003 and the first quarter of 2004, sales almost doubled but comparing 4Q2003 to 4Q2004 shows an 85% increase. Sales would more than double between 4Q2004 and 1Q2005. By the end of 2005, Apple’s dominance was cemented. They owned the digital distribution market.

Did Apple do anything unique? Apparently so, but with the benefit of hindsight, not so much. They developed an easy-to-use MP3 player, they licensed the right to sell music through their iTunes Music Store, and – at the RIAA’s insistence – they developed their unique version of DRM. Could Microsoft have done this? Yes, of course. At the time, Microsoft had far more resources than Apple, but being primarily a software company, Microsoft chose to develop their Plays For Sure and license it to hardware companies. Actually, anyone could have done what Apple did. And many companies tried. But only Apple, being both a hardware and software company, did it right. Playing by the rules dictated by the RIAA, Apple implemented the perfect storm. Granted, it wasn’t easy. The field was littered with failures and a multitude of MP3 players no one wanted. Apple entered the market somewhat late in the game and, before porting iTunes to Windows, had a very limited market. The iPod was met with a mixed yet less than enthusiastic response from the technical community. It took time before it began catching on. This was a huge – tremendous – gamble for Apple. But they stayed the course and eventually, slowly, acceptance began to spread. Any company could have done what Apple did. But no company did.

And that brings us to present day where Apple is the dominant force in the digital music market and the RIAA is scrambling, trying to figure out how Apple – playing completely by the RIAA’s handbook – has sold almost 89 million iPods and taken the world by storm.

Before moving forward, here’s a quick summary of the pertinent points:

  1. RIAA refuses to license digital music without DRM;
  2. RIAA insists all licensees shoulder the costs of developing and maintaining their own individual DRM;
  3. Apple follows the rules and develops FairPlay;
  4. Sales of Apple’s iPod go insanely ballistic worldwide;
  5. Apple becomes the #4 music retailer in the U.S.

And that’s where we’ll leave it for now. In Part 2, we’ll look at the European contingent, Jobs’ Thoughts on Music, and exactly why Jobs is right and Europe is wrong.