Why Dropping DRM Won't Save The Music Business (AAPL)

Add Bernstein Research to the cacophony of voices calling on Big Music to just get it over with and drop digital rights management (DRM) restrictions on their music download sales:

“We think the music industry should call off the RIAA and make all music DRM-free” the firm asserts in a note today. “We think that going DRM-free will maximise the revenues and profits for the music industry in the long term.”

We agree with the part about dropping DRM restrictions. Selling music in unencrypted MP3 format makes everyone’s music software and music players interoperable, and it gives the industry the best leverage they’ll have against Steve Jobs and Apple (AAPL). But it won’t do much for them in the long run…

Why not?

• We don’t think most consumers are aware of any DRM restrictions, because almost everything they buy or own works on iTunes and iPods.
• We have yet to see any concrete numbers from either EMI or Universal Music Group about their DRM-free tracks sold at iTunes and Amazon’s new mp3 store. We’ve been told, unofficially, that sales are “encouraging,” but we think if they were truly impressive, we’d have seen the results already.
• The conventional wisdom is that if only consumers had legal opportunities to buy music online, they would do so instead of using P2P filesharing systems, or borrowing and ripping their friends’ CDs etc. But there’s no shortage of legal places to buy music online these days, and consumers are indeed buying songs: They bought 1 billion tracks at iTunes in the first half of this year, and we assume that rate increased this fall. But the industry’s main problem remains unchanged: It used to sell discs at a wholesale price of $10; now it sells individual songs at a wholesale of about 70 cents. If the business is going to survive, it’s going to have to figure out a way to do that profitably — and dropping DRM isn’t going to solve that problem.

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