Friday, December 29, 2006

What's Wrong with iTunes?
Apparently, over the holiday, the iTunes music store received so much traffic from people with new iPods and iTunes gift cards, that it maxed out it's bandwidth and choked, "prompting error messages and slowdowns of 20 minutes or more for downloads of a single song."

I'm sure that people will have two reactions. They'll either point to this glitch as the price for extreme popularity, or they'll criticize Apple for not being able to anticipate the rush, even though they likely had a good idea of what iPod and gift card sales were shaping up to be.

But this is just a blip on the radar screen for iTunes. It has a much more dangerous challenge coming: it's own DRM.

iTunes files are "protected" (restricted) in several ways that will begin to annoy more and more users, and leave Apple open to growing competive threats:

1) iTunes encrypted AAC files can not be played on devices not approved by Apple. This means anything other than the iPod and a few models of cell phone.

2) Purchased songs can only be played on 5 computers that are registered with iTunes. While this isn't a problem for most people now, as the digital living room continues to develop, the number of "computer-like" devices in the home is sure to grow.

3) Protected AAC files can not be burnt onto MP3 CDs. I often take road trips that are several hours long, and would like to be able to burn one CD that will last my whole drive. My car can handle MP3 CDs, but I can't make one if any of the songs I want to put on it were purchased from iTunes.

Of course, for tech saavy users there are ways around all of these issues. However, they're far more cumbersome than the most ubiquitous alternative... piracy.

One of the more visionary entertainment executives on this subject today is Disney's Anne Sweeney. Ms. Sweeney has explained that at Disney "we understand piracy now as a business model," that needs to fought with better digital business models, not just by walling it off with DRM.

In several interviews, Ms. Sweeney has told this story:

The morning after the (Season 1) finale of "Desperate Housewives" had aired (in May 2005). I had my cable executive team meeting, and I walked into the meeting thrilled. The ratings had come in, and they were spectacular. This was a hit show. Vince Roberts, our worldwide head of technology and operations, said, "Congratulations! We're all thrilled for you and ABC. This is a tremendous moment. Can I show you something?" He got up and popped a DVD into the player in our conference room, and the finale of "Desperate Housewives" came up. And he said, "Fifteen minutes after the show ended last night, I downloaded this from BitTorrent.com." The quality was very good. The commercials had been stripped out. Talk about having a pause in the conversation. We started talking about piracy in a new way, which was piracy as a true competitor for our viewers.
Now, it is possible that Apple understands that the digital world is heading in a DRM free direction. It would shock me if Bill Gates understands it, and Steve Jobs doesn't. In fact, the DRM is a bit hypocritical since without college students' vast collections of illegal MP3s, no one would have ever bought an iPod. In all likelihood, the content owners (ie the RIAA) are demanding iTunes walled garden approach, and Apple is just biding its time.

Long term, Apple's current DRM environment is unsustainable and iTunes will continue to grow only if it reduces the DRM footprint on it's products.

The record companies and Apple will need to realize that iTunes success so far is not because of some magical technology that eliminated music piracy (gnutella, limewire, bear share, and other illegal download systems still exist). Instead, it's because Apple made it easy and fast to find, download, and play the music people want. So far, as Ms. Sweeney suggests, Apple has fought piracy most effectively by providing a better business model whether they realize it or not. Let's hope they compete even more vigourously in the future.

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