Rivals tune in as EMI digital experiment starts

EMI is taking a risk in becoming the first music major to ditch anti-piracy software on its digital music, but its larger rivals could be better placed to ultimately reap any rewards.

The music industry has used Digital Rights Management or DRM as the cornerstone in its fight against illegal downloading but its critics argue that it imposes too many restrictions on the consumer and therefore hinders legal digital sales.

In response, EMI, which has already issued two profit warnings this year, said it would put an improved sound quality version of its music online without protection.

One industry source said labels would watch the move closely but pointed out that EMI has struggled with a lack of album hits recently, meaning any potential benefit would be reduced.

“You have to have the hits that people want to buy, then you can look at the platform or choice of DRM or no DRM,” the source said.

However Jupiter analyst Mark Mulligan said the decision would change the game completely and expected other labels to follow.

“This is something that all the labels are having to consider … because of the state of the overall market. But EMI has been hit harder than anyone else.

“It doesn’t have the benefit of a big parent company and it doesn’t have a strong footprint in the U.S.. It has to be innovative. It wants to be ahead of the curve.”

Warner Music Group has said it sees no logic to dropping DRM but is still testing without it while Vivendi’s Universal Music has said it, too, is testing.

Under its first deal with the new content, Apple’s iTunes will sell tracks for the slightly higher fee of $1.29, 1.29 euros or 99 pence. Albums with the improved quality and DRM-free will stay the same price.

DRM LOGIC

DRM prevents users from making multiple copies but the different formats have also resulted in interoperability issues, meaning for example that tracks bought on Apple’s iTunes online store can only be played on Apple’s iPod.

Its critics argue that these restrictions hinder the growth of legal downloading which is crucial to music groups as the sales of physical albums such as CDs wane.

Bridgewell analyst Patrick Yau said he saw EMI’s decision as a significant announcement that would grow revenues.

“EMI has said that it is aiming for 25 percent of its revenues to come from digital sales by 2010, and we suspect that this will provide a boost to those aims,” he said.

If it goes on to agree deals with online retailers such as Napster or Rhapsody, their EMI DRM-free tracks could be played on the mass-selling iPod which could be a boost to both the retailers and EMI itself.

However EMI’s shares were trading down 1.8 percent at 1400 GMT, implying investors did not think the decision would have a huge impact.

One music executive also questioned whether EMI had sufficiently tested the move.

“How will it affect piracy?” one executive said. “We just don’t know.”

But analysts were agreed that the other group which would benefit was Apple, itself under pressure from consumer groups in Europe and the European Commission over the iTunes’ lack of compatibility and price restrictions respectively.

Apple’s Chief Executive Steve Jobs told reporters on Monday he was not concerned by the prospect of music from other online retailers being played on iPods and said his aim was to sell the gadgets by making them the best available.

“Most of Apple’s recent consumer success has actually stemmed from staying focused on devices for digital media and bringing the user experience to the next level,” analysts at Ovum said. “Downloading music without DRM is therefore a win-win situation for Apple.”