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Will 2007 See the End of DRM?

January 4, 2007

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The anti-digital rights management bandwagon is getting more crowded by the day. Even some major-label executives are pushing for the right to sell digital downloads as unprotected MP3s.

In 2007, the majors will get the message, and the digital-right management (DRM) wall will begin to crumble. Why? Because they’ll no longer be able to point to a growing digital marketplace as justification that DRM works. Revenue from digital downloads and mobile content is expected to be flat or, in some cases, decline next year. If the digital market does in fact stall, alternatives to DRM will look much more attractive.

Revenue from digital music has yet to offset losses from still-declining CD sales, and digital track sales remain a cause for concern. Month-over-month download figures were largely flat through 2006, even in the face of year-over-year gains. If the expected post-holiday spike in download numbers that has occurred in the past two years is weak, look for the glass on the panic button to break.

“People in the industry will have a very different conversation in January when the dust clears and they realize just how bad this year really was,” says Eric Garland, CEO of peer-to-peer tracking firm BigChampagne.

Even more of a concern is mobile. According to Gartner G2 analyst Mike McGuire, the ringtone market–currently contributing more than half of all digital revenue–will soften during the next 12 to 18 months as it matures.

Meanwhile, the music industry wants a strong competitor to the monster it created called iTunes. Forcing would-be competitors to sell music incompatible with the popular iPod is not showing any signs of working. Removing DRM would attract powerful new players to the market, and that- the theory goes -will result in more buyers.

“The majors . . . have got to capitulate, or they will continue to have a fractured digital media market that will slow down and stagnate,” says Terry McBride, president of Nettwerk Music Group, management home of such acts as Sarah McLachlan and Avril Lavigne.

Here are five places to watch this year’s DRM developments:

Amazon
The online retailer reportedly is itching to get into digital downloads but is holding out for a DRM-free service. It sells as many iPods as anybody and is a haven for music that is disappearing from physical retail shelves. “They already have a relationship with our consumer the way that a lot of others don’t,” Blue Note GM Zach Hochkeppel says. Viewed as the biggest threat to iTunes, Amazon has the power to force a DRM strategy shift.

LimeWire
Still in the process of settling with the music industry, the P2P file-sharing service wants to start charging its 40 million users $1 per download and share the revenue and user-behavior information with the music industry. But it wants to stay DRM-free. The company hired TAG Strategic consultant Ted Cohen, a former EMI exec, to convince the majors to at least test the idea for six months.

MySpace
The most popular Internet destination in the world is working with SnoCap to launch a music download service that would let musicians sell music directly from their profiles and that of their fans. But it will only sell files as MP3s. It is moving ahead by focusing on independent and unsigned artists willing to release unprotected music, and a successful showing would make the majors take notice.

eMusic
The indie-only specialist just surpassed 100 million downloads; it’s the second-largest digital music retailer after iTunes, all sans DRM. CEO David Packman says he is not interested in selling major-label fare, but he may have no choice if majors suddenly allow his competitors to sell in MP3 as well. But even if the majors did relent to MP3 sales on eMusic, the company’s business model would have to change–no label will agree to 50 downloads for $15 per month.

Yahoo Music
General Manager David Goldberg has convinced Sony BMG and EMI Music Group to test the DRM-free waters with limited, promotional “experiments” involving Jessica Simpson, Jesse McCartney, Relient K and Norah Jones. The lessons learned from these tests will either speed or slow their path to eliminating DRM.

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