The Digital Music Market: Back to Closed Systems?

The current developments in the market for MP3 players and digital music downloads are puzzling for many experts: imitating the success of Apple's iPod and iTunes combination, Microsoft is preparing the release of its own proprietary system in the form of the new Zune player and music store. Microsoft will continue to support its semi-open PlaysForSure platform that many independent hardware vendors use, but it's clear that most of the investments will go to the closed Zune world. And now, even RealNetworks's Rhapsody music service announced a Rhapsody-branded music player in cooperation with SanDisk. Apparently, this new player will use a proprietary Rhapsody software for DRM. Some time ago already, Napster did the same.

In theory, it wasn't supposed to work this way. Apple's music player strategy was often dismissed as being the typical Steve Jobs way: Build a great, but proprietary product and then get left behind while the world moves to open standards. It was like that with the Mac, and it will be like that with the iPod, the experts predicted (Nicholas Carr has a detailed post about this).

At least for now, just the opposite is happening: All the big vendors are busy building their own "walled gardens", duplicating the efforts of developing player hardware, rolling out software and licensing music. Isn't that terribly inefficient? Innovation theory says that a maturing technology should move towards an open architecture with clean, well-documented interfaces that allow everybody to compete on making the best components and end-user products. The typical results (as demonstrated by the PC market) are fierce competition, falling prices and in some cases a few companies that make huge profits because they control key elements of the standard. But what do we see in the digital music market? A confusing mess of competing DRM standards, one strongly dominating player, and a number of competitors that try to push their own closed systems. Not exactly a market right out of the textbook.

So why isn't there an open standard that makes all the walled gardens obsolete? I think there are two main reasons:

1) The music industry simply isn't interested in promoting (or even allowing) a more open world of music selling. They still regret the "mistake" of letting Apple license so much music and thereby establishing the standard price point of $0.99 per track, which is much too low in the opinion of music executives. Opening the model even more would probably drive down prices further. Of course it would also dramatically enhance demand, but thinking long-term doesn't seem to be a requirement for getting an executive job in the music industry.

2) There actually is an open standard, and it's called MP3. Consumers listen to their ripped (or illegaly downloaded) MP3s and don't really care that much about the various commercial music download offerings. According to a new study by Jupiter Research, the average iPod contains only 20 titles bought in the iTunes music store. That's not even a $20 value. Only 17% of iPod users buy digital music regularly.

In other words: Consumers aren't stupid. They won't let Apple (or anybody else) lock them in too much with copy-protected tracks. As long as there is no open DRM standard that allows owning songs forever and playing them on any device, online music sales will continue to grow much slower than they could.

But this also means that Apple is not as invincible as many think. If Jupiter's figures are really correct, the iPod's success is not based on the brilliant integration of a device with a proprietary content store, but simply on the fact that iPods are still the coolest MP3 players. And Microsoft's Zune isn't, for now at least.

Comments

[Patrice]

Mac wasn't exactly replaced with an open standard either. On the hardware level it was replaced with Intel-compatible processors. There is a variety because of clones, but it is not a standard. On the software level - well to call Microsoft Windows an open standard...

[Buy Online Rx]

Given how bad we looked at trial, do we even want to appeal the Witt case? If we don't appeal Witt, though, have we in effect conceded the whole ball game? Will a lame duck session pull our butts out of the fire? This is really no fun.