Wednesday, June 6, 2007

French praise for Apple’s closed music strategy

As noted earlier, Apple uses its closed DRM and iTunes Music Store (now iTunes Store) strategy to cross-subsidize low download prices with profits from its iPods.

By creating switching costs for buyers — making it difficult to take the content to other players — strategy has come under criticism from European regulators. Apple blamed record labels for the copy protection and even offered non-DRM content with one label that would go along.

Philosophically, I still don’t buy that Apple’s plan is anti-consumer: they openly say that their system is locked, so that people who sign up do so knowing full well that their music only works with their iPods (or iPhone). But then, I’m somewhere in the middle in the US competition policy spectrum, which makes me very laissez faire by French EU standards. French competition policy (dirigisme) is pretty simple: use regulation to prop up French companies (Cie. des Machines Bull, Alcatel, Thomson, Sanofi-Aventis) that can’t complete in the market, by protecting them and keeping them French, while at the same time hobbling or blocking companies (particularly American) that succeed in the marketplace.

So it was fitting that the pro-consumer effects of Apple’s music strategy got a strong (albeit left-handed) endorsement Saturday by an executive of Orange, France’s largest (and Europe’s second largest) music service. François Thénoz — its director of strategic marketing — is a France Télécom veteran and UCLA MBA who spoke on a panel at the USC-hosted Global Mobility Roundtable conference.

I didn’t have a tape recorder — and didn’t see the tidbit coming — but here is the paraphrase typed by this formerly ink-stained wretch:

One company, Apple, decides level of prices will be less than $1. It is very difficult for [other] players to monetize the services. Except for ringtones, we don’t see enough margin [in music]. “In terms of margin, it’s [music] not as interesting as some other content.”
Translation: we’re mad at Apple for setting such a low ceiling on consumer expectations for download prices, and so we’ve decided to take our records and stay home. If low prices are pro-consumer, it doesn’t get much more pro-consumer than that.

[NB: The tone of the comment suggests there is no chance that Orange would partner with Apple — which would leave Apple without a credible European alternative to negotiated better terms with Vodafone.]

Of course, there are other business models for music than the buy-one-track-and-own-it model. There is the monthly subscription model of Live365 or Progressive Real Networks; Verizon Wireless has tried it, albeit to mixed reviews. There is offering free downloads of artists who want the publicity model, used by, and also Live365.

This week, Lala is getting a lot of publicity for its website relaunch interesting wrinkle. They have offered CD trading, and now are offering free monthly subscriptions — subsidized by the albums (not tracks) you buy to download. Since Lala has to pay the record labels for the free content (estimated wholesale price: $6-8/user/month), they are expected to lose $40 million in VC in the next two years trying to build a viable competitor to Apple.

Even by Silicon Valley standards, the hubris is impressive:
Mr. [Bill] Nguyen — the company doesn't use titles but he is effectively chief executive — says he aims to be as big as the iTunes store in 18 months to two years.
Still, this is what we need at an early stage of a major industry transition: new entry and business model experimentation by a broad range of competitors. Despite its early lead, there’s no guarantee that Apple’s model will be the one left standing.

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