Apple Strikes a Chord

This could be the beginning of the end of copy-protected music downloads. Apple (Nasdaq: AAPL  ) and EMI Group (OTC BB: EMIPY.PK) will make EMI's tracks available in a digital rights management (DRM)-free format through Apple's iTunes store.

Offering a higher-quality download without the interoperability shackles of the original iTunes platform is a big win for consumers. The old way wasn't necessarily broken -- Apple didn't sell more than 2 billion digital downloads by accident. However, freeing up music fans to freely burn as many copies as they want of their purchased tracks, as well as offering the welcome portability to a wide range of media-playing devices -- including cell phones -- is as refreshing as it was inevitable. It never made sense that the freely available pirated copies through illegal file-sharing networks were better than the commercial product.

Apple will price the superior digital downloads at $1.29 apiece, $0.30 more than the conventional tracks. And yes, they are superior in more ways than the obvious. The emancipated EMI tracks will come at twice the sonic quality of the rest of the stuff selling at iTunes.

Complete DRM-free album prices will remain at $9.99. That strategy is likely to yield greater album sales than Apple's singles pre-sale discount from last week will. For DRM-free EMI CDs, the digital price will be less than the sum of eight individual tracks off the virtual disc -- unlike the conventional iTunes album, which is priced at more than the sum of 10 individual tracks.

Bigger than the Beatles
The buzz over the weekend was that this morning's briefing by Apple would be about the iTunes availability of the Beatles, who recorded for EMI. Now that Paul McCartney has left the label to release his next studio CD through Starbucks (Nasdaq: SBUX  ) -- yes, Starbucks -- EMI seemingly had the perfect excuse to cut loose with the strongest card in its tired deck.

With my apologies to John Lennon, this move is bigger than the Beatles. Steve Jobs flew all the way to EMI's headquarters in London for today's briefing, knowing the significance of the value proposition that is being introduced. Better tracks at better price points will be good for Apple as well as the major labels.

EMI won't stop with Apple. In a few weeks, it expects to strike other deals for DRM-free downloads in the AAC, WMA, and MP3 formats. Apple moves 70% of the digital-music sales in the country, so going through iTunes first is the right thing to do. But it's really just the beginning.

Other digital-music heavies such as Yahoo! (Nasdaq: YHOO  ) and Zune-maker Microsoft (Nasdaq: MSFT  ) -- as well as music-subscription services such as Napster (Nasdaq: NAPS  ) and RealNetworks' (Nasdaq: RNWK  ) Rhapsody -- would be nuts if they're not in advanced talks with EMI at the moment.

It will be interesting to see how this plays out for Napster and Rhapsody in particular. Those subscription services charge a 50% premium for their "To Go" plans that offer device portability, and the abundance of legal DRM-free availability may hack away at the perceived premium there. On the other hand, freer distribution may draw more attention to each company's smorgasbord model. Either way, the models will have to adapt to today's news.

EMI stands for "Every Move's Important"
Is EMI an unlikely first mover among its major-label brethren? Not really, but it is by far the hungriest. The company has struggled lately. Orchestrating a fire sale as an exit strategy has been a media pursuit since last year.

But EMI isn't as out to lunch as many may think. It has many of today's hot recording stars on its roster, including Norah Jones, Keith Urban, and Gorillaz. It has a great catalog to be monetized digitally.

Today's move is a gutsy one. Will DRM-free tracks now clog up the file-trading rings and cost EMI digital sales? Will the higher quality of the virtual tracks now make physical CD purchases obsolete? These are the questions that rival labels may want answered before following EMI, but they don't have the luxury of time.

If EMI's digital sales shoot through the roof, other labels will have little choice but to follow suit even if it means more dirt on the compact disc's grave. So, yes, this should be the beginning of the end of copy-protected downloads. However, it's also likely to the end of the beginning of the digital-music revolution.

The revolution is moving into a new phase right now, one in which consumers get to call the shots for a change.

Tune in to other related headlines:

Digital music is a high-growth industry that we often explore at the Rule Breakers newsletter service. XM was a former recommendation there.

Starbucks and Yahoo! are Motley Fool Stock Advisor picks. Microsoft is an Inside Value stock selection. Pick a service, and see whether a 30-day trial will suit your taste. They're all DRM-free.

Longtime Fool contributor Rick Munarriz isn't a subscriber to any digital-music service, even though he does have satellite radio. He does not own shares in any of the companies in this story. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.


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