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Steve Jobs does it again - April 2, 2007

The other major record companies are already muttering about EMI's DRM-free deal with Apple.

"It's problematic," an executive at another Big Four told Reuters in the U.K. "EMI haven't tested it enough so they don't know what the market reaction is going to be to open MP3s. The issues are will MP3s help expand the market and how will it affect piracy? We just don't know."

They may like it even less if it turns out EMI agreed not to demand a piece of Apple's iPod revenue as part of the deal.

As I've argued before, the real value to Apple of iTunes' proprietary DRM system isn't in locking consumers into the iPod, as commonly suggested. It's in locking the record labels into iTunes.

Nearly all of the songs on iTunes are available elsewhere on the web without DRM, both legally and illegally. But if the record companies want to sell licensed tracks to the 70% of the portable player market that uses an iPod, they have to go through iTunes, at a price set by Apple.

At 99 cents a track (79 cents wholesale) the record labels were, in effect, subsidizing sales of iPods without seeing any portion of the profits generated by Apple.

The last time the labels' licensing deals with iTunes came up for renewal, they pressed hard for variable pricing but backed down in the end.

More recently, they've talked of going after a portion of Apple's iPod revenue, which would be an absolute deal-killer for Apple.

Steve Jobs has to know the game will soon be up, however. ITunes sales have flattened out, reducing his leverage with the labels, and Microsoft has launched a credible competitor in Zune along with a committment to share a portion of the hardware revenue with the labels.

Thus, Jobs' recent call to drop DRM. In a DRM-free environment, iPods would have to compete with other MP3 players on a more level playing field, but the labels would have no grounds for demanding a piece of the hardware revenue.

Dropping DRM would also help Apple in Europe, where it faces growing political pressure over its use of proprietary technology.

Sooo, how's this for the basis of a deal that addresses everyone's interests?: EMI gets to raise the price of a download but drops any claim on Apple's iPod revenue, and the consumer gets DRM free music while paying a slightly higher price per track.

The only people who might object are the other record labels, who may still be holding out hope of getting a piece of Apple's iPod profits.

Whether that's actually the deal Apple and EMI struck I don't know. But even from what we do know, the other labels have reason to be concerned that they're about to get out-maneuvered again by the extraordinary Mr. Jobs.

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