Monday, April 2, 2007

EMI removes DRM - finally acts pro-consumer .. Sort of ..

Today's post was penned by Roy Smith - co-founder of Turtle Beach Systems, an early trail blazing company in the sound card industry. Thanks Roy!

Yesterday on April 1, the web was full of rumors about a big press event today in London from EMI Records. Supposedly Steve Jobs was going to participate – what would it mean? The Beatles on iTunes? No more DRM? Or was it all an April Fools joke?

Well, it turns out that EMI is the first of the “Big 5” record labels to crack on the DRM issue, allowing downloads of individual songs without DRM. As an added bonus, they are releasing these DRM-free tracks in a higher quality AAC format.

A great victory for all who decry DRM and its many inconveniences.

But as always with mega corporations, the real story is in the fine print.

A few paragraphs down in the press release, EMI announced that it will be charging more for the DRM-free versions. $1.29 per song. Let’s not cancel the celebration, this is a big step toward the end of DRM but let’s step back a bit and examine the situation we are now faced with.

If I buy a 12 track Coldplay CD at Amazon.com, I get 12 tracks with no DRM, and at maximum audio quality (better than AAC) for $11.97. Add a few bucks for shipping (or tax if I bought it locally) and we’ll call it $16. When I get the CD, I pop it in a player and I instantly have top quality music. The record company’s cost to produce the CD (including artist royalties) was probably about $2.50. They sold it to Amazon for about $6, so figure $3.50 profit on the CD.

Now, If I download the same Coldplay album (sans DRM) from iTunes, it will cost me $15.48, about the same. But I have a lot less to show for my money. I don’t have any physical back up if my computer’s hard disk crashes. I don’t have any artwork or credits if I want to know who played on it or produced it. It will take me 15-20 minutes to download it.

The record company’s cost for the download was whatever royalty they had to pay the artist. Did you know that most standard recording artist contracts call for less royalty to be paid to an artist for music that is delivered using “New Media/Technology”? Typically record labels pay 10-20% less royalty to an artist for music that was downloaded, despite the fact that their costs are much lower than a physical CD.

It's been widely published that the record companies split profits with iTunes about 50/50, so on the download version, EMI makes about half of the $15.48, or $7.75 gross. They pay the artist 10% less royalty ($0.70), and pocket the rest ($7.05).

Now as we celebrate that we have successfully picketed and petitioned the record industry to remove DRM, the net result is that we as consumers have less, the artists have less, and (surprise) the record industry has doubled profits.

But still, this is progress. Let’s hope a year from now we’ll be looking back at this like we do to the day the wall came down in Berlin… a small act that grew to symbolize a big change.

3 comments:

Casper Schougaard said...

ehhrmmm... you say that the artist gets 10% less royalty for new media/digital downloads. In your calculations however you only allow for 10% royalty (not 10% less than what they would normally get–11% by your calculations). You also mention that it has been widely published that Apple and the record companies share the gross income 50-50. I can't find anything like that. I would love to see it. And also any comments from bands as to their cut of iTunes sales.

Nossa Familia said...

The 'fine print' also indicates that if you purchase a full album, that the price remains the same. Essentially, the price bump only applies to single song purchases. If you buy albums, you got higher quality and DRM free music today for no extra cost.

Sam Abadir said...

Casper,
I used a 10% royalty in my estimate, which is actually quite high for a new band (they typically get 3-5%!)

Re: iTunes economics,
I just found this article that contains a detailed breakdown of RIAA and iTunes profits on a per-song sale.

http://ce.seekingalpha.com/article/33231

This math does not account for the 29 cent upcharges for DRM-free tracks, and would equate to RIAA getting 90 cents per track instead of 70 cents.

Based on these new numbers, EMI's gross on a DRM downloaded album would be $10.80. Pay the artist 10% (we'll ignore the reduced royalty for now) and they clear $9.72

That's nearly 3X the profit they make on a physical CD!

And that's my basic point - Record companies are giving artists and consumers less, while making a lot more, and complaining all the way to the bank about it.

Roy