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Amazon's clever DRM gambit - May 16, 2007

I placed a large order with Amazon.com the other day and they shipped it to the wrong address. I decided they were idiots.

Then I saw the news about their plans to sell music online and thought, well, OK. Maybe they got one thing right.

Most of the headlines have focused on their plans to sell tracks without DRM. But the really clever bit is the strong suggestion that tracks will be sold at various price points.

"We have a track record of being very competitive on price and offering very low prices to customers," Amazon VP of digital media Bill Carr told the AP. "We also have a track record of offering a wide range of price points on our products, too. There's not one or two or three price points on our CD store today - there are many, many different price points."

Here’s why that’s clever: Amazon is obviously late to the party in online music sales; to avoid being crushed by the 800-pound iTunes gorilla, it needs as large a pool of potential customers as possible.

If it were to use any DRM system that is not supported by iPods it would, as a practical manner, restrict its customer base to the relatively small slice of the portable player base that doesn’t use iPods.

Since Apple will never license FairPlay to anyone else, the only way for Amazon to reach iPod customers is to sell unprotected MP3s, which iPods can play.

For now, that means Amazon can license content only from EMI, among the major labels, because the others are still clinging to DRM.

But in declaring it will music only in unprotected MP3 form, Amazon makes an of Steve Jobs, who famously and for his own reasons has called on the record companies to drop DRM for downloads, even as Amazon seeks to compete with iTunes.

The really clever part, though, is variable pricing.

Amazon knows the labels are desperate for leverage against Apple as they begin renegotiating their iTunes licensing deals this spring.

What the labels want most of all—short of a piece of Apple’s iPod revenue—is variable pricing and control over their margins, which Jobs doesn’t want to give them.

So Amazon is dangling variable pricing in front of the labels, but at the price of going DRM free.

Your move, Sony, Warner and Universal Music.

Amazon’s gambit also shines a light on the potentially powerful role for retailers in solving the interoperability problem. We’ll explore that in a future post.

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