Daniel Eran Dilger
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Rise of the iTunes Killers Myth

iTunes Killer
Daniel Eran Dilger
After years of looking foolish for parading out model after model of embarrassing junk as the next iPod Killer, the seas of punditry have given up on finding an iPod Killer, and have instead sought to identify an iTunes Killer. It seems they’ve decided that the reason the iPod is outselling everything else is that it is “locked down” to the iTunes Store. Their obvious answer is to seek to kill iTunes so that online music buyers are liberated to go out and buy iPod alternatives. They’re wrong, here’s why.

The Days Before iTunes.
The would-be celebrants of the fall of iTunes seem to forget that Apple’s music store wasn’t what launched the iPod, nor was it the first music store to arrive–by a long shot.

They also dismiss the complexity of selling music, and gush about the various future plans announced by Universal Music Group to sell music outside of Apple’s iTunes, while ignoring the label’s outrageous history of incompetence and greed. Universal certainly lacks much of a track record for intelligent moves in the music downloads arena.

It’s useful to note that Apple’s original, Mac-only iTunes Music Store opened in April of 2003, accompanied by the third generation iPod. By then, the iPod had already established itself as the dominant hard drive-based music player. The iTunes Store (and iTunes software) for Windows wasn’t available until October of 2003.

Apple could convince the five major record labels–EMI, Universal Music Group, Warner Bros., Sony Music Entertainment, and BMG (the later two have since merged)–to sign contracts to sell their music in iTunes using FairPlay DRM because those labels’ own attempts to sell their music online had failed miserably over the previous half decade.

The media and most bloggers appear to have purposely forgotten that history, and seem hell bent on forcing us to repeat it. Instead, we should benefit from what we’ve learned about Universal’s motives and its competence in handling download sales on its own.

online music timeline

The Origins of Online Music: eMusic and MP3.com, 1998 – 2001.
Online music download stores started back in 1998, when online CD retailer eMusic partnered with Nordic Music to begin selling MP3s. The GoodNoise Corporation gobbled up eMusic later that year, along with the Internet Underground Music Archive. GoodNoise then renamed itself EMusic, and in 1999, bought up other early pioneer rivals Cductive and Tunes.com.

MP3.com was also founded in 1998, by Michael Robertson of subsequent Linspire fame. The site began listing unsigned, independent music, sponsored by the ads appearing on its download site. MP3.com originated a plan to pay artists per download or stream of their music. In July of 1999, MP3.com went public with what was then the largest tech IPO to date, raising $370 million. MP3.com was at one point serving up 4 million songs per day to around 800,000 unique users.

In addition to EMusic and MP3.com–which largely represented unsigned independent music–other companies and groups were promoting the download and distribution of music that belonged to the RIAA’s big five labels. The most notable example was Shawn Fanning’s original Napster file trading site, which rather than trying to sell music simply facilitated rampant piracy between users.

Attack of the RIAA: 2000.
MP3.com took some efforts to avoid distributing copyright songs, but the big five labels all sued it anyway over infringement in 2000. This was in large part because the online service allowed users to upload their own CDs to a private area where they could then listen to the files from another location, such as from work. MP3.com claimed it was the same as time shifting TV with a VCR, but the RIAA insisted it was copy infringement.

The RIAA’s labels also sued Napster for outright copy infringement on its open file trading site, and won an injunction that shut the service down in 2001.

RIAA Sues MP3.com

RIAA Shot Down Over Forcing DRM on MP3 Players.

The labels weren’t just going after online music stores; they had also earlier sued Diamond, maker of the Rio MP3 player, for allowing users to play copies of their own songs ripped from CD and ported over from their computer.

The RIAA insisted that Diamond follow the rules of the 1992 US Audio Home Recording Act by including hardware DRM in its players. That same insistence on hardware DRM had earlier destroyed the market for DAT and held back the adoption of MiniDisc. The RIAA also wanted Diamond to figure out how to charge users playback royalties on their portable music.

However, the court ruled that “because the Rio cannot make copies from transmissions or from digital music media such as CDs and tapes, but instead can only make copies from a computer hard drive, it is not a digital audio recording device.” That ruling established the MP3 player market and opened the way for Apple to release the iPod without any requisite DRM enforcement.

The Danger of DRM

Danger of DRM

Diamond Chases DRM Anyway.
After winning its case against the RIAA, Diamond paradoxically decided to move toward DRM anyway, licensing technology from InterTrust to incorporate into new generations of its players. Why?

Company executive David Watkins reported, “We believe that now is the time to embrace the broader issue of security in our devices.” The real reason for this urgency was that Diamond hoped to lock its Rio users to its new RioPort website using its own DRM before the rest of the tech community could establish plans for a shared DRM system.

The Secure Digital Music Initiative consortium had begun work back in 1998 to deliver standardized SDMI DRM as a way to guarantee the record industry’s monopoly over music. SDMI famously challenged the tech community to hack its DRM protection schemes, only to find that its protection was cracked open immediately. With SDMI left in shambles, Diamond hoped to jump on the dead horse of DRM and ride off rich into the sunset.

Now’s the time to protect copyright – Diamond exec – The Register

RealNetworks, Sony, Microsoft Try To Build Their Own Dead Horse.
Jealous and desperate of the potential for the Rio to corner the market on DRM, Sony scrambled to force more users toward its own ATRAC DRM, used earlier on the MiniDisc, in a series of new solid state music players that only played ATRAC music, not MP3s. Sony attempted to sell ATRAC music through its Sony Connect store, which integrated into its Windows-only SonicStage application for copying music to its ATRAC players.

Microsoft similarly announced its own plans to deliver a hardware reference platform and store partnerships built around its DRM. Microsoft’s Windows Media DRM was designed to allow labels to set whatever playback rights they desired for their content, limiting the ability of users to burn songs to CD, or even disabling tracks after a period of time or if the player didn’t regularly check in for playback authorization. Microsoft was not able to deliver its technology until several years later in 2004.

RealNetworks similarly fought to expand its streaming downloads business into portable devices using its own DRM system. Real, Sony, and Microsoft continued to mercilessly beat their dead horses of proprietary DRM throughout the early 2000s, setting up complicated limitations for users that prevented them from doing reasonable things with their own music. The reason for pushing such consumer hostile products was clear; they were all working to court the favor of labels and studios in a bid to control the dominant middleware technology in music distribution.

Sony ended up destroying its own portable music hardware business–and its Walkman legacy–in an attempt to protect its music business. Microsoft plotted out extensive plans to use Windows Media DRM to tie all media playback to Windows, extending its monopoly from desktop software into portable players, but couldn’t deliver. Real pursued rental music but couldn’t develop a business beyond its small subscriber base.

Until Apple entered the market in 2003, the only viable holdouts in legal downloads were EMusic and MP3.com, both of which represented independent artists and distributed MP3s without any DRM. Their fledgeling success was shot down by Microsoft’s chief conspirator, Universal.

The Empire Strikes Back: Vivendi Universal’s Buying Binge, 2001.
Vivendi Universal was the megacorporation founded by music megalomaniacs Edgar Bronfman Jr and Jean-Marie Messier. The duo had each scuttled major industries–Bronfman’s billionaire Seagram booze legacy, and Messier’s CGE, a massive French water and sewage utility–in order to build vast media entertainment companies. At the height of the dot com bubble in 2000, Messier’s Vivendi acquired Bronfman’s Universal.

After the bubble popped in 2000, $3 billion of Bronfman’s family wealth evaporated. Messier’s combined empire continued buying up properties however, including EMusic for $24 million and MP3.com for a whopping $372 million a month later in May 2001.

Somewhat ironically, Bronfman’s Universal had just sued MP3.com over patent infringement. While the other members of the big five music labels had already settled for roughly $24 million in damages from MP3.com, Universal had held out to extract another $53.4 million in damages and attorney fees. Now, just months later, the combined Vivendi Universal was buying up MP3.com for $372 million.

Why was Vivendi Universal dumping cash on the company it had just sued? It wasn’t planning to shut it down. In 2001, Stereophile writer Barry Willis wrote, “Some observers are calling Vivendi’s strategy a plan for world domination of Internet-based music.”

Where is the iPod Killer? Edgar Bronfman Jr., The Killer Piñata
Stereophile: Vivendi Universal Will Buy MP3.com

Vivendi Universal Kills MP3.com: 2002 – 2003.
Vivendi had already gained some knowledge about how difficult it was to sell music online. Duet, its earlier online music partnership with Sony, was struggling to find any subscribers.

In 2001, Vivendi’s Messier insisted that his company would run MP3.com and Duet “at arms length” from each other. Instead, the company ended up folding the two together and called the new music service Pressplay in 2002. However, incorporating the talent behind MP3.com couldn’t resurrect Duet, and the unit limped along for another year before Vivendi decided to break things up and sell them off.

  • The MP3.com domain and logo were sold to CNET.
  • The Pressplay site and infrastructure were sold to Roxio, which also bought the Napster name and relaunched Pressplay as the “New Napster.”
  • The original site’s music licenses of 250,000 independent artists was spun off to Trusonic, which later partnered with GarageBand.com to publish that music.

Meanwhile, EMusic was also sold off to investors, and relaunched in 2004 as eMusic, once again an independent music download service selling MP3s. It has since grown into the second largest music download service after Apple’s iTunes.

Real’s MusicNet Matches Pressplay in Failure: 2002 – 2003.
In parallel with Universal’s Pressplay, RealNetworks launched the MusicNet service in 2002 along with partners AOL Time Warner, BMG, and EMI. Both MusicNet and Pressplay failed so miserably they tied for ninth place in PC World’s “The 25 Worst Tech Products of All Time,” which last year ranked the two services behind technology disasters such as Microsoft Bob, Internet Explorer 6, Windows ME, RealPlayer, AOL, and Sony BMG’s infamous rootkit CDs.

PC World’s Dan Tynan ushered the two online stores into the ‘high-tech hall of shame,’ noting that “the services’ stunningly brain-dead features showed that the record companies still didn’t get it.”

Real MusicNet

Real Tries Again with Rhapsody Subscriptions: 2003.
In 2003, after its MusicNet service failed to gain any traction, RealNetworks pulled out of the partnership and decided to buy up San Francisco startup Listen.com instead. Listen.com had launched the Rhapsody service in 2001. Rhapsody had succeeded in licensing music from the big five labels in 2002, and provided ‘all you can eat’ streaming downloads to users who paid a flat subscription fee for the service using Microsoft’s Windows Media DRM.

Rhapsody allowed users to download rental music from a library of over 330,000 songs, and users could pay an extra 79 cents per song to allow them to burn specific songs to CD. Less than two thirds of Rhapsody library could be burned however.

The service’s music rentals are also known as “tethered downloads” because they only work on specific players that register with the service, and are subject to expire. Real’s move to using WMA tied its new Rhapsody service PlaysForSure players, but would not work with Apple’s iPod, which purposely didn’t support Microsoft’s WMA.

In 2003, Apple began selling tracks from within iTunes. Real promoted its newly acquired Rhapsody service as a more cost effective alternative to buying iTunes songs for the iPod. It compared PlaysForSure players with a $15 monthly fee against an iPod with $10,000 worth of purchased songs. That absurd comparison didn’t help its sales. Rhapsody has struggled to find subscribers, despite finding fans among industry wags opposed to Apple.

Real Dumps MusicNet for Rhapsody – BetaNews

Steve Jobs’ Predicted Failure of Rental Music.
Steve Jobs’ assertion that subscription music was bound was challenged by an interviewer in 2003 who noted that “Real Network’s Rhapsody, for example, has already won over some critics.”

Jobs replied, “One question to ask these subscription services is how many subscribers they have. It’s around 50,000. And that’s not just for Rhapsody, it’s for the old Pressplay and the old MusicMatch. 50,000 subscribers, total. The subscription model of buying music is bankrupt.”

Sure enough, after Apple’s online sales began to take off, Real began promoting the option to buy individual tracks, launching “untethered download” sales under the RealPlayer Music Store name. Real also attempted to develop technology that would enable it to sell DRM music that could play on both PlaysForSure players and iPods, but Apple refused to support Real’s DRM and blocked it from working in updates to iTunes.

That limited Real to selling its DRM music only to PlaysForSure players, which represented a very small market. Other online music retailers, including eMusic, successfully continued to sell music to a wide audience, including iPod users, through sales of open MP3s.

The Label’s Desperation vs Steve Jobs.
Prior to the launch of Apple’s iTunes Store, the RIAA labels were finding that nothing they could do would sell any significant amount of their music online. At the same time, they were finding increasing numbers of users–and an entire new generation of young people–were growing accustomed to downloading music without having any concept of paying for it. That desperate circumstance led the big five back to Apple.

A 2003 Rolling Stone interview with Steve Jobs revealed that Apple had been working to iron out a contract with the labels a year and a half. Jobs tried to convince them that outrageous DRM was not going to protect their music sales; instead, it would only prevent legitimate music sales from taking off and send users back to file trading.

“When we first went to talk to these record companies — you know, it was a while ago,” Jobs said. “It took us 18 months. And at first we said: None of this technology that you’re talking about’s gonna work. We have Ph.D.’s here, that know the stuff cold, and we don’t believe it’s possible to protect digital content.”

Describing the “amazingly efficient distribution system for stolen property called the Internet,” Jobs said he tried to convince the labels that “you’ll never stop that. So what you have to do is compete with it.”

“At first, they kicked us out,” Job said. “But we kept going back again and again. The first record company to really understand this stuff was Warner. They have some smart people there, and they said: We agree with you. And next was Universal. Then we started making headway. And the reason we did, I think, is because we made predictions.

”We said: These [music subscription] services that are out there now are going to fail. MusicNet’s gonna fail, Pressplay’s gonna fail. Here’s why: People don’t want to buy their music as a subscription. […] People want to own their music. You don’t want to rent your music — and then, one day, if you stop paying, all your music goes away. And, you know, at 10 bucks a month, that’s $120 a year. That’s $1,200 a decade. That’s a lot of money for me to listen to the songs I love. It’s cheaper to buy, and that’s what they’re gonna want to do.“

Steve Jobs: The Rolling Stone Interview – Rolling Stone

The World Since iTunes.
After the labels agreed to sign up with Apple’s iTunes Store in 2003, Apple has sold the vast majority of all their downloads, capturing around 80% of the entire market. Piper Jaffray noted in its annual survey of teenaged technology consumers that iTunes has a 90% share of the market among young music download users, those most likely to grab music from torrent sites in the past.

Since then, Microsoft entered the race with its PlaysForSure Windows Media DRM, with the goal of resurrecting music rentals and taking away the small market Real’s Rhapsody had assembled. It also hoped to take over Apple’s iPod market using hardware partner licensees. When that failed, Microsoft entered the race with its own player, which it made incompatible with PlaysForSure, despite using the same Windows Media DRM.

More recently, some labels–primarily Universal–have started making noises about pulling out of iTunes, or at least backing other music download services in addition to Apple. Why has Microsoft failed, and what are the future prospects of Universal’s music deals independent of iTunes? The next article will look.

Universal vs Apple in the iTunes Store Contracts

What do you think? I really like to hear from readers. Comment in the Forum or email me with your ideas.

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1 chefmitch { 10.13.07 at 11:31 am }

Great article, I can’t wait for part 2.

I’m off to the library to read the full story about Bronfman.

You made me think about a Sony MP3 player for the first time in years – I still can’t believe how badly they messed up.

2 Blog Feeds about Music » Archive » Rise of the iTunes Killers Myth { 10.13.07 at 1:56 pm }

[…] You can read the rest of this blog post by going to the original source, here […]

3 treestman { 10.13.07 at 2:15 pm }

Good stuff. As a huge music lover, I remember how thrilled I was when I heard the labels were going to put together their own download site, and what a major disappointment PressPlay — and of course everything they’ve done since — has been.

Regarding future moves, Universal just fired another shot (though I believe they’re shooting blanks) at Apple that I commented on here:

Total Disaster: Universal’s Never-Ending War Against Apple.

4 Audio book musings » Blog Archive » Rise of the iTunes Killers Myth { 10.13.07 at 2:53 pm }

[…] Jon wrote an interesting post today on Rise of the iTunes Killers MythHere’s a quick excerptAfter years of looking foolish for parading out model after model of embarrassing junk as the next iPod Killer, the seas of punditry have given up on finding an iPod Killer, and have instead sought to identify an iTunes Killer. … […]

5 John Muir { 10.13.07 at 3:37 pm }

As always: a nice job. Those who are ignorant of history are condemned to repeat it. Often badly.

Any thoughts on Total Music I wonder?

6 thgd { 10.13.07 at 5:09 pm }

Another excellent article.
The music companies appear ready to repeat history, and since their blind hatred runs so deep they appear ready to waste unbelievable amounts of money to bring Apple down.
At some point I would think this money losing vendetta would be halted by their stockholders. Let’s hope that happens sooner rather than later.

7 johnnyapple { 10.13.07 at 9:06 pm }

Another great article Dan. The only part I quesion is that by April 2003 “iPod had already established itself as the dominant hard drive-based music player”. At that point, Apple had sold about 650,000 iPods in 6 quarters. The April 2003 announcement brought 2 significant changes. The iTunes Music store for Mac users and better Windows compatibility using the more mainstream USB 2 in addition to FireWire. It was the first real breakout quarter for iPod, with sales reaching a then huge 304,000 units. The next big jump was two quarters later when iTunes and the music store were launced for Windows. Sales that quarter jumped to 733,000 and the rest is history.

Although the music store doesn’t count for a large percentage of music on the average persons player I think it had a huge impact on the impression of iPod and digital music relevance. It completed the picture. I didn’t buy a lot of music prior to the music store because I was often not sure what I was buying. Album name? Artist name? I didn’t know except for a handful of favorites. The iTunes Music Store let me discover new music and re-discover old music.

Does this constitute a monopoly? Not at all. Anyone could create a complete package; player + organization software + reliable sync + a music store. Nobody else has matched that effort but that’s not Apples fault.

8 JM { 10.14.07 at 12:00 pm }

Ok this might be a little NSFW, but in following links out of this article I found the following Steve Jobs quote from last year regarding the Zune and ‘squirting’:

“You’re much better off to take one of your earbuds out and put it in her ear. Then you’re connected with about two feet of headphone cable”

I find this quote astonishingly apropos of the market. In fact, it is why the iPod is (ahem) my favorite sex toy (I’m serious).

Go away, ponder (or even try it), I’m sure you’ll agree. The first thing you’ll find is that the two of you can both hear the same music, and *only* you two can hear it, and you can both hear each other at the same time. The effect is very remarkable.

And you’ll also start to look at the length of the ear cable and particularly the long separation between the two halves and that little sliding collar in a different light.

If Jobs is thinking on this level – and given his track record he clearly is – the competion is barely worthy of the name.

9 TonyR { 10.15.07 at 8:02 pm }

Reading this article, I kept wondering, “How could these companies fail so miserably at selling music online?” I have to admit, I never really explored the issue until iTunes and I’m probably spoiled by it. So I went over to Amazon.com and Wal-Mart to check out their offering. They’re really terrible. You can’t find anything. The genius of iTunes, and Apple in general, is understanding what the user wants and how the user can have the best experience. I love them for that.

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