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EMI/iTunes Deal Hits High Note

New York — The decision by music company EMI to offer its songs in unprotected Advanced Audio Coding (AAC) format through Apple’s iTunes site is only the first of many steps that must take place before consumers can buy songs from any authorized download site and easily transfer them to multiple brands of portable, home, and car audio playback devices.

But it’s a good first step, and it will encourage consumers to buy more music from authorized sites, according to analysts, marketers, the Consumer Electronics Association (CEA) and lobbying group Public Knowledge.

The announcement is already encouraging other music-download sites to consider offering DRM-free EMI songs. MusicNet, for example, confirmed it is in discussions with EMI to offer the label’s songs in unprotected form. New York-based MusicNet runs the back-end operations that companies such as Yahoo leverage to offer download services under their own brand.

The promise of DRM-free music, however, won’t be fulfilled unless all of the Big Four music companies and major independent labels hop on board, marketers said. That’s because EMI songs account for only about 10 percent of the 4 million songs available to authorized download sites in the United States and Europe. In addition, different sites currently use different DRM technologies that are incompatible with one another. The DRM technologies used by the iTunes and Microsoft Zune sites, for example, are incompatible and not licensed to other companies. Those technologies in turn are incompatible with the Microsoft WMA DRM used by Napster and most other major download sites.

More to come:Apple CEO Steve Jobs said the goal of DRM-free music from all music labels is achievable and that “we expect to offer more than half of the songs on iTunes in DRM-free versions by the end of this year.” Jobs contended that DRM technology has done little to stem the tide of illegal file sharing because most music is still sold on CDs, which generally don’t incorporate copy protection. In fact, a recent report by The NPD Group found illegal downloads outnumbering legal downloads by a 10:1 margin.

The next step toward total download interoperability would be for download sites to unify behind a single compression format, whether AAC or WMA, or behind a small number of formats playable on multiformat devices. The latter seems likely, given that many portables and networked digital media players (DMPs) in the home already decode multiple compressed-music formats. Apple iPods, for example, play AAC- and MP3-encoded music, and most other MP3 portables play WMA and MP3 files.

To encourage such interoperability, EMI said it is willing to offer its music in multiple DRM-free formats, including WMA and MP3.

MP3 Player Plans: In the short term, EMI’s announcement will likely trigger a scramble by MP3 player manufacturers to add AAC decoders to their portables to play back the EMI downloads — and offset an advantage enjoyed by MP3-playing cellphones. Most MP3-playing cellphones play unprotected AAC songs as well as MP3 files. In many cases, the phones also play protected and unprotected WMA files.

Today, few MP3 players and video-capable MP3 players incorporate AAC decoders, but SanDisk said it previously announced plans for one and hasn’t ruled out more. Philips is also considering the inclusion of AAC, a spokeswoman said.

Also in the near term, the Apple/EMI decision will likely boost EMI’s low 8 percent share of the authorized digital music market, said Yankee Group analyst Michael Goodman, who expects the number of EMI downloads to jump 40 percent to 50 percent. Other major music companies will let EMI take the risk in dropping DRM before they consider a similar move, he said.

Even if all music labels strip their songs of DRM protection, it won’t give consumers many more song choices, he noted, because most major download sites already offer most of the same songs. Such a move, however, could trigger competition among sites to improve their usability and deliver other features. “The iTunes storefront is not the best,” he noted.

Dropping DRM also won’t boost MP3 player sales, he added, given that the market is near maturity and already turning into a replacement market.

Home network impact: For digital audio networks in the home, the Apple/EMI decision will enable many AAC-decoding network-connected DMPs, including Sonos models, to stream iTunes-downloaded EMI songs in native digital form from a networked PC. These DMPs, which connect to a wired Ethernet or Wi-Fi wireless network, decode unprotected AAC files but not Apple-protected AAC files because Apple hasn’t licensed its FairPlay DRM technology, said Sonos cofounder Tom Cullen.

In contrast, a variety of DMPs play protected WMA downloads under Microsoft’s Plays For Sure Initiative, Cullen noted.

Some wireless DMPs get around Apple and Microsoft DRMs by converting the protected songs to the wireless Bluetooth audio codec (SBC) or some other digital format before streaming the song wirelessly. With Logitech’s Wireless DJ system, for example, the host PC plays protected songs, which are then converted to the Bluetooth audio format for streaming to audio systems in other rooms. The conversion process, however, yields a lower quality signal compared with the quality that would otherwise be obtained if a protected AAC song was transported in native format to a client device, the company admitted.

High quality option: With the joint Apple/EMI announcement, Apple will offer DRM-free EMI tracks worldwide in May at a higher quality 256kbps data rate for $1.29 per song, or 30 cents more than protected EMI songs at 128kbps. The additional price not only gives consumers more flexibility to play songs on multiple devices, Apple said, but it provides audio quality “indistinguishable from the original recording.”

iTunes customers also will be able to upgrade their existing EMI downloads to the higher quality, DRM-free version at 30 cents per song.

Apple will still offer its entire catalog of songs in 128kbps protected-AAC format at $0.99 a piece.

“This is a great day for consumers,” said Gigi Sohn, president of lobbying group Public Knowledge. Apple and EMI “recognize that offering high-quality music without the inconvenience of digital rights management (DRM) will be an incentive for consumers to purchase more music.” Consumers, she said, “will have the same digital freedom from an album they download as one they purchase from a store.”

CEA president/CEO Gary Shapiro said Apple and EMI Music recognize “what consumers really want out of their digital music experience — high resolution recordings worthy of both home and on-the-go listening, along with the freedom to move music among devices.”

Bob Kohn, CEO of RoyaltyShare, said if other major music companies follow suit, the music download business will double or triple in size. “Removing DRM eliminates one of the great impediments to the growth of the digital download business, which is the incompatibility of files purchased on iTunes with non iTunes-compatible music players,” he said.

RoyaltyShare developed a Web-based royalty processing service used by music companies to track royalty payments due from on-line download services.

Dropping DRM will “allow for increased competition among the other audio player manufacturers and online retailers such as Napster, MusicMatch and Rhapsody, who now will be able to compete with Apple/iTunes on equal footing,” Kohn continued.

He noted, however, that it wouldn’t be legal for consumers to buy the songs and e-mail them to friends or post them on Web sites or blogs, although the lack of DRM makes it technically possible.