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Wednesday, February 07, 2007, 06:00 am PT (09:00 am ET)

Chances of DRM-free iTunes Store are low, says firm

Despite calls by Apple chief executive Steve Jobs for major record labels to drop their anti-piracy requirements for songs sold over online music stores, there is less than a 25 percent chance the labels will bite, says research and investment firm PiperJaffray.

In an open letter posted on Apple.com this Tuesday, Jobs responded to demands from European nations that Apple open its FairPlay DRM (Digital Rights Management) system that it uses to protect music downloaded on the iTunes store.

Essentially, Jobs absolved Apple of the criticism of a "closed" music system and redirect it toward the labels. He suggested those labels abolish DRM on downloaded music and that they license their music to Apple and other online stores without restrictions.

"In posting this letter Jobs is making a statement that Apple does not advocate DRM - it is the music companies that require its use," PiperJaffray analyst Gene Munster told clients in a research note on Wednesday. However, the analyst believes there is a "less than 25 percent chance" the music industry will take Jobs up on his calls and license music to online stores without DRM.

"Record labels have worked hard to protect their product from theft by negotiating DRM requirements, so despite Jobs' request, DRM free online music services are not likely to be the norm any time soon," he wrote.

Still, Munster said there remains an unlikely possibility that the labels will "call Apple's bluff" and agreed to sell music DRM free online, which he believes would be a positive for the company and its market-leading iPod+iTunes ecosystem.

"Consumers choose a device first and a music service second," the analyst told clients. "Apple is confident, justifiably given the iPod's leading market share, that increasing usage of online music services based on an open platform will sell more devices and most of those devices will be iPods."

In a DRM-free online music world, Munster notes that consumers may choose a service other than iTunes to download music but said that would be somewhat inconsequential to Apple if iPod sales increase.

"The reason for this is that iPods are significantly more profitable to Apple than iTunes; iPod (35 percent of sales) gross margins are in the 30 percent range while iTunes (5 percent of sales) gross margins are in the 5 percent-10 percent range," he wrote.