Razors and Blades Again and Again: Apple and Kodak

The last two days have been interesting for those of us with a strong interest in razors and blades, in this case, Apple’s iPod and music and newly-announced printers by Kodak and the cartridges that will go in them. Yesterday, Steve Jobs posted Thoughts on Music on the Apple website, in which he set out his views of music DRM. Apple is prepared to walk away from DRM (well, only sort of, and nothing suggests that Steve Jobs is willing to do so more generally (read: Don’t expect Pixar films to be free of DRM anytime soon)). And Kodak has announced a new approach to selling printers and cartridges: “think: is it smarter to save money on a printer or ink? (Hint: You only buy the printer once.)” Raise prices on printers and lower prices on cartridges. Both of these are worth considering more carefully.

While the empty iPod is a thing of beauty, you probably want to listen to something on it. Razors and blades. Apple sells the razor, and content for the iPod comes from many sources. Jobs does a little division—number of iTunes songs sold/number of iPods sold—to note that Apple has sold 22 songs per iPod. More math and Jobs concludes that the average full iPod gets 97% of its content elsewhere, from unencrypted CDs, from legitimately downloadable content—I listen to BBC and MarketPlace podcasts—and presumably from p2p sites with copyright-infringing content.

But, as I have noted in a prior post last October, Apple makes a fortune off of the iPod. Apple has routinely pushed for lower prices for content on iTunes to drive iPod sales. Sell razors and give away the blades. The iPod is—first and foremost—a copying device. If DRM interferes with copying, get rid of it. The lowest possible price for music is zero. Plus, says Jobs, the music industry is playing Apple: they sell all of their CDs copy-control free, so why on earth should Apple get stuck selling copy-controlled content? As Jobs puts it: “[s]o if the music companies are selling over 90 percent of their music DRM-free, what benefits do they get from selling the remaining small percentage of their music encumbered with a DRM system?”

That isn’t really right. Guys who sell copiers rarely are interested in things that make it hard to make copies. Jobs must recognize that the music industry is in the midst of a format transition. Music has done that before: moving from wax cylinders to LPs to CDs and now online. The music industry wants this transition to include encryption. They are stuck selling unencrypted CDs—SonyBMG’s effort to do otherwise was a smashing failure—because of the installed base of CD players, but they don’t face these backwards compatibility restrictions for online music, hence the difference in approach on encryption. I am sure that Steve Jobs gets that, but you certainly don’t see that in his post.

The second thing we are seeing is that DRM has also operated as a way to look the iPod as a platform. The Jobs letter pitches this as proprietary format competition—Apple’s version competing with Microsoft’s Zune and Sony’s own format—and that is fine, but the letter ignores the fact that Apple has taken affirmative steps to block others from selling DRMed content for the iPod. When RealNetworks reverse-engineered the iPod to make it compatible with Real’s online store, Apple updated the iPod to block the sales. But Apple is losing on this front with European regulators, and so Apple may see this as unsustainable. Indeed, Jobs ends his letter with a plea to the Europeans to go chase the European music companies—instead of Apple presumably—and then Apple will “wholeheartedly” embrace a DRM-free music marketplace.

Jobs should start with what he can control. That means not blocking the next reverse engineering of the iPod. And then we should turn to Pixar. Do the same rules apply to video? Jobs will almost certainly note that video has had encryption from the getgo. Want to finally be done with the VCR but keep the content on a few stray tapes? My DVD-recorder blocks me from doing that. And DVDs have long included a variety of restrictions on use, country restrictions being the most obvious (you can’t play region 2 DVDs on a region 1 player). I doubt that Pixar will abandon DRM anytime soon. The difference, of course, is that Jobs doesn’t have a razor for video—the video iPod notwithstanding—so he won’t sacrifice content sales to grow the video player platform.

As to Kodak, briefly, printers have usually been sold at low prices, with the money being made on the cartridges. The rise of cartridge refilling has put pressure on that business model, and printer sellers have responded with contracts and lock-and-key systems to try to tie cartridges to printers. All of that is actually quite interesting and raises tricky issues under the Digital Millennium Copyright Act—I have a paper on this—but we should want a legal system that supports competition among different systems. Kodak’s new offering represents exactly that competition.

Looking for more? I discuss iTunes in more detail here; on my Network Industries class blog, Claire Hausman discusses iTunes and Rebecca Bell talks about Kodak.

 

Comments

[Erasmussimo]

This hardware/software issue is an ancient one; back in the 1970s, IBM got into trouble over its bundling strategies, which forced their hardware customers to purchase IBM software. That IBM software was deficient in many ways -- the natural outcome of a noncompetitive market. Eventually IBM was forced to abandon its coercive techniques, after which software for IBM mainframes jumped in quality.

But what really drove the point home was the experience of the personal computer industry, in which the intense competition between platforms, (Apple, MS-DOS, Atari, C64, etc) forced platform makers to compete on their platforms, and software makers to compete on their software. The result was an explosion of high-quality software at low prices.

And here we go again with music and printers. It's the same old story, with the same conflicts and the same resolutions. The platform makers want either a monopoly on the software or a non-market in which the software is free. The best resolution for society is for there to be brisk competition in both platforms and software. But platform/software combinations suffer from winner-take-all tendencies that confer natural monopolies upon the winner.

The basic lesson that platform sellers just can't get through their skulls is that, in the long run, the greatest profits are obtained by encouraging a robust software market for the platform -- which in turn requires that software creators have strong protections for their intellectual property. Apple's position is short-sighted and could well threaten the long-term viability of the iPod.

[Doug Lay]

Once again, your analysis completely ignores the fact that "Digital Rights Management" has not worked to keep any piece of content, of any sort, off of the file sharing networks. DRM's record is one of total failure. Competing against free is a hard cold reality of today's digital content marketplace, and content sellers who insist on DRM are providing a product that is WORSE than what consumers can get for free. But I expect you will continue to pretend this state of affairs does not exist, because it does not fit into your ivory-tower academic model of the world.

[Erasmussimo]

Mr. Lay, I am not as pessimistic about the theoretical possibilities for DRM. We know that it is possible to robustly encrypt data. It is a bit harder to encrypt and decrypt data in a standalone device (because the interloper can monitor the communications between data and controller), but it remains theoretically possible. What makes the problem so difficult is the additional constraint that any such system not impose undue inconveniences upon the customer. I certainly agree that, at this time, there is no technology for DRM that is fast, robust, cheap, and convenient. However, I would not go so far as to predict that the problem can never be solved.

[Bruce Boyden]

Apple could go the route of console games and license the FairPlay encryption, but not decryption, method to other music distributors. Jobs doesn't say that possibility is expressly ruled out in Apple's agreement with the labels, so I'm guessing it's not. Instead, he suggests that the more insiders that are in on the secret, the higher the risk of breaches of the DRM scheme, but that comes just after he finishes demonstrating that insiders are not the primary source of circumvention attempts, outsiders are. Bad insiders tend to leak content, not decryption methods.

It doesn't appear that licensing FairPlay encryption would placate the European regulators, however, since it seems they want broader availability of decryption, not encryption. At least that's what I gather from the news reports -- are there English-language documents giving the regulators' views more directly?

[DWAnderson]

I don't think this is just another format change, rather it is a more fundamental change in the nature of the good involved. See my discussion at http://thunor.spaces.live.com/blog/cns!71C238B5E0E3724D!192.entry

Although I believe DRM is doomed and that the industry needs to find a new model, what I can't figure out is: Why in a competitive music industry isn't any of the big players trying something more radical?

[Joan A. Conway]

Way over my head, perhaps I should study this more seriously!

[Doug Lay]

Erasmussino:

Where in my comment do I talk about the theoretical possibilities for DRM? I'm talking about market reality in the here and now, and the reality is that DRM has been a total failure at preventing file-sharing and insults honest customers by giving them an inferior product to the unauthorized alternative. You admit yourself that DRM currently doesn't work very well and faces serious challenges. Should company executives ignore that reality when making business decisions, because someone did a thought experiment that shows effective DRM is possible in theory?

[Erasmussimo]

Mr. Lay, I agree entirely that the current approaches have failed and the entire question must be reconsidered. I sought only to remind readers that there remains an alternative to abandoning ownership of the intellectual property.

[Michael Risch]

"The Jobs letter pitches this as proprietary format competition—Apple’s version competing with Microsoft’s Zune and Sony’s own format—and that is fine, but the letter ignores the fact that Apple has taken affirmative steps to block others from selling DRMed content for the iPod."

This to me is the key point. Job's claim that eliminating DRM would open up the iPod and iTunes was sufficiently without credibility that it makes me wonder about his good faith belief in the remainder of what he says.

[LAK]

Funny Eras, I have the exact opposite opinion. The DRM makes me not buy music from Apple, or even legitimately sometimes. I have two devices, my sony phone which has 4GB of music on it and my Ipod which is dedicated to my car. To play music on both I can't buy it from a legit source. So I either buy the CD and rip it (I do - so wasteful, but necessary) or just download it from a file sharing site. It's costing Apple and the music companies money in my case.

Apple's DRM is not what keeps people buying Ipods, or vicea versa. Design, ease of use and functionality are. Sales based on what should be an antitrust violation here, and which is apparently considered as much in the EU, should not be considered legitimate either legally or as a matter of business sense. You don't want you constomers to feel like they are you hostages! They will leave after so long when they finally get sophisticated enough to realize how constrained they are.

[Doug Lichtman]

My puzzle in all this is why Jobs thought that he should take this point public, obviously irking music copyright holders by painting them as the bad guy. To a large degree, Jobs needs the music industry in order to succeed, much as the music industry today leans on Apple to promote the iPod. So why go public? We all know that couples typically strive hard to keep their spats quiet rather than telling the whole world who said what to whom. Thus, my question: what kind of negotiation strategy is it for Jobs to make this sort of public break with his economic partners, and what do we think he is hoping to accomplish by calling out his friends in this manner?

[Doug Lay]

Why does Jobs need the music industry in order to succeed? The iTunes store produces puny revenues compared to sales of iPods, and the majority of music on iPods (97%, according to Jobs) doesn't come from the iTunes store. Maybe maintaining the store and FairPlay isn't worth the hassle, and Jobs wants to get out, while blaming the store's demise on bull-headed record labels who won't give consumers what they demand. If that's the case, good for him.

[LAK]

Well, without the iTunes store, the iPod would not have been nearly as successful. And the iTunes store would have never happened without apple agreeing to DRM. But now that it has an established footprint, I don't think it is as necessary as it was before.

My guess would be to reveal to the public who is the bad guy in all this: the music industry - to distinguish Apple from its greedy content providers in the minds of consumers.

[Bruce Boyden]

From CNET -- the RIAA doesn't sound terribly annoyed:

"The Recording Industry Association of America, however, issued a statement interpreting Jobs' letter as an offer to license the FairPlay technology.

"'Apple's offer to license FairPlay to other technology companies is a welcome breakthrough and would be a real victory for fans, artists and labels. There have been many services seeking a license to the Apple DRM. This would enable the interoperability that we have been urging for a very long time,' it said in an e-mailed statement....

"An Apple representative declined to comment on the RIAA's interpretation of the letter."

http://news.com.com/Apples+Jobs+calls+for+DRM-free+music/2100-1027_3-6156763.html

I suspect this won't harm Apple too much with the labels. CEOs and lobbyists make inflammatory statements about each other all the time in this area. I don't know much about the specific dynamics here, but it strikes me as unlikely that one or more labels would pull their content from iTunes in the next round of negotiations as a result of Jobs's letter. They need the authorized download market to succeed as much as Jobs does.

Of course, it could get nasty if Jobs actually succeeds in his goal to deflect European regulatory pressure onto the labels instead.

[Doug Lay]

Wow, isn't the RIAA cool, playing their "I can't hear you!" game. Some might say that kind of flippancy is unbecoming in an organization recently given to suing kinds and conducting SWAT-team raids of their business partners, but whatever.

It definitely appears that Warner Music chairman Edgar Bronfman IS annoyed at Mr. Jobs.

http://www.ft.com/cms/s/0c874346-b794-11db-bfb3-0000779e2340.html

"Mr Bronfman, speaking to investors as Warner announced its earnings, called Mr Jobs’s argument “completely without logic or merit” and said his company was committed to the continued use of copyright protections, known as digital rights management, in the same way that software makers and film studios safeguard their intellectual property."

Given Warner Music's latest quarterly performance, perhaps Mr. Bronfman isn't in such a good position to critique Mr. Jobs as illogical. Is there any evidence that the DRM strategies espoused by the likes of Picker and Boyden have done anything to protect Warner Music's business model? Sure doesn't look that way. While law profs like Picker and Boyden are insulated from the consequences of the bad business strategies (and bad policies) that they champion, and Bronfman is probably protected in his job by his family name, lots of the folks at Warner Music are looking at seriously hard times. I wonder how they feel about the DRM pipe dream? Do they still believe?

In brighter news, the WSJ reports that EMI is seriously looking at issuing ALL of their catalog in DRM-free format (would that possibly include the Beatles?!?!?!) Apparently they've asked several retailers for proposals, and will evaluate them to see if they make good business sense. Hopefully EMI and one or more of the retailers will be able to pull this off. Aside from the usual challenges of getting the money and the legal details right, I'm sure there will be intense pressure from DRM zealots in several quarters to scuttle any deal. I'm sure it's no accident, BTW, that the one major label willing to think seriously about ditching DRM is also the one major label that is not part of a larger conglomerate where music is only part of a larger content portfolio.

[Randy Picker]

Doug (Lay),

I don't think that you get what the law (and derivatively, a law professor) is supposed to do. So my job isn't to tell Warner Music whether or not they should use DRM. You obviously believe that it is bad business strategy for them to do so, and the good news is that if you are right, Warner will suffer from a bad business decision.

One of the core functions of law is defining property rights and enforcing them. p2p technologies have effectively gutted many of the property rights held by copyright holders. Those rights haven't changed on the law books--they remain fully in force--but they have changed as a matter of practice because of p2p. DRM responds to that, and while we can have a discussion about whether we should start from scratch regarding the rights of copyright holders, at its core, DRM is about giving copyright holders the opportunity to (try) to vindicate the copyrights that were more easily enforced prior to p2p.

[Doug Lay]

Prof. Picker:

If your job isn't to tell Warner whether to use DRM, why do you presume to tell Mr. Jobs whether to use DRM, in your post above? Really, stating that he should have the DRM removed from Pixar films is little more than snark, since he is almost certainly not in a position to make that decision on behalf of Disney.

Placing your snarky business "advice" to one side, the argument that DRM is effective at combatting p2p traffic is widely understood as fallacious. Have you perhaps heard of the Darknet paper, written at that hotbed of anti-IP sentiment Microsoft? Perhaps the arguments in the Darknet paper are not "interesting" to you as a legal academic, but they sure do correlate with the reality of today's marketplace in digital content, including content (such as movies) where all authorized versions are wrapped in DRM.

[Randy Picker]

Actually, I wasn't advising Steve Jobs to drop DRM at Pixar, more noting the possible inconsistency in his position. (To be clear, that almost certainly wouldn't be my advice.) The Jobs letter would have been more persuasive if he had also addressed DRM in a context where he had content at stake. He doesn't for music. (You can decide whether pointing out that inconsistency is snarky or fair.)

As to the darknet paper, yes, I have read it (indeed, even discuss it in my most recent academic paper on this subject:

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=899155

The point isn't so much whether DRM is effective in the way that you describe--though I think that effectiveness is more complicated than just whether DRMed content makes it into the darknet--but about whether the law should support mechanisms for the enforcement of copyrights.

That was the point of my prior comment. Do you have a view on that?

[Doug Lay]

Given that Mr. Jobs' roles at Apple and Disney are somewhat different, and he is speaking in his open letter as a representative of Apple, not Disney, I think you are stretching things to talk about inconsistency. Regardless, you are moving out of your core expertise in law and offering business analysis. Business analysis of this sort from lawyers has encouraged content companies to embrace DRM-based business models, and these models have failed, at least for music companies.

The law should not support mechanisms for the enforcement of copyrights, if those mechanisms don't work, and they impinge on freedoms.

[joseph shealy]

Prof. Picker,

You state that Mr. Jobs letter would have been more persuasive if he had content at stake.

Have you ever heard of Walt Disney Records? How about the Disney Channel? Did you know that the best selling ablum released in 2006 was the Disney Channel's "High School Musical" soundtrack?

Mr. Jobs may not own this content but the sales from Disney Records and the Disney Channel music has a direct effect on his financial well being.

Inconsistent? No. Fair? No. Snark? Yes.

[Vincent Clement]

What does DRM do for Pixar or Disney? Nothing. What does DRM do for the consumer? Nothing but frustrate them. There is nothing like buying a DVD and having it skip due to the copy-protection scheme. Wow, thanks for treating me, the paying customer, as a criminal. Yes, that makes me want to buy more your product.

I am not only able to copy those supposed copy-protected DVDs, but I am able to remove all the junk (previews and FBI anti-copyright warning) and the macrovision and region protection.

I can then burn the movie to a blank DVD, put the original DVD away in a safe place and not have to worry about my kids either scratching or losing the disc. I'm not sharing the disc or uploading it to BitTorrent. I'm just protecting my investment.

DRM is a dead end. Every time a new DRM scheme is introduced, it is cracked in no time. One of the 'benefits' of Blu-Ray and HD-DVD was a state-of-the-art copy protection system. HD-DVD movies are now available on BitTorrent. So much for state-of-the-art.

DRM has nothing to do with rights and management of those rights. It has everything to do with controlling how a paying customer uses the content.

[Joan A. Conway]

For what its worth "Boeing versus Airbus" in Playing the Game, page 111, by John Newhouse mentions that "Some engine company people describe what they do as selling "at a measured loss." They can, they know, more than make up for their loss through maintenance and sales of spare parts. "It's a razor/razor-blade industry," they like to say. "We give the razors away and make money on the blades." More than half of what an airline spends on equipment goes to the engine suppliers."

[Michael Bellavia]

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[Venkatesh Iyer]

I feel if cost of Printers are raised, then cartridge prices should be lowered. Then it would be worth considering.