The Drm Dilemma: Incompatibility Slowing Growth Of Digital Music Market

The market for legitimate music downloads is booming, but the stumbling block of incompatibility will not go away.

Just ask anyone who has ever tried to put a Napster track on an iPod.

At the heart of the problem are dueling digital-rights-management systems from bitter rivals Apple Computer and Microsoft. Files using either company's DRM are incompatible with players that support the opposing DRM.

The recording industry and many of its digital retail partners flagged this problem 18 months ago. Today they are no closer to finding a solution, thanks to a lack of cooperation among the tech heavyweights.

Experts say the DRM dilemma might not be resolved for another two years.

"It's not going to go away quickly," Napster chief technology officer William Pence said at a recent DRM conference in New York.

DRM technology wraps around song files to block mass copying and peer-to-peer distribution of music downloads. It dictates when, where and how music files can be consumed legitimately.

Microsoft's Windows Media DRM is supported on more than 60 devices and used for digital files sold by dozens of retailers, including Napster, AOL, Yahoo, RealNetworks, Virgin, FYE and Wal-Mart. Apple's DRM is called Fair Play and works only in Apple-controlled products and services like the iPod and the iTunes Music Store.

As more consumers go digital, the compatibility issues between Apple and Microsoft become more pronounced. Apple, the early market leader, has been particularly resistant to shaking hands in the interest of compatibility.

More than 184 million digital tracks were sold in the United States this year through the end of July, according to Nielsen SoundScan. That is almost double the amount sold during the same period in 2004.

Still, some digital-music executives say compatibility problems are slowing the growth of legitimate download sales and subscription services.

"It's unquestionably holding the market back," says David Pakman, managing director of Dimensional Associates and head of digital music retailer eMusic. "If everything was interoperable, then certainly sales would be higher."

Key to the long-term proposition of digital music is the idea of building a system where music can be accessed anywhere and everywhere. But in the short term, the industry is just looking for DRM rules to replicate with music files what consumers are used to doing with their CDs: moving seamlessly from home stereo to car to computer to portable players.

Even the CD presents DRM issues, because Apple has not licensed Fair Play for inclusion on copy-protected discs, thus making secure CDs incompatible with the iPod, the most popular portable player with more then 15 million units sold.

Apple declined to comment.

Dimensional and eMusic are avoiding DRM issues by not supporting DRM at all. Instead, they sell licensed content in the open MP3 format. This tactic limits the amount of music they can offer, however, because the major labels will not license music to be sold as MP3 files.

For those committed to the concept of DRM security, the situation is about to get even more complicated as wireless carriers get in on the act with technology that allows mobile phone users to buy music downloads over the air.

A consortium of carriers and handset manufacturers known as the Open Mobile Alliance is developing a third major DRM standard, OMA, for phones.

Sony BMG Music Entertainment is among the supporters of OMA, but even that company's president of global digital business, Thomas Hesse, acknowledges that another rights standard "is not going to make things easier."

Microsoft and Apple are also looking to facilitate the sale of music via cell phones, lining up support from handset manufacturers like Motorola (which is backing Apple) and Nokia (which is aligned with Microsoft).

However, it is unclear whether the carriers want to sell music in either format. They may ultimately back OMA, thus exacerbating the DRM compatibility problem.

Regardless of where compatibility problems originate, labels and retailers are looking to develop bridging solutions that can approximate interoperability.

RealNetworks in July marked the one-year anniversary of its Harmony initiative, which allows tracks from the RealPlayer Music Store to work with Apple's iPod and a number of portable players that use Microsoft technology. But this is a temporary solution, unsanctioned by Apple. Real cannot guarantee how long its tracks will be compatible with the iPod. Apple has already declined Real's offer to license its Fair Play DRM.

Elsewhere, more than 30 media and technology companies—including all four major labels—have formed a consortium called Coral that aims to create standards for DRM interoperability.

Coral, which does not count Microsoft or Apple among its members, intends to unveil a framework for interoperability by the end of the summer.

Bill Rosenblatt, head of consulting group GiantSteps Media Technology Strategies and editor of the newsletter DRM Watch, says Coral has a chance to elaborate on the concept introduced by Real's Harmony initiative.

He sees interoperability as a feature that could be promoted by large cable companies or telecommunications players offering broadband access.

"Consumers derive value from interoperability, so a third party should offer interoperability as a service," he says.

On the retail level, some Windows-based services, including MSN Music, are lobbying the labels to let consumers who want to switch platforms exchange their Apple Fair Play tracks for Microsoft Windows Media files, sources say.

Negotiations on exchange rights are said to be in the early stages. A sticking point is whether the retailer would pay the labels for the tracks even though the consumer has already purchased rights to them.

On the mobile side, suppliers of over-the-air downloads are exploring dual-delivery scenarios that would provide consumers with separate versions of the same track for phone and PC use.

Some wireless carriers are trying to block consumers from shuttling content between a phone and a PC via a flash card or USB connection—a practice known as side loading. They fear losing control of the DRM and the transaction.

Another bridging solution under consideration but proving tough to deliver on is converting files from one DRM format to another on the fly.

Bruce Gitlin, head of ContentGuard, a leading holder of DRM patents that is owned by Time Warner, AOL and Microsoft, points out that such conversions—known as transcoding/transcripting (converting one codec to another and converting one DRM to another)—raise thorny questions about who is responsible for customer support. Also in question is the quality of the consumer experience: The process could be time-consuming and clunky at playback.

Perhaps the biggest issue is that Apple and Microsoft still have to agree to allow consumers to convert files into each other's format and DRM.

Microsoft executives say Apple is not letting this happen.

"Regardless of whether the technology would or could be developed, you still have the question of licensing," says Marcus Matthias, a product manager in the digital group at Windows Media. "And basically they [Apple] don't offer a license."

A lot of the DRM concerns could be addressed with the emergence of a compelling player for the Windows environment, which already has a place on home servers and deals on the mobile side. But for now, Apple's iPod/iTunes system dominates the legitimate download market.

Hesse says the goal for the music industry is to have enough flexibility that consumers are not stuck in a dead end.

"We'd like there to be as few codecs and as few DRMs as possible," he adds, "so the consumer can move around as unimpeded as possible, and investments made in one format can be translated into another." ••••