Amazon vs. Apple: Why Are the Songs So Cheap?

On hearing the news that Amazon (AMZN) had put 2 million songs, free of copy-protection, for sale on its new MP3 music store, I — like nearly everyone else who writes about Apple (AAPL) — went straight to the site to do a cost-comparison with the iTunes Music Store. My choice: KT Kunstall’s Suddenly I See, $1.29 (without copy protection) from Apple, $.89 (also without copy protection) from Amazon, a 40% price differential.

Which raises an immediate question: why are they doing this?

Apple, which sells songs for $.99 a track (protected) and $1.29
(unprotected) probably makes a lot less on each download than the music
labels, which have been complaining loudly that they aren’t making
enough — at least for their most popular songs.

Steve Jobs of course, can look at the music as something like a loss leader. He’s
happy to make just a few cents profit per song as long as he’s cleaning up
on the 100 million or so iPods and iPhones we’ve bought to play them.

But EMI and Universal, whose intellectual property represent the
lion’s share of the music on Amazon’s new site, must be getting even
less from Amazon than they were from Apple. And having fought for years
to keep their music copy-protected with so-called digital rights
protection (DRM), they’re selling it on Amazon DRM-free. At a 40%
discount. What’s their motivation?

The smartest answer to that question I’ve seen was posted yesterday by David Kravets at Wired.com.  He heard Warner Music’s Edgar Bronfman, Jr., tell Goldman
Sachs investors last week that he was thinking about removing DRM
from Warner’s music downloads — a few months after suggesting
Warner would never abandon DRM. The money quote: "We need some online competition" for Apple’s iTunes Music Store. As Kravets explains:

The self-created headache for the industry is that the highly popular
iPod and new iPhone only play music protected by Apple’s proprietary
FairPlay DRM solution or music that isn’t protected at all. And Apple
chairman Steve Jobs has repeatedly balked at licensing FairPlay for use
on competing download services or devices.

That meant music companies had to choose between using iTunes
or going DRM-free. The industry stood by and allowed most of its
music-download sales to come from Apple.
Recognizing opportunities lost to Apple’s dominance, the music industry
is moving toward throwing DRM overboard in a bid to open up new retail
markets and promotional opportunities.

In other words, the labels are using the fire-sale of DRM-free music on Amazon to try to break Apple’s stranglehold on their business. It must be worth an awful lot to them to win a bit of leverage with Steve Jobs in future negotiations.

All
of this is great for the consumer, who now has two or three (if you
count Wal-Mart) places on the Web to shop for digital music downloads.

And it’s not even so bad for Apple. Sure there’s pressure on them now
to lower their prices (especially for EMI titles, which are available at
both Apple and Amazon’s music stores at a 40-cent per song price differential).
But since Amazon’s songs slide seamlessly into iTunes music libraries
and play beautifully on Apple’s hardware — which is where Apple makes its money — what’s not to love?

One last thought, again from Kravets’ Wired.com piece, quoting Bronfman on how dramatically Apple has disrupted his business:

"Never before in the history of content has the hardware been more
valuable than the software," Bronfman said. "You think about the VCR or
the video cassette — the video cassette always had more value than the
VCR that you shoved it into. Apple has been able to turn that model on
its head." (link)

Drastic disruptions apparently call for drastic measures.