Will DRM-free music threaten iTunes?

Need proof that Apple's iPod and iTunes Store has forever changed how people, particularly mobile people, acquire music? Here it is: The recording industry recently reported that nearly 13 percent fewer CDs were sold in 2006 than the previous year, while sales of downloaded digital songs increased by almost 60 percent.

The iPod/iTunes combination accounts for about 70 percent of all digital music sales and portable media devices, according to market studies. But some industry analysts believe that we're only at the beginning of the digital media age and that changes are coming that could cut into Apple's dominance.

For example, nobody is quite sure what the impact will be as DRM (digital rights management) for purchased music fades away. One major record company, EMI, has said it will allow online stores such as the iTunes Store to sell DRM-free downloadable music. Other major labels are expected to follow suit.

Another trend that could change the digital media scene -- and Apple's dominance of it -- is new models for subscription music services. So far, subscription services such as Rhapsody and Napster, in which users pay a monthly rental fee for downloading as much music as they want, have not proved popular. However, some claim that subscription service business models are evolving and may yet attract lots of new users.

"Everything is changing," said Neil Strother, an analyst at JupiterResearch. "It's a really disruptive time."

The end of DRM

The rise of the Internet in the mid-1990s gave rise to the illegal sharing of media, largely through use of peer-to-peer file-sharing software, such as the first generations of Napster. The recording industry responded first by prosecuting some of those who participated in file sharing, then by requiring DRM on music that was sold via legitimate online outlets, such as iTunes.

But consumers don't like DRM.

"DRM leads to suboptimal satisfaction," said James McQuivey, a principal analyst at market research firm Forrester Research. "DRM muddies the experience, so you're never sure if it'll work for you."

For one thing, DRM limits where you can play music. If, for example, you buy a song from iTunes, the DRM -- plus the fact that Apple uses a proprietary music format -- means you can play only the music on an iPod.

Such limitations have angered many users, particularly in Europe where the European Union is threatening Apple with legal action for limiting competition.

The situation gets even dicier with Microsoft's PlaysForSure DRM, which is used by the music subscription services. PlaysForSure is somewhat more open; for example, you can buy a PlaysForSure-compliant device from a vendor such as SanDisk or Creative Labs that works with virtually all of iTunes' competitors. But, as we'll discuss later, nobody is certain of the future of PlaysForSure.

As a result, dropping DRM likely will make it even more attractive for users to download music because it eliminates some of the hassles. That explains why industry leaders such as Apple's Steve Jobs advocate terminating it.